On ATM Fees

by Don Boudreaux on September 8, 2006

in Regulation

Tyler Cowen found at the NBER site this paper about ATM fees.
Here’s Tyler’s summary of the intuition behind the
paper:

The core intuition is that a given ATM often has monopoly
power ex post, once you are there and need the money.  Lower fees mean
fewer machines but that still might be better than facing the mark-up.
Here is the paper, whack it
down if you can.

Here are a few of my own thoughts.

First, in city centers ATMs don’t seem to be particularly
scarce or so far apart from each other to justify accusing many of them as
having locational monopolies.  A few
months ago I was in Aveiro, Portugal, and in
quick need of cash.  Even though Aveiro
is no great metropolis, I noticed three ATM machines each within (I’m estimating
here) less than a five-minute walk from the little shop that refused to accept
my credit card as payment (and, thus, caused me to seek out cash). (The machine I used charged a fee; I presume
that also the others would have charged me a fee.)

So the locational-monopoly story might work for the lone ATM
in some remote town nestled high in the Canadian Rockies, but surely it is a
suspect account of ATM fees charged for use of machines in cities.

Second, and relatedly, as the acceptability of credit cards
(at least in the U.S.) for making even very small payments increases, the
plausibility of the locational-monopoly account of ATM fees shrinks. Greater acceptability of credit cards as
payment for the likes of cups of coffee and ice-cream cones means that even the
lone ATM within a convenient walk of a Starbucks or a Baskin-Robbins has less
locational-monopoly power than it might have possessed just a few years ago.  Are ATM fees becoming rarer?

Third, the locational-monopoly account fits very awkwardly
with the fact that banks typically do not charge ATM fees to their own
customers. Presumably it’s just as
inconvenient for a Bank of America customer to seek out another ATM (other than
the Bank of America ATM that he’s about to use) as it is for a Citibank bank
customer, standing behind him in line, to do so.

Fourth, if we grant (contrary to what I argue above) that
ATMs indeed are little locational monopolists, this putative fact would mean
that ATMs are at least far enough apart from each other that it’s not worth the
typical cash-seeking person’s time to walk or drive from one ATM to another in
order to save a dollar or two.  By the
NBER paper’s authors’ admission, though, outlawing ATM fees reduces the number
of ATM machines. Thus, with fewer ATM
machines the average distance between each one still in operation increases, making
any need to trek from one to another even more burdensome.

So imagine a busy Saturday night in downtown Des Moines, where ATM
fees are prohibited.  A long line exists
at a few, and one or two others are out of service.  The inconvenience facing customers needing
cash to find the nearest working ATM is now greater than it would have been had
the government of Iowa not outlawed ATM fees. Are these
customers made better off by the prohibition on ATM fees?

Fifth, many automobile dealerships today offer free loaner cars when you bring a car that you bought from that dealership into that dealership for service or repair.  But I know of no dealership that offers free loaners to persons driving other makes of automobiles.  If governments mandate that any dealership that offers free loaner cars to service-customers who bought their cars from that dealership must also offer free loaners to service-customers who bought their vehicles from other dealerships, what would happen to the prevalence of "free" loaners?

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  • Interesting that you mentioned Portugal. Portuguese ATMs charge no fees for Portuguese card-holders (even outside of your own bank)!


    I think fees are allowed by law, but no bank is stupid enough to charge them. You do pay ten euros a year for card maintenance, but that's not really a major thing.

  • I think that it's possible a system where banks do charge the other bank a fee, but this bank chooses not to pass it to the customer.


    All in all, things should even out, and no bank will be actually paying any other bank any large amount of money. Net result: the right, strong, incentives for ATMs to pop up and no fees for the customer.

  • John Hall

    I've lived in both Iowa and currently NYC and I gotta say that comparing the ATM situation in both of those areas is like apples and oranges. Iowa and all other small towns are virtually impossible to get around without cars. That alone creates a different atmosphere. Furthermore, 99% of stores in Iowa (and rural America I presume) accept debit cards and credit cards because most of the stores are national chains or compete against national chains which accept them. In 6 years in Iowa and 3 in Indiana, I don't think I went to more than 2 places that didn't accept cards.


    However, in NYC (for only three weeks), I've been plenty of places that don't accept cards unless you make like 15-20 in purchases or at all, but I would say 25-50% of these places had their own ATMs in the store (for a fee of course).


    It's a different economy to compare against. In a driver-dominated economy, it costs very little to stop by the ATM at one point of your trip if you know a place you're going won't accept your cards. In the city, I'm rarely more than 4 or 5 blocks from a Chase ATM and rarely more than a block away from a fee-charging ATM.

  • luispedro,


    I'm curious. Where do you think the banks would get the money from to pay fees to each other?

  • Ammonium

    I'm pretty sure that all of the credit card companies prohibit retailers from mandating a minimum charge for credit cards. Retailers may put out signs about a minimum fee, but it's against their contract and they could be reported.


    It seems like most anywhere I use an ATM there are at least 3 ATMs sitting next to each other or on the same block. It's pretty likely that one of them won't charge me a fee, even though I have a small bank from another region of the country.


    The worst fees are at ATMs in bars. I suppose if you're drunk and the bar is full, you probably would rather pay the money then having to walk around looking for a cheaper ATM and then wait in line to get back into the bar. I think I also remember some really high fees once in a casino.

  • Bob Smith

    I think that it's possible a system where banks do charge the other bank a fee, but this bank chooses not to pass it to the customer.

    That's what USAA Bank does. They reimburse you for up to $12/month in ATM fees. Note that since they do that once a month, after the fact, low account balances can end up costing you overdraft fees, too.
  • Ted

    Ten euros a year sure sounds like an ATM fee to me. Most years I don't pay $12 worth of ATM fees.

  • The best way to create change with ATM's is don't use them. When I travel, I make heavy use of credit cards and plan ahead so that I have "enough" cash merely as backup or for the piddling small purchases. The cash is secured when I go to the bank approximately once evry two weeks. This isn't difficult - I've used an ATM exactly once in my life.

  • Bob,


    Aside from their customers, where would a bank get money to cover the costs that it incurs, such as the cost of reimbursing ATM fees?

  • John Thacker

    I have seen a place where a locational monopoly did come into play-- but that was aboard a cruise ship.

  • "I'm curious. Where do you think the banks would get the money from to pay fees to each other?"


    From the fees they charge each other. Its like check clearing: If bank A owes bank B 100 and bank B owes bank A 99, only 1 dollar changes hands, but more than one bank can be involved.


    I think that it should even out: bigger banks have more customers but more ATMs, as well. So they get more charges to pay, but receive more as well. Net balance: around zero.


    As for 10 euros/year being like ATM fees. No, they are not. I am yet to pay a fee in the US, but I take care not to use other banks' ATMs and carry a lot of cash. I did lose in convinience. The extra convinience sure is worth $10/year, but not $2/withdrawal.

  • My suggestion is for everyone to use debit card instead! Or Credit card would be even better. For city people, ATM withdrawal can pushed to zero. There is no need to carry lots of cash everywhere. We could probably ask the accounting dept. to make the paycheck partially in small cash also, so no need for actual ATM withdrawal. At least it is workable at my place.


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