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Wednesday, March 1, 2000

They Can Afford It, Can’t They?

Stockholding Citizens Are the Ultimate Losers When ATM Fees Are Banned

A lot of bad public policy is based on the “they can afford it” principle. Pharmaceutical prices should be lower because pharmaceutical companies can afford it. Health insurance should cover two days in the hospital for mothers and their newborns because health insurance companies can afford it. My favorite example of recent months is the furor over ATM fees.

Once upon a time there was a world without ATM machines. You had to actually go to your bank, a giant assemblage of bricks and mortar to get your money. Imagine someone saying he would put a branch of the bank very near your house, a little tiny branch called an ATM. And miraculously, for a surcharge of maybe an additional two dollars, you could even use the ATM of a bank that was not your own.

It would probably seem like an incredible bargain. Alas, what once was a bargain is now considered an outrage by some. Some people think banks should not be allowed to charge noncustomers a direct fee for using their ATM machines. These fees should be eliminated, so the argument goes, because the customers’ own banks already pay the ATM’s bank a fee. And after all, banks make enough money already—they can afford it.

Market-based solutions to social problems often fail politically because of the way an issue gets framed in the media and the policy arena. In the debate over whether companies can afford to be regulated, market-based solutions almost always lose. After all, the companies can afford it in the popular sense of the term. They are always profitable, at least when the regulations are proposed.

Is there a good argument against the “they can afford it” gambit?

Shortly after the Santa Monica, California, city council and the voters of San Francisco voted to ban ATM surcharges in their respective cities, I heard a radio news story discussing the issue. The story quoted a Bank of America spokesman and a man in the street. The spokesman for Bank of America said, “Grocers don’t give away groceries. Doctors don’t give away medical care.” He sounded exasperated. He was probably being quoted at the end of a long and abusive interview.

Giving Things Away

On the surface, the spokesman’s argument was silly; banks and other businesses give away lots of services for free while charging for others. Giving him the benefit of the doubt, I think he meant to say that banks, like every other business in America, should have the right to charge for their services.

I agree. Maybe even the courts will recognize that cities have no right to regulate banking fees. (I despair of the courts’ ruling that the federal government has no such right either.) But in the battle for public opinion, rights-based arguments (and especially constitutional arguments) are often unpersuasive. Much more common is the argument of the man on the street whose quote followed the Bank of America spokesman’s. It went something like this: “Banks make a lot of money. What right do they have to charge $1.50 for me to get my own money?”

The banks and the pharmaceutical companies and the health insurers need to reframe the argument if they want to have any impact on public opinion.

It helps to think of the ATM as a very specialized vending machine. When we go to a soda vending machine, we understand there are two costs of using the machine: the soda itself and the storage and refrigeration costs. In the case of a soda vending machine, these costs are combined into a single fee you are charged to get a soda.

In the case of the ATM, there are implicit and explicit fees to cover the various costs of storing and providing the money: the cost of maintaining the machine, the cost of keeping it filled with cash, and the occasional loss of cash due to theft. When you get money from a machine belonging to a bank that is not your own, there are additional costs and additional fees charged to your account.

But suppose there were no fees taken from your account. Suppose if you wanted to use the machine of a bank that was not your own, it took six quarters to use the machine. Imagine standing in front of the machine, about to put your six quarters in, when along comes an affluent well-dressed man in a custom- tailored suit. “Excuse me, sir,” you say politely, bringing him to a halt. “You look prosperous. Would you mind giving me six quarters to use this machine?”

Or how about this exchange? “Excuse me, sir. Do you own any Bank of America stock or mutual funds that hold their stock?” If he answers yes, you explain that because he made plenty of money last year, surely he can afford to share six quarters in a friendly gesture.

But why worry about whether he is a stockholder or even if he looks prosperous? Why should you have to pay to get money out? Just ask a random stranger for the six quarters. Wouldn’t it be more pleasant to have someone else pay for your service?

When you frame the question in this way, it doesn’t seem as plausible a request as making the banks reduce their profitability. Of course, “we” are the banks. Our fellow citizens who are the stockholders pay out of their pockets for a ban of ATM fees. Or the money comes from other customers or the employees in the form of lower wages. There is no free lunch.

Recommended Response

All of the above is a bit lengthy for an effective radio interview. So here is my recommended speech for corporate interviewees when asked if they can afford to cut fees: “We’d love to cut fees. But unfortunately, there is no free lunch. We believe it would be immoral to make our customers, employees, or investors pay a price for serving the customers of other banks.”

“But,” interjects the interviewer, “don’t you charge more than the actual cost? Don’t you make a profit out of letting people get access to their own money?”

“Sometimes we do. That is the reward to our investors for taking the general risk of investing in a bank and for the specific risk of putting money in little machines that are prone to being robbed. Without that return, there would be no banks and you would keep your money under a mattress and sleep poorly. But look at the bright side of such a world. You would be able to take your money from under the mattress free of charge.”

  • Russell Roberts the host of the weekly podcast, EconTalk and co-creator of the Keynes-Hayek rap videos. His latest book is How Adam Smith Can Change Your Life. He is also a John and Jean De Nault Research Fellow at Stanford University"s Hoover institution.