Get your money for nothing, get your votes for free

Running with the theme of taking cheap shots at Australia from afar, I turn now to a popular but short-sighted proposal to cap ATM fees in Australia.

Member for Melbourne Adam Bandt told Tom Elliott banks had every right to ensure they didn’t make a loss processing a transaction, but that should be where it started and ended.

“Don’t let them make a profit out of it,” he said on 3AW Drive.

“As a matter of principle, we believe people shouldn’t be charged for the privilege of accessing their own money.”

It should come as no surprise to anyone that the US’ own paragon of economic illiteracy, Bernie Sanders, is advocating a similar proposal for similar reasons.

Vermont Sen. Bernie Sanders ramped up his onslaught against the financial sector in a campaign speech on Tuesday with a series of drastic proposals, including a promise to break up big banks within the first year of his presidency and to put a $2 cap on all ATM withdrawals.

. . . 

“In my view, it is unacceptable that Americans are paying a $4 or $5 fee each time they go to the ATM,” he continued, adding later that “people should not have to pay a 10 percent fee for withdrawing $40 of their own money out of an ATM.”

This proposal is typical of a class of policies that are incredibly popular, but tend to have bad results for the very people they are apparently intended to protect.

Right now, if a person uses the ATM of a bank at which she is not a customer, that bank may, and often does, charge a $2 or $3 fee. For a long time, the Greens have been railing against these fees on the grounds that banks shouldn’t be allowed to profit from customers accessing their money. The problem with this reasoning is that profiting from customers who need access to their money is the reason banks exist. If you get rid of bank profits, you get rid of banks. Not having banks is much worse for consumers than having to pay banks for convenient banking services.

According to Bandt, who has led the charge against these ATM fees for a while now, the fees charged are far higher than the actual costs of providing ATM services.

You pay a $2.50 ATM fee but transaction only costs bank 77c. If gov cracking down on credit card surcharges, do the same with ATM fees too.

— Adam Bandt (@AdamBandt) October 20, 2015

It also costs Nike $30 to make a pair of sneakers that it sells for over $100. When you buy food in the shops, you pay a price higher than the combined price it cost the farm to grow the food, the wholesaler to transport the food, and the retailer to sell you the food. The increased price you are paying is what Nike, the farmer, the wholesaler, and the fresh food people call “profit,” and it’s the reason each of them exists. Unfortunately for Adam Bandt , it’s also the reason that banks exist.

When you pay an ATM fee, you aren’t “paying for the privilege of accessing your own money.” You’re paying for the convenience of accessing your money at a time and place more-or-less of your own choosing. You could keep your money at home and never worry about paying a fee to access it. You could take wads of cash with you every time you left your house and not worry about using the ATM at all. But that is inconvenient and unsafe.

Instead, you park your money in a bank. The bank may pay you interest on the deposit if it won’t cost the bank much to handle the money because you don’t have terribly convenient access to it (a savings account), or it may charge you fees if they offer you additional services that are convenient to you, but cost the bank money (checking accounts in the US, I think Australian banks call these transaction accounts).

Whatever you choose, the bank is only offering you an account in order to make money from you. If you get a savings account, the interest rate the bank pays you will be less than the return the bank will get from investing its capital elsewhere. Right now, the bank lending rate in the US is so low that banks are paying sub-1% interest rates on savings accounts. They can get such cheap capital from the Fed that they don’t really need your money, and aren’t willing to pay you for it. If you get a checking/transaction account, the fees the bank charges for that account will be higher than the cost of providing you a checking account. This is, again, what we call “profit” and it’s the whole reason banks offer you checking accounts at all.

The problem with proposals like the one that Bandt and Sanders are making is they ignore this economic reality, and treat ATM fees like a bug in the system that can be fixed with no repercussions. To the contrary, ATM fees are part of the system, and capping them to “cost of service” will result in banks charging these fees in other ways, in order to protect their profits. Something similar happened in the US when the Durbin Amendment to the Dodd-Frank Act capped debit card interchange fees.* To make up for revenue lost from processing debit-card transactions, banks reduced the availability of “fee free” accounts and increased fees on other accounts.

If Bandt gets his way, or if Sanders gets his way in the US, and ATM fees are capped, expect to see higher fees on checking/transaction accounts. I’d also expect to see fewer ATMs in low-traffic regions, where banks can’t justify placing an ATM to serve a small number of customers unless they can charge non-customers higher-than-cost fees to subsidise the service to their customers. That’ll be a net loss both to the bank’s customers, and to the non-customers who were willing to pay a fee for the added convenience.

In short, banning ATM fees is a policy that feels good, because it sounds like it’s going to save people money, but will be bad. It’s based on a fundamental misunderstanding of basic economics, and it will hurt the consumers it’s intended to protect.

*Debit card interchange fees are the fees that banks charged merchants for processing debit card transactions. Large retailers that ran a lot of debit-card transactions pushed for the Durbin Amendment because it’d save them a lot of money. Neither they nor Dick Durbin cared much for bank customers, who got boned when the incredibly predictable result happened.