Submission to the Senate Inquiry into Matters Relating to Credit Card Interest Rates

ATM Fees

Background

The ATM system is made up of two types of ATM owners. Financial institutions maintain networks of ATMs largely as a service to their own customers, who can transact on those ATMs without paying an explicit fee. A larger network is likely to attract more depositors, therefore it may not be critical that financial institution ATM fees cover the cost of installing and running ATMs, given that the institution can profit from the broader customer relationship. Independent ATM owners, however, operate their networks as a stand-alone business and rely solely on the fees generated to be viable. Independently owned ATMs make up a little over half of all ATMs currently deployed in Australia.

As noted, no ATM fees are typically paid when a cardholder makes a transaction (withdrawal or balance enquiry) on an ATM owned by their own financial institution (‘own ATM’). However, fees are often paid when a cardholder uses an ATM owned by another financial institution or an independent owner (‘foreign ATM’). The nature of these fees changed in 2009 when a set of reforms was introduced by the Australian payments industry, with support from the Reserve Bank.

Prior to the 2009 reforms, two types of fees were generated on a ‘foreign’ ATM transaction. An interchange fee was paid by the cardholder's bank to the ATM owner to remunerate the ATM owner for the service provided. These fees were bilaterally negotiated but were generally around $1.00 per transaction. The cardholder's bank recovered this cost by charging a ‘foreign fee’ to the cardholder. By 2009, a foreign fee of $2.00 was common, double the typical interchange fee.

Interchange fees had proved to be extremely inflexible. With the cost of ATM provision rising, there was concern that the $1.00 interchange fee might make deployment of ATMs by independent owners uneconomic, resulting in a decline in the availability of ATMs. This would be likely to affect regional and remote areas more severely, due to the higher cost of maintaining ATMs in those areas. At the same time, the Bank had concerns about the transparency of the foreign fees charged by financial institutions to their own cardholders. The fees were not disclosed at the time of the transaction; the cardholder would typically see them for the first time when they checked their bank statement at the end of the month. It is likely that many cardholders were unaware that they were paying these fees, particularly for balance enquiries.

The 2009 reforms removed interchange fees in the ATM system and allowed ATM owners to charge cardholders directly for making an ATM withdrawal. This ‘direct charge’ had to be disclosed clearly to the cardholder before they completed the transaction, providing an opportunity for the cardholder to cancel the transaction if they did not wish to pay the fee. At the same time, financial institutions were encouraged to remove the foreign ATM fees charged to their own customers as these could no longer be justified where no payment was being made by the institution to the ATM owner. Some additional changes were made in an effort to remove barriers to entry to the ATM system.

Effects of the reforms

The reforms had a number of effects:

• Financial institutions ceased charging their own cardholders a foreign fee. The new direct charges imposed by ATM owners in most cases were initially set at around $2.00. In other words, for a foreign ATM transaction, a $2.00 foreign fee was simply replaced by a $2.00 direct charge.
• The increased transparency of these arrangements resulted in a marked change in cardholder behaviour; there was a significant shift by cardholders to use ATMs provided free of charge by their own financial institution, saving an estimated $270 million in fees in the first two years of operation.
• Cardholders also started to make greater use of eftpos cash-out at retailers, where there is generally no charge.
• ATM numbers increased as independent deployers took advantage of the ability to set their own fees rather than relying on the $1.00 interchange fee. In addition to increasing the number of ATMs in ‘convenience locations’ such as small stores or clubs, it became possible to locate ATMs in low-traffic locations and provide temporary ATMs at festivals and events. There was strong competition between deployers for suitable ATM locations, which had the effect of bidding up rents or ‘rebates’ at those locations. Overall, ATM numbers increased by around 14 per cent between 2009 and 2012.
• Financial institutions sought to provide their cardholders with a wide network of fee-free ATMs. In addition to their own ATMs, smaller institutions have been able to provide fee-free access to another large network – most often Cashcard, RediATM or Westpac/St. George.

Current state of play

Networks

According to the Australian Payments Clearing Association (APCA) there were 31,829 ATMs in Australia in June 2015. This represents around 1,300 ATMs per million inhabitants, which is relatively high by international standards (Graph 18). Looking ahead, it is likely that ATM numbers will begin to fall, given the observed decline in cash use and ATM withdrawals discussed further below.

Currently, around 45 per cent of the national ATM fleet is owned by financial institutions and the remaining 55 per cent by independent deployers. As noted earlier, most financial institutions provide customers with free access to one of the major networks, meaning most Australian cardholders have access to a fee-free network of several thousand ATMs (Table 2).

Fees

There is no regular, comprehensive source of information on ATM direct charges. The Reserve Bank has from time to time conducted a survey of the major players in the industry to gain more information and has completed such an exercise in recent weeks for the benefit of the Inquiry. The Bank estimates that the survey covers around 97 per cent of ATMs in Australia (Table 3).^[12]

The survey reveals that the average direct charge for a ‘foreign’ withdrawal in July 2015 was $2.33, up from $2.04 in 2010.^[13] This represents an increase of 14 per cent. Overall, direct charges on withdrawals have risen by 17 per cent from the typical $2.00 foreign fee prior to the reforms. This increase is similar to CPI inflation over this period and has occurred in an environment where, as discussed below, there has been a shift away from the use of cash for payments and a decline in ATM withdrawals, which has increased unit costs. The average direct charge for a balance enquiry was $2.15, up from $1.82 in 2010.

The increase in average direct charges for withdrawals since 2010 has been driven primarily by independently owned ATMs. Direct charges on these ATMs now average $2.57, up from $2.15 in 2010, an increase of around 20 per cent. Among financial institution ATMs, the average foreign withdrawal fee is $2.02. This is consistent with pre-reform foreign fees, but higher than the $1.94 average in 2010, reflecting NAB's decision to increase fees by 50c in 2013 to match the $2.00 charged by the other major banks.

These changes are reflected in the distribution of ATM fees (Table 4). In 2010, three-quarters of ATMs charged $2.00 for a withdrawal, with only 17 per cent above that level. While in 2015 $2.00 remains the most common withdrawal charge, close to one-third of ATMs now charge either $2.20 or $2.50, and close to one-fifth charge from $2.75 to $2.90.

The range of independent ATM withdrawal fees recorded in the survey is zero to $5.00. Only a small number of ATMs are at the very high or very low end of the range. For instance, 102 ATMs (0.3 per cent of an overall sample of 31,000 ATMs) charge more than $3.00. 25 ATMs charge the highest fee recorded of $5.00; deployers report that these tend to be located in adult entertainment venues. On the other hand, around 90 ATMs do not levy a direct charge on either withdrawals or balance enquiries.

Average direct charges on balance enquiries are lower than withdrawals, at $2.15, but they have risen at a somewhat faster rate – 33 cents or 18 per cent since 2010. In this case, financial institutions and independent owners have contributed equally to the increase. Two-thirds of balance enquiry fees remain at $2.00 or less, compared with close to 100 per cent in 2010.

While the model for provision of ATMs differs from country to country, withdrawal fees in Australia appear comparable with those charged in a number of other countries where fees apply (Table 5). Charges in India are significantly lower as a result of a regulated cap at the equivalent of A$0.42 (plus taxes), while in Brazil they are also relatively low at A$0.70. However in both cases those fees may apply to all transactions (including on the cardholder's ‘own’ network) once a threshold of transactions is reached. In jurisdictions with income levels closer to Australia's, fees start at around A$1.50 and can be as high as A$7.00. Notably, in Canada and the United States, both foreign fees and direct charges can be applied to the same transaction, potentially resulting in quite high costs to cardholders.

Transactions

While there has been a modest rise in average direct charges on foreign ATM transactions, the number of ATM transactions on which a fee is charged has been declining. Estimates from the latest survey indicate that a direct charge was paid on around 28 per cent of all withdrawals in 2014/15, down from around 33 per cent in early 2010.^[14] In absolute terms, the number of charged withdrawals declined by around 20 per cent between 2010 and 2014/15, suggesting that in total cardholders paid around $60 million less for withdrawals than in 2010.

The decrease in charged transactions is likely to have been even more marked for balance enquiries, where cardholders now have ready access to account information via internet and mobile banking. In 2014/15, less than 20 per cent of all ATM transactions were balance enquiries, but most of these were on ATMs provided by the cardholder's own financial institution. Overall, a direct charge was paid on 10 per cent of balance enquiries.

ATM withdrawals compete directly with eftpos cash-out. Use of eftpos cash-out increased significantly in the years following the reforms, as cardholders became more conscious of ATM fees and sought to avoid them (though the use of cash-out has also begun to decline recently, reflecting declining cash use) (Graph 19). Cash-outs have increased from around 20 per cent of cash withdrawals prior to the reforms to 27 per cent currently. If ATM withdrawals and eftpos cash-outs are combined, around 80 per cent of withdrawals overall do not attract a fee.

The Bank's 2010 Consumer Use Survey indicated that cash-out was used disproportionately in regional and remote areas where cardholders might have had less access to their own financial institution's ATMs. This indicates that those cardholders motivated to do so were mostly able to make withdrawals free of charge using cash-out facilities (Graph 20).

More generally, ATM providers are being affected by a decline in the use of cash as consumers switch to greater use of payment cards. The Bank's 2013 Consumer Use Survey indicated that consumer cash payments have fallen from 69 per cent of payments in 2007 to 47 per cent in 2013. As a consequence, the number of ATM withdrawals has been falling by around 4 per cent per annum since 2013, although the decline in the value of withdrawals has been somewhat less as the average withdrawal size has increased (Graph 21).

Costs

Information on the costs of ATM provision is available from the 2010 ATM Taskforce Report on Transparency and Competition, the Bank's Payment Costs Study and market studies produced by Edgar, Dunn and Company and the Payments Consulting Network.^[15]

These sources highlight that cost structures and business models differ markedly between financial institution ATM fleets and those operated independently. Financial institution ATMs tend to have relatively high transaction volumes compared with independently owned ATMs (based on the Bank's survey, around 100 per machine per day at financial institutions, compared with 25 per day at independently owned machines), meaning that the per-transaction costs of financial institution ATMs are much lower. However, given that their networks are primarily for the benefit of their own cardholders, relatively few of those transactions attract a fee.

The Bank's Payment Costs Study suggests that ATM owners on average face a per-transaction cost of $0.77 for providing an ATM withdrawal (based on a survey mostly focused on financial institutions).^[16] Therefore, cardholders who pay $2.00 to make foreign withdrawals at financial institutions’ ATMs are in effect subsidising the free transactions provided to those institutions’ own cardholders. However, as direct charges are paid only on around 11 per cent of withdrawals and around 6 per cent of balance enquiries, it is unlikely that ATM fees are covering the cost of financial institutions’ ATM networks.

In contrast, independent ATM owners receive a fee on all transactions, but their per-transaction costs are high compared with financial institutions and can vary significantly from provider to provider. Some contributors to the Bank's Payment Costs Study pointed to costs as high as $2.50 per transaction. While comprehensive current data are not available, Edgar, Dunn and Company in 2010 estimated that independent ATM costs averaged more than twice those of the major banks. This is partly because independent owners’ transaction volumes per machine are significantly lower than those of financial institutions, so fixed costs are allocated over fewer transactions. In addition, site costs are higher because most machines are in rented convenience locations, rather than on premises owned by the ATM owner, as is frequently the case for financial institutions.^[17] Based solely on financial institution data, the Payments Consulting Network report estimated that off-site costs in 2013 were around 50 per cent higher than owned sites. Further, the cost of site rental had increased by 47 per cent in the preceding three years.

Fee-free ATM arrangement for very remote Indigenous communities

The 2011 ATM Taskforce found that residents of very remote Indigenous communities were paying more in ATM charges than other Australians due to a combination of cultural factors and the fact that only independent ATMs (which charge all cardholders a fee) were viable in those locations.^[18] With support from the Bank and the Treasury, a group of fifteen financial institutions and the two largest independent ATM deployers agreed on a scheme to voluntarily provide up to 85 fee-free ATMs in very remote Indigenous communities in the Northern Territory, Queensland, South Australia and Western Australia. The scheme commenced in December 2012.

Reserve Bank of Australia
14 August 2015

Footnotes

The Bank appreciates the extensive assistance provided by the respondents to the survey, enabling it to cover around 97 per cent of the industry. The small proportion of the industry not covered is likely to reflect a mix of small financial institutions and independent deployers who each own relatively few ATMs. [12]

The averages quoted here, unless specified otherwise, are in terms of averages across ATMs, not across ATM transactions. [13]

This is broadly consistent with the findings of the Bank's recent Consumer Use Survey, which found a decrease of around 8 percentage points between 2010 and 2013. [14]

See Commonwealth Treasury and RBA (2011b), Stewart et al (2014), Edgar, Dunn and Company (2010), and Payments Consulting Network (2014). [15]

The card issuer also faces a cost on average of 8 cents per transaction. [16]

The Edgar, Dunn and Company data include financial institutions’ estimates of imputed site costs for branch ATMs; these were significantly lower than estimates for off-site locations. [17]

See Commonwealth Treasury and RBA (2011a). [18]