House of Commons Treasury Committee Cash Machine Charges Fifth Report of Session 2004–05 Report, together with formal minutes, oral and written evidence Ordered by The House of Commons to be printed 15 March 2005 HC 191 Published on 31 March 2005 by authority of the House of Commons London: The Stationery Office Limited £23.00 The Treasury Committee The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of the HM Treasury and its associated public bodies. Current membership Rt Hon John McFall MP (Labour, Dumbarton) (Chairman) Mr Nigel Beard MP (Labour, Bexleyheath and Crayford) Mr Jim Cousins MP (Labour, Newcastle upon Tyne Central) Angela Eagle MP (Labour, Wallasey) Mr Michael Fallon MP (Conservative, Sevenoaks) Rt Hon David Heathcoat-Amory MP (Conservative, Wells) Norman Lamb MP (Liberal Democrat, Norfolk North) John Mann MP (Labour, Bassetlaw) Mr George Mudie MP (Labour, Leeds East) Mr James Plaskitt MP (Labour, Warwick and Leamington) Mr Robert Walter MP (Conservative, North Dorset) Powers The Committee is one of the departmental select committees, the powers of which are set out in the House of Commons Standing Orders, principally in SO No. 152. These are available on the Internet via www.parliament.uk The Committee has power to appoint a Sub-committee, which has similar powers to the main Committee, except that it reports to the main Committee, which then reports to the House. All members of the Committee are members of the Sub- committee, and its Chairman is Mr Michael Fallon. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) from Session 1997–98 onwards are available on the Internet at: www.parliament.uk/parliamentary_committees/treasury_committee/treasury_co mmittee_reports.cfm. Contacts All correspondence for the Treasury Committee should be addressed to the Clerk of the Treasury Committee, 7 Millbank, House of Commons, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5769. The Committee’s email address is: [email protected]. Cash machine charges 1 Contents Report Page Summary 3 1 Introduction 5 The issue and this inquiry 5 The operation of cash machines (ATMs) in the UK 6 How ATMs work 6 Cash acquisition by individuals 7 The Cruickshank review 8 The costs of ATM provision 9 2 The principle of charging 11 Approaches to the funding of ATM provision 11 The growth of charging cash machines 13 Prospects for the future of the free estate of ATMs 15 Machines in bank branches 15 Conversion of non-branch sites to charging by independent operators 17 Pressure on banks to sell off free machines to charging operators 18 Effects of the interchange fee 21 The role of the site owner 23 Conclusions on prospects for the free estate 25 3 Transparency 28 The principle of transparency in notification of charges 28 The current requirements since April 2004 29 New requirements from July 2005 31 Further improvements needed 32 Improving the terms of the LINK agreement of December 2004 32 Improvements in areas outside the December 2004 agreement 34 Enforcement 36 Consumer awareness of charges 37 4 Regulation 38 The LINK Network 38 The Banking Code 39 Governmental regulatory authorities 40 2 Cash machine charges 5 Financial Exclusion 42 Cash machine charges and financial exclusion 42 Areas with concentrated financial exclusion 43 The level of ATM charges 44 The Post Office 46 The context 46 The relationship between the Post Office, subpostmasters, and ATM operators 48 Information for customers about free counter withdrawals 50 Increasing access to current accounts at post office counters 51 The Direct Payment programme for benefits 52 Post Office: general conclusion 54 6 Conclusions 55 Conclusions and recommendations 56 Formal minutes 64 Witnesses 67 List of written evidence 68 List of unprinted written evidence 69 Cash machine charges 3 Summary The issues At the time of the Cruickshank Report in 2000, only a tiny proportion of cash machines involved a direct charge. The proportion now is 37%. Cash machines are the most important method of cash withdrawal in the UK, used by millions every week. Concerns arise about: x the principle of charging and the increasing prevalence of charging machines; x the clarity of presentation of these charges to the consumer; x the impact that the spread of charging may have on financial exclusion. The principle of charging and the prospects for the free ATM network Cash machines which charge consumers are a legitimate business model. However, their spread gives rise to a public policy issue: how far is such a trend desirable? Although charging machines only account for around 3.6% of total cash withdrawals in October 2004, it is estimated that over the past twelve months consumers have paid around £140 million in charges. At the same time, the number of free machines is also increasing. The increase in the number of free machines, alongside the increase in charging machines, should represent an increase in non-charging sites. However, because of their location and increased concentration in machines, there is a question how far this growth has actually increased the number of generally available and genuinely different sites. Provided the LINK agreement remains in force and banks continue to offer free banking for personal customers, at present there seems little threat to continued free access to all cash machines located in bank and building society branches. The independent charging operators’ expansion of their business will result in cash machines in previously unserved locations, but will also result in a trend of free machines being forced out of sites and replaced with charging machines. Banks and building societies have incentives to sell some of their non-branch machines to independent operators: there could accordingly be conversion of a large number of free ATMs to charging. The attitude of the site owner is very important in determining whether a cash machine on their premises is free of charging. The public sector has a particular responsibility and public sector managers will wish to take into account the extent to which their employees and other site users may find it difficult to access free cash elsewhere. Overall, opinion differs as to how far the trend of free machines converting to charging, in locations away from bank branches, will go. A great deal will depend on the attitude taken by banks to the provision of free machines in these areas. It is therefore important that the Government monitors the situation very closely, and is ready to respond. 4 Cash machine charges Transparency of charges The industry has a duty to provide consumers with sufficient information to allow an informed choice about whether to use a charging machine. Poor standards of transparency are detrimental to consumers, and hinder competition. The arrangements put in place by LINK since April 2004 are inadequate. The improvements agreed in December 2004, to take effect from July 2005, are welcome but do not go far enough. We recommend: clear indication of the amount of surcharge on external signage; larger minimum font sizes; standardised labelling for all free and charging machines; no use of the word ‘free’ in connection with other services available from a charging machine; timely and prominent warnings where a machine previously free is to be replaced. There is also a need for evidence of greater effectiveness in LINK’s enforcement procedures. Regulation LINK needs to improve consumer representation and to develop greater openness. The present LINK approach to enforcement is inadequate. The Banking Code should be extended before the end of the year to cover all charging cash machine operators (including Code subscribers’ subsidiaries) and to incorporate LINK transparency rules. Financial exclusion & the Post Office Vulnerable consumers should not be subject to disproportionate costs as a result of ATM charges. A substantial reduction in the availability of free machines could exacerbate existing financial exclusion. The Government needs to keep developments under review. The Post Office has a unique role. Most post office ATMs charge, with sub-postmasters having no control over the decision. This is not in the best interests of sub-postmasters, benefit recipients or local communities. Government should ensure that the switch to direct payment of benefits does not disadvantage recipients in their access to cash. Key areas for action from Government, regulators and the industry: x Growth of charging machines: There would be important public policy concerns if, away from existing branches, free access to cash withdrawals declines. The Government needs to keep developments under review. x Better transparency: Improvements have been made in the requirements set down by LINK, but more needs to be done. x Regulation and the Banking Code: Charging cash machines need to be brought within the Banking Code. x Financial exclusion: Cash machine charges may have a disproportionate impact on low- income consumers. If free machines are withdrawn from areas without bank branches then this may exacerbate existing financial exclusion. The Post Office has a particular role and there is a need for a fundamental change of strategy. Cash machine charges 5 1 Introduction The issue and this inquiry 1. Aspects of the operation of the cash machine market were reviewed in the Cruickshank Report on Competition in UK Banking in March 2000. At that time, only a tiny proportion of the cash machines—also known as ATMs (Automatic Teller Machines)—in the UK involved a direct charge for the user. The proportion now is 37%. In 2004 consumers spent £140m accessing cash at cash machines. The time is ripe for a review of the issue of cash machine charges. 2. We planned to include questioning on this during evidence sessions in October last year with bank chief executives, as part of our work on credit card charges.