All Commentary
Wednesday, March 1, 2000

Stealing from ATM Machines

There's Still No Such Thing as a Free Lunch

Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author and editor of several books, including The Politics of Envy.

A few years ago, an ATM in Georgetown, an upscale neighborhood in Washington, D.C., malfunctioned. People lined up to clean out the $20 bills being handed out in place of $5 notes.

San Francisco voters essentially did the same thing last fall when they passed an initiative to ban ATM fees. Apparently the latest American entitlement is no-fee convenience cash. Banks should install ATMs, far and wide, but not charge noncustomers for using them.

The city council in Santa Monica, California, and the states of Connecticut and Iowa have enacted similar bans. Other cities are threatening to act. The Defense Department is considering imposing a prohibition for ATMs on military installations.

Naturally, the politicos argue that they are protecting the public interest. But—shock!—it turns out that banks are willing to fight back. In November, Bank of America and Wells Fargo announced that noncustomers would not be able to use the banks’ ATM machines in Santa Monica. They said they would do the same in San Francisco if the California Bankers Association lawsuit against that city failed. Wailed one frustrated customer, “I use this [Bank of America] machine because it’s convenient. My bank is a small bank and it doesn’t have many ATMs.”

Fair is fair, however. Why should banks pay to provide cash machines for people who have accounts at other institutions? Yet the believers in a free lunch were outraged.

USA Today editors called Bank of America and Wells Fargo “nasty” and “sour.” The newspaper suggested that governments retaliate by withdrawing tax receipts from banks that impose a surcharge.

What better evidence is there of a government out of control? Most Americans would agree that the nation faces lots of serious cultural and social problems. ATM fees would not, however, seem to be particularly important. After all, no one has to use an ATM. Not that many years ago no one could, since they didn’t exist.

But now there are more than 227,000 ATMs across America. The improved convenience for consumers is obvious. That benefit is now evident even overseas, where travelers can acquire foreign currency at a better exchange rate than from local merchants.

So banks and the other businesses that now routinely install ATMs are providing a service. People who use them believe the benefits of not driving across town to their bank are worth the cost. Why shouldn’t ATM owners be compensated for their troubles?

The primary argument for not doing so is that Americans are morally entitled to free ATM service. Apparently we all have a right to life, liberty, the pursuit of happiness, and non-fee ATMs.

Whence that right stems is not clear. But it is a great principle. How about applying it elsewhere? The right to free cab rides and television repair? The right to free cable TV and telephone service? And so on.

Actually, ATM owners have a moral right to set their own fees. But, cry the USA Today editorial writers, “consumers need a break.”

Everyone would like a break. By what standard are ATM fees too high?

The so-called U.S. Public Interest Research Group, a left-wing lobbying group, has led the charge, arguing that the fees, which now average $1.27 for large banks and $1.03 for small ones, are excessive.

Although everyone assumes that ATMs are cash cows, in fact they are not. Cash machines have not allowed banks to eliminate tellers. Explains analyst John Charles Bradbury, “Instead of substituting for and replacing tellers, ATMs have become a complementary service offered by banks.”

A Federal Reserve study figured that banks lose an average of more than $10,400 a year per machine. As a result, the total industry loss exceeds $1 billion. A McKinsey & Co. study found that the machines have saved $200 million but cost $1.5 billion.

So why do banks offer ATMs? To attract customers. And why should banks, and especially nonfinancial institutions, add more ATMs? Until now, at least, they could collect fees.

As Bradbury has observed, “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.”

Indeed, prior to 1996 the major networks, such as Cirrus and Plus, banned fees. Later, they dropped the ban under pressure by member banks and, interestingly, the government. The Department of Justice considered filing suit against the prohibition as anticompetitive.

Governments may get away with banning ATM fees and not cause banks to yank out existing machines. But, as Bank of America and Wells Fargo proved, the banks can deny noncustomers access.

Moreover, banks—and nonfinancial companies that now provide half of new ATM machines—aren’t likely to put them in new, and increasingly remote, locations. In fact, in recent years the greatest expansion has occurred in places such as convenience stores, grocery stores, shopping malls, and airports. The opportunity to get cash in such locations is worth far more than even the highest fee.

Once consumers find diminishing access, they will probably start clamoring for a subsidy. And the politicians, urged on by ATM-makers, will be only too happy to oblige.

The only conceivable role for government is to ensure that ATM machines list the fees charged. Indeed, last year’s banking reform mandates disclosure and giving consumers the opportunity to cancel the transaction before any fee is charged.

Not even this step is necessary, however. Consumers can simply avoid any machine on which fees are not listed.

The only other conceivable argument for a fee ban is that such charges put small banks at a disadvantage because they can’t create similarly large (free) ATM networks for their depositors. But there are plenty of other ways to get cash for free (including debit cards) and plenty of other reasons to choose a small bank (including more personal service).

Indeed, advocates of fee bans obviously think consumers are stupid. USA Today whined that “big banks, hiding behind their high ATM surcharges, tend to charge higher fees and pay less interest than smaller institutions.” Actually, this demonstrates that financial institutions can and do offer competing packages of benefits. If customers prefer bigger ATM networks to lower fees, who are the USA Today editors or Santa Monica city councilmen or San Francisco voters to deny them?

Anyway, small banks have no claim to public aid because they are small. The ATM prohibition is an attempt to force larger banks to underwrite their smaller competitors by giving customers of the latter free access to an ATM network that is expensive to introduce and maintain.

The campaign to ban ATM fees is yet one more attempt to find the free lunch that never exists.

  • Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.