FEDERAL RESERVE BANK OF NEW YORK IN ECONOMICS AND FINANCE April 1998 Volume 4 Number 4 ATM Surcharges James J. McAndrews The recent spread of ATM surcharges has sparked significant debate among consumers, policymakers, and ATM owners. Much of this debate has focused on the direct costs that surcharges impose on consumers. The use of ATM surcharges, however, also raises broader questions about ATM deployment, customer convenience, and the nature of banking competition. In April 1996, the two largest national automated teller ATM Networks and ATM Fees machine (ATM) networks, Plus and Cirrus, ended their Most ATM networks are organized as joint ventures prohibition on direct fees for using an ATM. Since that owned by a central group of bank members.2 A network decision, many banks and nonbanks that own machines provides an array of services that link together the have chosen to impose these fees, known as surcharges, ATMs of its members. The activities of the network are on users who are not depositors of the machine owner. governed by a set of rules agreed to and implemented Surveys show that these fees, which can reach as high by the network’s board of directors. as $5.00, average about $1.00.1 ATM network organizations engage in a host of activi- The relatively sudden appearance of ATM surcharges ties that support the trademark, brand name, reliability, has led to a large increase in the cost of ATM transac- and operation of the ATM system controlled by the net- tions to some consumers. This cost burden has work. The basic operational activity of the network is to prompted significant public debate, which in turn has support ATM cash withdrawals by the deposit account led many state legislatures and congressional subcom- holders of any member bank. This function requires the mittees to consider bills to ban surcharges. network to transfer electronically, or “switch,” the trans- action information from the ATM to the account holder’s This edition of Current Issues provides a brief bank and back again. This communication and sorting overview of the organization of ATM networks, the fees activity is accomplished through the aid of leased or they charge member financial institutions (most of dial-up telephone lines and centralized computers. Many which are banks), and the fees banks and ATM owners networks also provide ancillary services such as ATM charge consumers for ATM services. It then looks at the servicing and clearing and settlement of payments to their potential effects of surcharges on ATM deployment and members or other banks. bank competition. We find that surcharges appear to have led to a significant increase in the number of ATM services entail two types of fees: wholesale ATMs, but they inconvenience some consumers and fees, which are paid by the banks to other banks or to may weaken price competition among banks in the long the network, and retail fees, which are paid by the per- run. Finally, the article examines the surcharge policy son conducting the transaction to his or her bank or to options facing the United States today. the ATM owner (see box). CURRENT ISSUES IN ECONOMICS AND FINANCE Wholesale fees are set by ATM networks and comprise holders.3 Surcharges vary widely, ranging from as little the switch fee and the interchange fee. (Most networks as $0.50 to as much as $5.00, but they average about also charge a membership fee, which is not transaction- $1.00 per transaction. based.) Switch fees, which range from $0.02 to $0.15 per transaction, are paid by the cardholder bank to the net- ATM Surcharges: The Pros and Cons work to cover the costs of routing transactions through the Surcharges entail both benefits and costs for ATM network’s computer-switching system. The interchange owners, consumers, banks, and ATM networks. The fee is paid by the cardholder’s bank to the ATM owner to primary benefit of surcharges is that they have the compensate the owner for the costs of deploying and ser- potential to lead to a better match between the supply of vicing the ATM; interchange fees typically range from ATM locations and customer demand for remote access $0.30 to $0.60 per transaction. In addition to compen- to their bank accounts (Salop 1990, 1991). ATM sur- sating ATM owners, the networkwide interchange fee is charges, however, also impose direct costs on con- designed to standardize the arrangements that enable sumers and may have long-term consequences for member banks’ cardholders to use an ATM owner’s transaction volume and banking competition. We review machines (Baxter 1983). By fixing a single price for all these pros and cons in our analysis of the effects of interchange transactions among its many members, a ATM surcharges on deployment, customer convenience, network avoids numerous interbank negotiations. ATM transaction fees, and banking competition. The retail fees of an ATM transaction are set by the ATM Deployment cardholder’s bank and by the ATM owner. When a card- The introduction of surcharges appears to have resulted in holder uses an ATM that is not owned by his or her one important customer advantage: a better match bank, the cardholder’s bank may charge a user fee to between customer demand for ATMs and ATM deploy- cover the interchange fee that it must pay to the ATM ment. In particular, surcharges encourage the deployment owner. User fees, also called “foreign fees,” range from of ATMs to areas that are too expensive for interchange $0.25 to $2.50, and average about $1.00 per transaction. fees alone to support, such as airports, casinos, football Surcharges also fall under the category of retail fees. stadiums, and ski resorts. By lowering the number of As noted, banks that own ATMs typically surcharge transactions needed to generate sufficient revenue for other banks’ depositors rather than their own account owners to recoup ATM costs, surcharges can encourage ATM Transaction Fees Fees for ATM services fall into two broad categories: wholesale fees and retail fees. Fee Category Set by Description Fee per Transaction Switch fee Wholesale ATM Fee paid by cardholder’s $0.02 to $0.15 network bank to network organization for the costs of routing transaction information Interchange fee Wholesale ATM Fee paid by cardholder’s $0.30 to $0.60 network bank to ATM owner for costs of deploying and maintaining shared ATM User fee Retail Cardholder’s Fee paid by cardholder $0.25 to $2.50 (or foreign fee) bank to cardholder’s bank for using an ATM not owned by the cardholder’s bank ATM surcharge Retail ATM Fee paid by cardholder $0.50 to $5.00 owner to ATM owner for the costs of deploying and maintaining the ATM FRBNY 2 deployers to maintain ATMs in high-cost, high-value The decrease in interchange transactions suggests locations. that consumers have changed their pattern of ATM usage. To avoid surcharges, many consumers are likely If surcharges promote ATM deployment, we would visiting ATMs that are less convenient than those they expect to find that ATM installations have increased had used previously. Consumers may also be withdraw- since surcharges were permitted in 1996. Indeed, from ing and carrying larger amounts of cash each time they 1996 to 1997, the number of ATMs in the United States use an ATM to spread the costs of a surcharge over a increased 18.5 percent, the fastest rate of growth in larger dollar value. A decision by customers to reduce fifteen years (Chart 1). At the same time, the number of the number of visits to ATMs could erode the conve- transactions per machine fell rapidly, indicating that the nience that a network is designed to offer. number of machines has grown faster than the total number of transactions. Thus, ATM deployers find Transaction Fees it profitable to continue to deploy ATMs even though Some ATM owners stand to gain from an increase in the number of transactions per ATM is lower than revenues resulting from ATM transactions. Each time a in previous years. This fact is consistent with the customer who is not an account holder withdraws hypothesis that surcharges allow machines to be placed money, the ATM owner collects the surcharge—in addi- in higher cost, lower volume locations. tion to the interchange fee. Given that approximately 1,700 interchange transactions take place at an average From 1996 to 1997, the number of machines located ATM every month, these additional fees can amount to off bank premises also increased—further evidence that significant earnings. Although the number of inter- surcharges may have improved customer access to change transactions has fallen, ATM owners are ATMs (Chart 2).4 Much of the transaction volume at nonetheless motivated to surcharge, because in doing off-premise machines is provided by customers who so they capture a larger share of the benefits of the net- have accounts at banks other than the bank that owns work economy. Before such fees were introduced, the the ATM. The interchange and surcharge revenues col- benefits of the increased availability of ATMs flowed lected from these transactions help owners to recover more directly to the cardholder’s bank. the higher costs of maintaining off-premise machines. Anecdotal evidence also supports the hypothesis that Although surcharges boost the earnings of ATM surcharges have influenced the growth in the number of owners, they may also impose costs—in the form of ATMs: ATM deployers indicate that surcharges have customer losses—on both ATM networks and network been a leading factor in the business decisions that have banks. An ATM transaction has two components: the led to the recent acceleration in the growth of ATMs.5 information provided by the cardholder’s bank, and the Customer Convenience machine and cash supplied by the ATM owner.