RDP 2012-03: ATM Fees, Pricing and Consumer Behaviour: An Analysis of ATM Network Reform in Australia 2. The ATM Market in Australia

At the beginning of 2009 there were around 27000 ATMs in Australia. Each of these machines provided cash withdrawal services and could be used by cardholders of all Australian banks, credit unions and building societies (hereafter generally referred to as banks). Deposit customers were typically not charged for using ATMs owned by their bank (‘own-bank’ ATMs).^[3] In contrast, until March 2009, the use of a foreign ATM may have led to the levying of interchange fees, foreign fees and direct fees, although ATM owners chose not to impose direct fees (Figure 1).

2.1 Reform

In March 2009, the payments industry and the RBA introduced major reforms to Australia's ATM system. These reforms involved the elimination of interchange fees and a move to direct fees, reflecting concerns regarding efficiency, deployment of ATMs, the transparency of fees and the sufficiency of competition.^[4] As the reform altered the fee regime, it prompted an adjustment in ATM fees. Post-reform, an ATM owner's only recourse to recovering the cost of providing ATM services from non-deposit customers is to charge directly for ATM services (see Figure 1).^[5] In addition to the formal elimination of interchange fees, the RBA also discouraged the use of foreign fees, although foreign fees were not formally banned (Lowe 2009; RBA 2009c). These aspects of the reform were aimed at increasing the transparency of ATM fees: as part of the reform, direct fees must be displayed prior to a transaction being finalised, at which point the customer can cancel the transaction at no cost.

At the time of the reform, banks claimed that discouraging foreign fees was inappropriate because a foreign fee was needed to recover the costs incurred when their deposit account customers used foreign ATMs (ABA 2009; Westpac 2009).

These costs no longer included interchange fees but still included managing disputed transactions and customer complaints, settling the transactions and costs associated with maintaining ATM network connections. These are hereafter collectively referred to as the own-bank processing cost which was estimated to be $0.12 on average in 2007, which was 14 per cent of the total cost of an ATM withdrawal to financial institutions (Table 1).

ATM operators also incur costs when a withdrawal takes place at one of their machines. In 2007 the average cost to an ATM operator was $0.74. Similarly, more recent survey data suggest the industry average cost per transaction was $0.70 for ATM operators in 2010 (Edgar, Dunn & Company 2010), although there is considerable variation in the average cost across types of ATM operators and ATM locations. For a foreign ATM transaction, the ATM operator and the cardholder's bank are separate institutions; in own-bank transactions they are the same entity.

2.2 Empirical Features of the Reform

Prior to the reform, interchange fees were around $1.00 per transaction and foreign fees were around $2.00 per transaction. Post-reform, when interchange fees were prohibited, almost all institutions increased their direct fees from zero to $2.00 (for a cash withdrawal; Table 2). A year on from the reform, direct fees had largely stayed at this level (Filipovski and Flood 2010).^[6] Foreign fees adjusted in the opposite direction, by around twice the change in interchange fees. Many Australian financial institutions immediately dropped their fees to between $0.00 and $0.50 on the day the reform was implemented (RBA 2009b) and over the month that followed virtually all financial institutions reduced this fee to zero, where they have remained (Table 2).^[7] Following the reforms, cardholders continue to be able to use own-bank ATMs without charge. For a sample distribution of fees charged by financial institutions and independent ATM operators before and after the reform see Appendix A.

Given the offsetting movements in foreign and direct fees, the price paid by consumers for using a foreign ATM remained broadly unchanged at around $2.00. However, as the price is now comprised entirely of the direct fee, customers see the total price of a foreign ATM transaction directly before deciding whether to proceed.^[8]

As well as affecting prices, the reform appears to have brought about an acceleration in the pace of ATM deployment. The number of ATMs grew at an annual rate of 5½ per cent over the two years following the reform, compared with average annual growth of 3¼ per cent over the four years to March 2009 (calculated using Australian Payments Clearing Association (APCA) data). With the move to charging direct fees, ATM operators were better able to set fees that reflected costs; deploying ATMs in low-volume or high-cost locations became more viable and it was easier for non-bank operators to participate in the ATM market (Treasury and RBA 2011).

Footnotes

Many Australian banks – particularly the larger banks by market share – offer accounts with unlimited free own-bank ATM transactions, while some institutions limit customers to around six free transactions per month (RBA (2004) and bank websites). As the average number of ATM withdrawals made by an individual in a month is around four (Emery et al 2008; Bagnall et al 2011), it is unlikely that a material number of consumers paid own-bank ATM fees. [3]

See RBA (2009a) for details on the reform package. [4]

Non-deposit customers refers to the potential users of a bank's ATMs that are not the bank's deposit account customers. [5]

Of the institutions that were not charging a direct fee of $2.00 a year on from the reform, most were charging a direct fee of $1.50 with the remainder generally charging more than $2.00. [6]

Well after the reform, only a very small fraction of Australia's deposit-taking institutions charge a non-zero foreign fee. These foreign-fee charging institutions are all small credit unions or building societies, and some foreign fees only apply after a certain number of transactions have been made. [7]

As opposed to seeing the price on their bank statement, which was the case when the price of a foreign ATM transaction was composed entirely of the foreign fee. [8]