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Is ATM interchange an anachronism?

Stan Paur, keynote speaker at the ATM Industry Association's 2001 Conference West, contends that interchange is no longer as relevant as it once was – and could go away entirely.

October 11, 2001

One could make a case that the ATM industry was built on interchange, the fee that a card issuer pays an ATM owner when one of their cardholders uses a machine.

So when Stan Paur threw out a hypothetical suggestion that the fee could go away in the future, at least some of those in attendance at theATM Industry Association'sConference West in Las Vegas earlier this week predicted such a move could put a few cracks in the foundation of the business.

Paur, president and chief executive officer of thePULSE EFT Association, said that interchange was introduced as an incentive for financial institutions to open usage of their ATMs to customers of other banks. It worked phenomenally well; as cardholders became accustomed to getting cash from practically any machine, ATM usage rose dramatically.

Yet Paur contends that ATM interchange has become far less relevant in recent years.

Although EFT networks each set their own interchange rates, Paur said they vary no more than 10 percent to 15 percent between networks. While ATM interchange was meant to promote competition among networks, he contends that competition today is based primarily on geography rather than cost.

"Interchange may be an anachronism," he said, noting that while PULSE is not advocating the elimination of ATM interchange, the network has considered the idea.

Unlike ATM surcharges, Paur said that interchange has remained static throughout the years. PULSE's fee has been 50 cents since 1989 – if adjusted for inflation, that's 33 cents in today's dollars. ATM surcharges, however, have risen steeply. According to PULSE research, the average surcharge went from about 60 cents in 1995 to $1.63 today.

Ron Schuldt, chief operating officer of third-party processorColumbus Data Services, said that surcharges would shoot up even more if ATM interchange went away. And merchants accustomed to keeping 100 percent of the surcharge would question why they had to give up part of the fee.

"Some ISOs don't talk about interchange with their merchants," Schuldt said. "They'd have some explaining to do when they tell a merchant he has to raise the surcharge 50 cents but he doesn't get to keep it."

Merchants might not be the only ones due an explanation. Ken Paull, executive vice president of sales and marketing for third-party processorLynk Systems, said that card issuers might also have to answer to the public if an elimination of interchange caused surcharges to rise.

"I think it could easily get turned around on the banks," Paull said.

Paur said consumers have begun modifying their behavior to avoid paying ATM surcharges, including using their debit and credit cards more often to avoid paying fees. Seventy percent of the 700 respondents in PULSE's latest consumer survey, which wrapped up in August, said they had done so.

As consumer usage of PIN-based debit has risen, so have retailers' costs for supporting it. Unlike ATM transactions, merchants pay card issuers a fee for PIN-based debit transactions. According to PULSE research, that cost has risen from a flat 4 cents in 1995 to up to 48 cents in 2001.

Paur believes that the idea of paying interchange to ATM owners may rankle card issuers who have become accustomed to collecting these fees from merchants. "I think you'll see pressure building for the elimination of interchange," he said.

But without some kind of a multilateral agreement to drop interchange, Columbus Data's Schuldt said EFT networks would risk losing customers. "If just one network decided to do it, it would be suicide."

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ATM Industry Association (ATMIA)

The ATM Industry Association, founded in 1997, is a global non-profit trade association with over 10,500 members in 65 countries. The membership base covers the full range of this worldwide industry comprising over 2.2 million installed ATMs.

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