Mr. Chairman, members of the Committee, my name is John Ward, and I am President of First American Bank, a community-based bank in Elk Grove, Illinois, with $1.2 billion in assets. First American Bank owns and operates 177 automated teller machines and imposes convenience fees at all of them. I am appearing today on behalf of the Consumer Bankers Association (the CBA). The CBA was founded in 1919 to represent retail banks nationwide. Today, it represents approximately 750 financial institutions, which hold nearly 80 percent of all consumer deposits. CBA's focus is on retail issues, including deposit, investment, and lending products and services. Its membership includes bank holding companies, regional, super-regional and money center banks and community banks and thrifts. CBA's members include some of the largest deployers of automated teller machines in the United States.
I am pleased to testify today on the subject of ATM convenience fees. My message to the Committee is a simple one: I am a community banker and I support ATM convenience fees. I support them for many reasons.
First, consumers want the widespread availability of ATMs that has accompanied the introduction of convenience fees. ATM deployment has increased dramatically since the national ATM network rules changed in April 1996 to permit these charges. Convenience fees have permitted ATM operators to put machines in locations that would not have been economically viable without them. Here is an example from our market: Chicago's Wrigley Field had just a single ATM before the 1997 advent of convenience fees in Illinois. There are now at least five at the park. This sort of relentless competition clearly benefits consumers.
Second, consumers have (and will continue to have) many ways to avoid surcharges, and they will pay convenience fees when the location of the ATM and their need for cash make paying a fee more attractive than not. In fact, most people never pay a convenience fee, because they get cash back for no cost at a merchant when they use an ATM card, write a check for cash or go to a machine that does not impose a fee. They have quickly become educated about their alternatives and act accordingly.
The market for ATM services is operating freely, by increasing access and competition and by giving consumers more choice and convenience. If legislation is enacted to ban convenience fees, those benefits will be lost.
Third, convenience fees do not hurt small banks. The argument has been made that these fees are a ploy by big banks to steal customers away from smaller banks by forcing people to change their account relationships to avoid surcharges. This is not true.
As a community banker, I compete for my customer's business the old-fashioned way: by offering a superior product and superior service at a reasonable price. The greatest strength of community banks is their ability to give their customers personal attention. We also generally offer them better interest rates and pricing for our services.
Asking consumers hypothetical questions about their future behavior does not really address the issue of whether most consumers view convenience fees as the critical factor in deciding where they are going to bank. Clearly, most people, when asked whether they like paying a fee for something, are going to say they do not. People generally react negatively to any change, and the imposition of convenience fees at ATMs is clearly a change from what most consumers have experienced at ATMs over the years. But it does not mean that they will be driven away from banking relationships that have many other positive aspects simply to avoid an occasional surcharge.
A growing body of evidence bears this out. Research conducted on behalf of the Pulse EFT Association demonstrated that only 1.8% of checking and savings account customers in the Pulse network market area switched their accounts from one bank to another solely or partially to avoid surcharges. Further research on competition among Texas banks also indicates that surcharges have not had a negative effect on the market shares of banks with less than $250 million in assets. And remember that this research was conducted in the only market in the country where ATM surcharging has been prevalent for a significant period of time.
My views are echoed by other community bankers around the country. The Independent Bankers Association of Texas, representing close to 700 banks, has adopted a formal position that surcharging has not proven anti-competitive to small banks. Other community banker organizations in Colorado and Indiana have endorsed similar positions. Community-focused banks have begun forming networks that compete for consumers' business by advertising that they do not impose convenience fees. And a recent article in the American Banker newspaper stated that as many as 65% of small banks and 13% of credit unions are imposing convenience fees. This is compelling evidence that many small financial institutions do not feel these fees jeopardize their competitive posture or their relationships with their customers.
Small banks that are urging you to pass a ban on ATM convenience fees because they are concerned about competition should redirect their efforts. Healthy competition is the cornerstone of our economy. We should not try to avoid that competition by asking the government to step in. Doing so will only distort the marketplace and hurt both banks and their customers.
Certainly, one of the reasons I support ATM convenience fees is because they help offset the cost of ATM deployment and provide important fee income to my institution. Like any other executive of a profit-making enterprise, I have a duty to insure the maximum safe return on the investment of our shareholders. Foregoing ATM convenience fee revenue is not good economic policy for my institution. Being forced to do so by legislation would not be good public policy.
Another argument made by the opponents of convenience fees is that the financial services industry is "double charging" for the use of ATMs, imposing ATM fees on consumers, both for using their bank's ATMs and for foreign ATM transactions, and then "forcing" consumers to pay convenience fees when they use ATMs.
This is incorrect for several reasons. A financial institution makes the decision to charge a convenience fee and determines the amount of the fee independently of its decisions about fees for its own customers. Determining the amount of an ATM fee (or whether a consumer will even pay for ATM transactions) is a complex matter. Like any product pricing decision by a business, many factors are weighed in that decision. The importance of the customer to the institution will affect whether he or she will pay any fees at all, including foreign ATM fees.
In any case, the separate decisions of a bank to impose ATM transaction fees on its own customers and convenience fees on the customers of other banks do not result in double charging by the consumer's bank. If consumers choose to pay convenience fees, they are paying the fees to one of my bank or non-bank competitors, not to my bank. They are being charged for two separate services, by two separate entities.
The role of the ATM networks in the pricing equation is also the subject of much debate. Some people have suggested that an increase in the interchange fee set by the ATM networks would do away with convenience fees. The "interchange fee" is the charge paid by a customer's bank to an ATM operator (which may or may not be either a bank or a member of an ATM network) for the use of the ATM by the bank's customer. The interchange fee was designed in part to compensate the ATM operator for the use of the ATM by another bank's customer. Whether it ever adequately compensated operators for the costs associated with ATM placement is debatable, but it is generally acknowledged that the fees now rarely cover the costs of installing and operating ATMs. The only way that any ATM operator I know can make a business case for installing ATMs, particularly in convenience locations, such as resorts, airports, stores, and hotels, is by surcharging transactions initiated by non-customers. We tried it without surcharging, and the economics just do not work.
Before I close today, I would like to say that in my experience with consumers, I have found that they react rationally to market changes. It is clear to me that they are doing so in the face of increased numbers of institutions imposing convenience fees. When they do not want to pay convenience fees, they engage in behavior to avoid them: they use surcharge-free ATMs; they get cash back at point-of-sale locations; they use other means to obtain cash; or they avoid cash altogether by using credit or debit cards. Most people do not pay convenience fees; research has shown that almost 70% have never paid a convenience fee in the Pulse network market area, and approximately 25% of cardholders pay about 75% of the fees. For those consumers who are willing to pay for the convenience of getting cash when and where they want it, there are the 165,000 ATMs in this country from which to choose, nearly 20% more machines in 1997 than in 1996, and continuing to increase.
These consumers are reacting in the way the CBA and others have predicted they would. They have educated themselves about convenience fees, avoid the fees when it is convenient to do so through the many means available, pay them when the convenience of the ATM location outweighs the other costs, and clearly enjoy the benefits of much greater ATM deployment resulting from the ability of deployers to assess convenience fees. They rarely switch banks to avoid surcharges. A ban on convenience fees would clearly harm consumers because it would result in a decrease in the number of ATMs available and a reduction in consumer convenience and freedom of choice.
A ban will also hurt business. Financial institutions and other ATM operators would obviously lose fee income, but so would a myriad of small businesses that profit from ATM deployment. Convenience store and gas station operators, hotel and resort owners, operators of and vendors at sporting and entertainment events and thousands of retailers across America would all feel the impact of a surcharge ban in decreased revenues.
Thank you for this opportunity to present the views of the Consumer Bankers Association. I will be happy to answer any questions that members of the Committee may have.
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