Commentary

More ATM Fees = More ATMs

By John Charles Bradbury
August 27, 1998

In the midst of a tough reelection campaign, Sen. Alfonse D’Amato (R-N.Y.) is posing as a champion of consumer rights: he is currently proclaiming the evils of charging fees for using automatic teller machines. D’Amato, chairman of the Senate Banking Committee, has released a new government study documenting the rising number of banks that charge ATM fees or surcharges.

In an effort to stop that trend, D’Amato proposes banning ATM owners from charging non-bank customers fees for using ATM services. At a committee hearing he exclaimed, “Double charges are a gold mine for banks and it’s the consumers that are paying dearly.” If the senator were to look a little closer at the issue, he might realize that the recent boom in the ATM industry — which has made life far more convenient for consumers — is the result of increased ATM fees. And if consumers are prohibited from paying for ATM services, they may lose the vast ATM network they now enjoy.

Consumers in our fast-paced society value quick, convenient access to their money. The first people to realize that were not banks but private entrepreneurs, who saw that they could make a buck by placing ATMs in convenient locations. It was the ATM fee that allowed those companies, which have no other way to recoup their costs for providing and operating the machines, to meet consumer demand. From 1995 to 1996 the number of ATMs ordered from manufacturers increased 40 percent. The number of orders during that time exceeded the orders from 1991 to 1993. Approximately half of those orders were placed, not by “big banks,” but by non-banking companies that make most of their revenue from ATM fees.

The fact that this growth occurred after the two largest ATM networks in the country (Cirrus and Plus) rescinded their ban on surcharges is no coincidence. ATMs in more convenient locations mean that consumers save time and money. Bank customers demand this convenience, and they are willing to pay for it.


In the past, when there were no charges for ATM use, there were far fewer ATMs. A low-cost ATM needs at least 3,000 transactions a month to break even. With a fee, that number is cut to 500.


But consumers often say, “I used to get this service without a fee, so why do I have to pay now?” The reason is that ATMs are not free. In the past, when there were no charges for ATM use, there were far fewer ATMs. A low-cost ATM needs at least 3,000 transactions a month to break even. With a fee, that number is cut to 500. Economist David Humphrey of Florida State University found that, although early studies of ATMs predicted savings for banks, the reality is that banks are actually taking a loss to provide this convenience. The consulting firm of McKinsey & Co. estimates that ATMs have cost the industry $1.5 billion and saved only $200 million.

Banks, like all businesses, want to make money. If they are going to lose money on a service, they will not provide it. With ATM fees, banks and non-bank ATM owners can place ATMs in places that were once not cost justified. Those places include grocery stores, convenience stores, airports and many other sites where people are happy to pay for quick access to cash. As a result, consumers don’t have to drive 20 minutes across town to get money out of the bank; instead, they can choose to pay the fee for the convenience of ATMs.

Many smaller banks also complain because they cannot support vast ATM networks, which are common to larger banks. At the Senate hearings, Wayne Cottle, president of the Dean Co-operative Bank in Franklin, Massachusetts, expressed his fear “that there will be a substantial deposit migration away from my institution.” In other words, “I cannot compete in this economy, therefore the government should protect me.” Is that any way to run our economy?

In the American economy, firms that do not provide the services consumers demand are replaced by those that do. What has made this county’s economy so prosperous is its refusal to interfere with competition and innovation. Competition is not something the banking industry lacks, given its 200,000 ATMs and 10,000 financial institutions. That free and open competition led to the invention of the ATM in the first place.

Another important fact to remember is that getting access to your money without a fee is still very easy. Customers can write a check, use a debit card or credit card or simply visit their own bank’s ATMs. Those who value convenience less still have other options for getting money, while those who would prefer to pay for this convenience can do so. If Senator D’Amato gets his wish, consumers will lose not only the fees that he despises so much but also the large network of ATMs on which consumers have come to rely.

John Charles Bradbury is the author of “ATM Surcharges and the Expansion of Consumer Choice,” recently published by the Cato Institute.