A Growing Quandary

By Newkirk, Kristine M. | Independent Banker, May 1998 | Go to article overview

A Growing Quandary


Newkirk, Kristine M., Independent Banker


Escalating ATM surcharge fees generate extra revenue but jeopardize long-term network access

People who don't keep accounts at Marine National Bank of Jacksonville, Fla., pay surcharges when they use the $60 million-asset bank's sole ATM. The extra fee income the ATM collects is welcomed, says Joseph Williams, the bank's president and CEO. After all, 80 percent of the ATM's transactions in a high-traffic tourist area involve so-called foreign customers.

But Williams sees long-term ramifications to surcharging for community banks--such as whether large banks are using surcharging to reduce community bank access to the payments system. "We as community banks are badly disadvantaged when the big boys can price us off the networks," he says.

As a result, surcharging is becoming a two-edged sword for Williams and other community bankers. The extra fee income surcharging brings community banks is often helpful, but having community bank customers increasingly face more and higher surcharge fees at competitors' ATMs tempts them to switch accounts to larger banks with more ATMs.

Community bankers like Williams are growing concerned about what they see as a big-bank attempt to rid ATM networks of the community banks that helped build those networks early on. Not so long ago, community banks were welcomed into large bank networks to build the transaction volume necessary to make ATMs viable. But that was before MasterCard and Visa lifted their bans on surcharging in April 1996.

With many more customers relying on ATMs and facing higher surcharge fees (now as high as $2 or more) at more locations, community bankers now feel pressured to develop alternative low-cost ATM links for their customers. Even bankers taking a stand for or against surcharging fear that payment system access is being compromised.

Williams wonders how high surcharges can rise before his bank's customers begin to migrate to other institutions with vaster ATM networks. "There is a limit to how much my customer will pay to bank with me," he says.

Community bankers, regulators and legislators on all sides of the issue are taking a harder look at the longterm effects of surcharging on the payments system.

Changing Consumer Habits

To avoid surcharges, consumers are changing their banking habits to avoid foreign ATMs. The number of foreign customer ATM transactions on the MAC network, for example, dropped 10 percentage points--from 60 percent to 50 percent--between June 1996 and June 1997.

Consumers in the southwest are also apparently walking away from surcharges. According to a recent Texas-based Pulse EFT network survey of consumers, nearly 70 percent of those surveyed said they never pay surcharges. More than 80 percent said they avoid ATMs they know impose cash-withdrawal fees.

Significantly, of those consumers polled in the Pulse survey who have paid surcharges, only 27 percent have paid more than $1 for an ATM transaction. According to Pulse, this suggests that consumers are willing to accept surcharges that are $1 or less. Higher fees make consumers more inclined to walk away from ATMs before paying a surcharge.

As surcharge fees climb nationwide, concern over whether consumers will move their banking accounts has community bankers adopting a number of short-term strategies to enhance their customers' access to ATMs.

Matthew Doyle, CEO of $308 million-asset Texas First Bank in Galveston, Texas, embraced a strategy that bigger is better--at least in terms of network size. Within the last three years, Texas First Bank and three sister community banks have collectively gone from zero ATMs to 20, blanketing their market area with proprietary machines.

Although building an ATM network this size required a sizable investment up front, plus about $1,500 per machine for monthly maintenance, Doyle says a surcharge fee of $1 should enable those machines to turn a profit of $25,000 to $30,000 this year. …

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