STRATEGIC PARTNERS
More testimonies presented to the Senate Banking, Housing and Urban Affairs Committee. See if you agree with some of the industry's 'experts.' Second part of two by James Belcher, contributing writer
March 7, 2002
The second part of this two-part study sheds light on information the Senate Banking, Housing and Urban Affairs Committee heard recently before they defeated the surcharge ban in a partisan vote.
We invite your reaction to these testimonies in our message boards. For more indepth research, after each testimony a link to the witness's full text is provided.
Prepared Testimony of Mr. Wayne A. Cottle
President
Dean Cooperative Bank
Franklin, Massachusetts
Stance on the surcharge ban: PRO
Small businesses in Massachusetts are going to find it harder to get loans unless ATM surcharges are banned in the state. This is one of the findings of three studies commissioned by the Community Bank League of New England. The group of 137 small Massachusetts banks commissioned the studies to determine what is likely to happen to small banks if surcharges are not banned. The studies mapped current ATM locations, surveyed consumer attitudes about ATM use and surcharging, and analyzed the projected economic impact of allowing Massachusetts ATM owners to
surcharge.
The mapping study revealed that the state's two largest ATM owners, BankBoston and Fleet Bank, own about two-thirds of the state's ATMs, and about 82% of the ATMs in the city of Boston. The survey of consumer attitudes, which polled ATM users who were not current BankBoston or Fleet customers, determined that while 94% favor a surcharge ban, one-third of the respondents would switch to a larger bank with more ATMs to avoid surcharges.
The economic impact study found that surcharging presents problems for small banks, small businesses, local governments, and customers of all Massachusetts banks. For Massachusetts bank customers, ATM costs will grow and convenience will shrink as fewer fee-free machines become available. ATM surcharges will also drive customers away from small banks to banks with large fee-free ATM networks, with a commensurate shift in deposits away from small banks. Small businesses and local governments will find it harder to access capital as their traditional small bank lenders watch their deposits shrink. The study concludes that big banks stand to gain in two ways from surcharging: increased fee income from the surcharges directly, and an increased deposit base from customers who switch to avoid the ATM fees.
Interchange fees should make ATMs profitable enough without surcharges, the Community Bank League argues. The group suggests that if ATMs aren't profitable enough, then the interchange fee should be raised. The group also thinks that the current absence of surcharging in Massachusetts hasn't stopped ATM owners from making a profit, because new machines continue to be deployed. While fee profits are important to ATM owners, the community banks remain especially wary of the effect of surcharging on their deposit base; profit loss projections for small banks from an ATM surcharging-related deposit shift are estimated at $321.5 million.
Full text of testimony
Prepared Testimony of Mr. J. Raymond Curtin
President and CEO
Empire Federal Credit Union
NOTE: Mr. Curtin is presenting the testimony of Mr. Michael S. Vadala
who was unable to appear at the hearing.
Stance on the surcharge ban: PRO
Credit Union members will be some of the hardest-hit ATM customers if surcharging remains unchecked, says the head of The Summit Federal Credit Union. Summit CEO Michael S. Vadala says that credit union members are among the least able to afford ATM fees, with relatively low annual incomes. Many credit union members will also be burdened by higher account fees if they switch to big banks to avoid ATM surcharges. Members who decide to remain with their credit union will face an additional $150-$200 in annual expenses from surcharges.
Like many other credit unions, Summit subsidizes ATM surcharges for its members, allowing them a certain number of fee-free transactions at foreign ATMs every month. While the credit union deploys its ATMs in the most convenient locations possible, The Summit will never be able to deploy as many ATMs as larger institutions, and wants to keep surcharges on foreign ATMs as low as possible to minimize costs to members. The credit union also disagrees with the notion that surcharging will allow ATM deployment in previously underserved areas, as lower income communities are less able to pay surcharges. The Summit does not
surcharge on any of its own ATMs, including one at Frontier Field Stadium, where 94% of the transactions are made by customers of other financial institutions.
Like many community banks, credit unions think that the ATM industry generates enough fees to make surcharging unnecessary; Mr. Vadala points out that ATMs reduce the cost of doing business in branches. Vadala says that credit unions are mandated to provide low-cost financial services to members. The bank mandate to provide value to shareholders is now at odds with this mission, as bank ATM surcharges are raising credit unions' cost of providing ATM service to their members.
Full text of testimony
Prepared Testimony of Ms. Linda F. Echard
President and CEO
IBAA Bancard
Stance on the surcharge ban: CON
While some community bankers fear surcharging, IBAA Bancard opposes a surcharge ban. The group forms credit, debit, and ATM card alliances to support the Independent Bankers Association of America, and advocates a market-driven solution to the surcharge debate. Customers have other ways of accessing their accounts, and the decision to use an ATM which surcharges constitutes a market choice, the group says. IBAA Bancard also predicts that a ban on surcharging would reduce overall convenience for consumers, and possibly stifle the future role of ATMs in electronic commerce.
"ATMs are not a monopoly," says IBAA CEO Linda Echard. ATMs are only one method of accessing deposited cash. Consumers may also visit branches during branch hours, and make cash withdrawals, write checks for cash, or purchase travelers checks. Many grocery stores allow customers to write checks for more than the amount of purchase and receive money back, and merchants who accept debit cards frequently offer a money-back option. Consumers who do use ATMs can usually use the bank's ATMs for free, and surcharge-free ATM alliances are offering still more ways of accessing cash at no added cost.
IBAA Bancard predicts that a ban on surcharging would reduce convenience for customers. The group says that many ATMs have been deployed in remote locations on the basis of expected surcharge revenue, and would be removed as unprofitable if surcharges were banned. The group also notes that ATMs are now being used to deliver other services such as movie tickets and postage stamps. ATM fee regulations could limit development of other such services. IBAA Bancard suggests this could be especially stifling for ATMs used to deliver future electronic commerce
services.
IBAA Bancard points out that while owners with large fleets of ATM machines tend to surcharge more often at higher amounts, community banks have come to rely on the fee income as well. The group says that relatively few community bank customers are upset with surcharging. Community banks may also be more wary than large banks of losing surcharges as a revenue stream. Thirty-nine percent of community banks surveyed by IBAA Bancard said that they provide their customers with information on how to avoid surcharges, and many community banks are
absorbing some of the fees for their customers.
Full text of testimony
Prepared Testimony of Mr. John Ward
President
1st American Bank
Elk Grove, Illinois
Stance on the surcharge ban: CON
ATM surcharges are "convenience fees", and community bankers should treat them as a market reality rather than a threat, according to community bank president John Ward. Ward supports surcharges because he believes they have promoted widespread ATM deployment, giving consumers more convenient access to their accounts. He also feels that options for avoiding surcharging make the decision to use an ATM which surcharges a choice, which consumers pay for with a "convenience fee."
Ward rejects the idea that small banks will lose customers to big banks with large networks of fee-free ATMs. While survey results have suggested that up to one third of small bank customers would switch to a large bank to avoid surcharges, Ward says this rarely happens. Small banks compete with large banks on more than just their ATM fees. Small banks use personal attention, better interest rates, and better pricing for financial services as competitive advantages in the market for
customer deposits. A Pulse EFT network survey of Texas-area banking customers revealed that only 1.8% of checking and savings account customers switched on the basis of surcharges. Other research on the Texas banking market (the only area where widespread surcharging has existed for a significant period of time) suggests that surcharging has had no negative market share effect for banks with $250 million in assets or less.
Convenience fees are not double charges by the consumers' banks, Ward says, as the fees are paid to the foreign banks. The surcharge is, rather, a market innovation which has allowed deployment at locations which are not profitable enough to support an ATM without surcharging. Increasing the interchange fee as a substitute for surcharging does not account for this innovation; there were fewer ATMs before widespread surcharging because the interchange fee wasn't enough to support greater deployment. The convenience of ATMs has been enhanced by the increase in deployment, and consumers decide when this convenience outweighs other
costs by using the machine. Consumers are adjusting to surcharges by using fee-free ATMs as much as possible, Ward says. He points to a Pulse EFT network survey as evidence that the surcharge is a market choice for consumers: almost 70% of Pulse customers have never paid a convenience fee in the Pulse market area, while 25% of cardholders pay about 75% of all fees.
Full text of testimony
