The nirvana fallacy and ATM fees

Australians have woken to the news that the hated ATM withdrawal fees have been scrapped.

Here is our political class claiming credit:

Mr Morrison said the initiative — led by the Commonwealth Bank as it attempts to recover from a series of scandals — followed on from the government outlawing businesses profiteering from credit and debit card transaction fees.

“There’s a whole range of costs that are thankfully and usefully coming out of the system now and this is another one, but we’re taking action now and we’re glad to see the banks have too,” Mr Morrison said.

Labor MP Peter Khalil said the ATM decision had come after calls from Labor for a banking royal commission, while Liberal senator James Paterson said it was good to see the banks acting of their own initiative without government intervention.

Not quite. The real villain of this story is the Reserve Bank of Australia and their ill-considered 2009 “reforms”.

The nature of ATM 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 reforms, when a consumer made a transaction at an ATM that was not owned by their own financial institution (a ‘foreign transaction’), their financial institution paid an ‘interchange fee’ of around $1.00 to the ATM owner. The financial institution then passed that fee (and often more) on to their customer as a ‘foreign fee’ that was visible to the cardholder only on their subsequent monthly statement. By 2009, a foreign fee of $2.00 was common, double the typical interchange fee. The Reserve Bank was concerned about the inflexibility and lack of transparency of these fee arrangements and in 2009 interchange fees and foreign fees were removed. Instead, ATM owners were allowed to charge cardholders directly for making an ATM withdrawal, provided that the direct charge was disclosed clearly to the cardholder and the cardholder was given an opportunity to cancel the transaction (at no charge). 

As my RMIT colleague Jason Potts and I have argued the RBA didn’t understand the underlying economic rationale for interchange fees and got the policy horribly wrong. In their pursuit of neoclassical purity and a desire to make the real world conform to their ideological priors the RBA instituted a policy that clearly disadvantaged  consumers.

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16 Responses to The nirvana fallacy and ATM fees

  1. Louis Hissink

    How long before our political masters stumble on the really, really good idea of making usury illegal?

    It might take a Short(en) wait, perhaps ? After all, their Faith du jour, praise be to him and his messenger, proscribes it, so if our fate is creeping Meccanisation, why not also completely misunderstand the time value of money and ban interest payments as well.

  2. RobK

    As I understand it, the use of ATMs is waining with the uptake of tap&go so the banks are saving face magnanimously giving up a dwindling cash cash cow and everyone gets a pat on the back. It’s all sweet now. 🙂
    Still it’s a good thing rather than bad, shame it took so long.

  3. Rob

    This was a terrible policy. I live in a small regional town with only one atm. There was no inter-bank fee before 2009 as the banks had a gentlemen’s agreement to not charge it in places where an alternative was not easily available. The reserve bank, cheered on by PM Ruddy, forced them to charge it regardless – this was fairer you see.

  4. Tim Neilson

    #2507067, posted on September 25, 2017 at 11:23 am

    Sounds about right.

    People are being charged fees for a service, and technology and the free market produce an alternative which helps them get what they need cheaper.

    Without any government interference.

    But then politicians leap into the fray to claim credit.

    At least so far we haven’t seen the Termite/Peanut Head duopolistic cartel impose any more regulatory burdens (funded by charges or taxes on the banks which of course would never translate into higher costs for consumers or less return for investors).

  5. Mark

    Of course, the net outcome of this will be less ATMs. This may not matter as their usage is declining anyway.

    Small regional towns with only one ATM – will soon be small regional towns without an ATM

  6. H B Bear

    For a long time a wide branch network was a competitive advantage for a bank. Now it is just a cost.

    Creative destruction at work.

  7. mh

    Australians who live in an urban/suburban area should have better things to whinge about anyway. How about they walk 100 yards to their banks’ ATM. Can they not plan their lives a bit better? Fair dinkum.

  8. JohnA

    mh #2507103, posted on September 25, 2017 at 11:49 am

    Australians who live in an urban/suburban area should have better things to whinge about anyway. How about they walk 100 yards to their banks’ ATM. Can they not plan their lives a bit better? Fair dinkum.

    And now that those fees have been abolished, there is no market incentive to gain any exercise at all. Where are the Obesity Police when you need them?

    Second point: if the supermarkets have their wits about them they would fight this because cashouts at the checkout should be a win for them:
    a) less cash to deposit so lower costs of cash handling (holding costs, insurance and fees from the cash transporters)
    b) more fees at the checkout for the banks.

    IIRC, if you do a cashout at the supermarket the whole transaction is taken as a cash withdrawal, attracting different (= higher) fees. Now the incentive will shift to doing one ATM withdrawal and using the cash for more retail transactions. The retailers will face a larger incoming tide of cash instead of an ebb tide.

  9. Bruce of Newcastle

    I looked up ATMs just now and I’m surprised how cheap they are. A wall mounted one may only cost $10,000. Likewise getting them filled up may cost only $100 or so.

    Which at $2 per transaction means it’d take only 50 transactions to pay for each refill, and 5,000 more transactions to pay for the machine itself. By which time the poor thing has died of overwork.

    The fees don’t only pay for the payments system you know.

  10. FelixKruell

    The should have learnt from the disastrous outcome of their earlier payment system ‘reforms’ – after which we all started paying ridiculous credit card surcharges.

  11. d

    Surely ATM fees are going because there is no value in collecting them anymore? Surely the banks are realising that because the use of cash is declining, paying for an ATM network that less people are using is costly. Therefore, with the big banks dropping the fees, they free up their networks for anyone and no longer have to invest in new ATMS and/or decrease support for their own.

  12. Baldrick

    Cut the RBA some slack. They’ve been busy with other things, like fulfilling their statutory reporting obligations to Equity and Diversity.
    sarc off/

  13. Nerblnob

    I use ATMs in supermarkets more often than banks when I’m in Australia – or anywhere really.

    Soon you’ll need them more often when cities catch the Uber-banning disease.

  14. Spring is near

    Correct me if im wrong but i understand most ATMs were sold on to private investors. Many retirees have used ATMs as investments getting a rent or percentage of the fees. So it would be perfectly logical for banks to give away other peoples revenue.

    I have seen stats showing the significnat drop off in ATM use since tap and go was introduced. The ATM show is over.

    Virtue signalling bank style.

  15. Huh? ATM in a … supermarket? Wtf for?
    ATM’s are not free to operate. As noted above, there is a cost to the hardware, and to the provision of analogue cash.
    But they’re cheaper than an Eftpos. A tap ‘n’ go is fine when it is quiet.
    However a cash transaction is the fastest of all. Electronic transactions are about twice as long, sometimes three times as long.
    When it is busy my bar eftpos always “malfunctions”.

    The driveway eftpos never fails, and the merchant service provide has to guarantee me the average transaction time is closer to 5 seconds than 10 seconds. This is coz I once had a new install that took about 30 seconds to process, major fight between the bank & me, now such an extended transaction time is grounds for me to terminate without notice the merchant agreement.

  16. Dave in Marybrook

    I was a bit miffed the other day, going to a car hire depot and showing them the printout of my on-line booking.
    “I’m sorry sir, your booking looks like it’s with Avis… this is Hertz.”
    “But there’s no Avis in Marybrook. Come on, hand over the keys, I’ve paid my deposit.”
    “Errr, maybe you should have planned your holiday a bit better?”
    “Come on, they’re all Toyota Corollas. I’ve paid a deposit for a Corolla, and I’m here, now, wanting one. Hand one over, surely you’ve got a spare?”
    “Sir, our cars are all allocated for our Hertz customers, and we manage their supply and location to best suit our customers. No doubt Avis does the same, they are another successful car hire company…”
    “Yes yes yes, that’s why I use Avis, but as far as I’m concerned, you’re all the same, and probably in cahoots to fleece customers and bump up unnecessary charges. Now, give me my Toyota!”
    etc etc

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