Selected Skirmishes: Cash Money

How consumer activists sabotage ATM customers

The California legislature has been devoting much of its 1997 deliberations to an issue of vital importance to the health of our republic: whether laws are needed to stop banks from gouging customers for cash withdrawals at automatic teller machines.

It turns out that when your bank provides you a service, like making cash available to you in some remote location at 3 a.m., they sometimes charge a fee. These charges can run all the way up to $1.50 for delivering up to $300 in fresh bills. That is an outrage. It's your money, and you should be able to pop it into your wallet wherever and whenever you want, at face value. Some legislators are incensed and, taking their cue from the watchdogs of the public interest at Consumers Union, are attempting to make ATM fees illegal.

This episode speaks volumes about the manner in which politicians and "public interest" operatives package the case for government regulation. That brief typically consists of two parts: 1) An unconscionable ripoff is being perpetrated by a gang of avaricious thugs in the unregulated marketplace. 2) The government must pass a law to rein in these villains.

No fuss, no muss, no intellectual heavy lifting. Lawlessness has permitted evil men to perpetrate crimes, and a bureaucrat must be deputized. Regulation is as easy as dialing 911.

And yet somehow they keep getting a wrong number. Perhaps their circuits are crossed. Let's check that listing.

The economics of ATM fees are not rocket science. In short, banks charge fees (both implicit and explicit) for providing financial services. One such service is safeguarding one's liquid assets (often in an interest-bearing account) and then making them available on demand. Until just a few Super Bowl blowouts ago, the customer was forced to cash his chips by locating a branch of his bank, motoring there, queueing up, and dealing with a bank teller sporting a "Have a Nice Day" lapel pin. Such negotiations, of course, could be conducted only during "banker's hours." Come 3 p.m., and your money was locked up for the night.

Now, thanks to a modicum of deregulation-induced competition and a hearty push from the miracles bubbling up in the laissez-faire computer technology sector, ready-teller machines make one's cash reserves safely available 'round the clock, 'round the world. Your mad money is accessible to you at every store, bar, restaurant, bus depot, shopping mall, airport terminal, casino, hotel, and major intersection in Christendom or the Orient. You can get at your cash day or night, Tuesday or Sunday, in the United States or South Africa. And not once must you say, "You have a nice day, too."

ATMs are so ubiquitous and easy to use that we tend to take them for granted. But while such convenience is provided remarkably efficiently, it is not done for free. The brutal fact is that maintaining machines and juggling cash balances costs cash money, particularly when a customer ventures out and uses the services of a machine operated by a bank where he does not maintain an account. Papers will have to be shuffled; competitive wages will have to be paid.

If this transaction costs the bank a dollar to process, the customer who inspires the shuffle may be offended at being charged for a service he considered fee-free. Fine. Let's pass a constitutional amendment giving every American the right to zero-priced cash withdrawals. A victory for the consumer?

This is where the real bunko artists step in. The Consumers Union purports to champion the customer's interest; instead, it succeeds only in burying fees across a range of banking services. While the government may make the $1.00 fee go away, the buck doesn't stop there: The government cannot make the associated costs go away.

A rule that suppresses upfront charges will predictably inflate other terms of service–say, by imposing a higher fee on checking accounts, a slightly lower money market interest rate, a slightly higher fee on credit card charges, etc. Believe me, the average bank branch manager with three years on the job could figure out 1,000 ways to pad customer costs (or short client convenience) before breakfast.

Say the government really got tough, and sent in the Marines to audit and secure every one of these theoretical escape hatches, making damned sure no extra charges were imposed to compensate for the now illegal ATM fees. The banks could simply stop offering cash withdrawals at cooperating ATM locations. Airtight consumer protection: No service, no service charge.

While the price control on ATM fees (setting the transaction charge at a maximum of $0.00) is doomed to fail for consumers, it is almost guaranteed to succeed for consumer advocates. The "pass a law" fairy tale scenario fits perfectly: Evil bankers are robbing innocent men and women who are only trying to get their own money back! The fact that the proposed law will be easily sidestepped, thus resulting in customers' getting stuck with hidden charges unrelated to the costs their transactions incur, is simply not of interest to consumer advocates.

In essence, they receive a service charge on every regulatory solution dispensed from their public policy machine. The price they're charging, as well as the product delivered, should teach us all a little about outrageous gouging.

Contributing Editor Thomas W. Hazlett ([e-mail]) teaches economics and public policy at the University of California, Davis.