The tyranny of economic morons
cover art istock
by Daryl Cornell, CEO, Triton Systems
More and more it seems that the only real requirement for election to public office is a complete and utter ignorance of basic economic facts. The latest poster child has to be Illinois State Representative Arthur Turner.
Earlier this month, ATM Marketplace reported that Mr. Turner had introduced an Illinois state bill that would cap all ATM charges at $1.
"In concept, what we are trying to do is just limit ATM fees and keep them from skyrocketing," said a very concerned Mr. Turner.
He went on to lament that "out-of-network fees can reach as high as $7 to $10 just for withdrawing from your bank."
This bill is already out of committee and is now being considered by the Illinois House of Representatives.
For the benefit of Mr. Turner and his colleagues, let's review the history of the ATM and its impact on consumer access to cash:
In 1997, there were an estimated 165,000 ATMs in the U.S. These were almost exclusively bank ATMs, whose use was limited to customers of each individual bank.
If you wanted cash, you drove to your bank's branch and either waited in line at the counter or withdrew cash from one of those "newfangled" ATM machines.
The result was "free access to your cash" but at the expense of drive time and gas, which normally resulted in larger withdrawals in order to minimize trips to the bank.
With the advent of surcharge for nonbank customers in 1998, the networks greatly expanded customer access to cash in several ways.
Firstly, banks could now allow access to their ATMs to non-bank customers — for a fee of course, which covered the additional ATM wear and tear and more frequent cash refills.
Secondly, and of even greater importance was the surcharge-driven creation of the white label ATM industry. The introduction of surcharge allowed entrepreneurs to launch hundreds of retail ATM companies nationwide.
These businesses invested capital in hardware, secured merchant contracts and sold or placed ATMs in retail locations nationwide.
Customers now had a choice: to voluntarily pay a "convenience fee" for using a white label ATM; or to avoid the convenience fee by getting cash at their own bank's ATM.
Fast forward to 2017 with now more than 400,000 ATMs in the U.S. No matter where a customer might be, access to cash is never far away. With nearly 250,000 terminals deployed, the white label ATM industry operates more than 60 percent of all ATMs.
Thanks to the reduction of consumers visiting the bank to make cash withdrawals and merchants visiting the bank to make cash deposits (now that they can efficiently recycle cash from the till at their ATM) has driven the shuttering of tens of thousands of bank branches, greatly expanded customer choice for cash access, and facilitated large-scale reductions in fuel consumption and crime from fewer cash deposits.
The white label ATM industry has been good for both bank downsizing and customer choice. However, retail ATM operators incur many expenses in providing customers with access to cash.
ATM hardware purchases, licenses and insurance, equipment maintenance, transaction processing, cash-loading, equipment upgrades, transportation, employees and revenue-sharing with the merchant are all real costs of running a white label ATM fleet. Even at the current average convenience fee of $4.50, far less than $1 ends up as profit for the business.
So what happens in Illinois and elsewhere should this $1 ATM fee cap become law? Economics 101 tells us that when costs exceed revenue, business activity ceases.
No longer economically viable at a $1 surcharge cap, white label ATMs will quickly disappear. A 60 percent contraction in ATMs will mean longer lines at bank branch counters and bank ATMs. In response, banks will likely once again block access to their ATMs to all but their own customers.
Essentially, consumers will be transported back to the era of 1997 cash access — only with far fewer bank branches to accommodate them.
Ultimately there will be loud constituent protest and the policy will be reversed, but this is a staggeringly inefficient way to educate our politicians on the basics of economics.