I want to indicate from the beginning that I am here without any agenda. I'm just expressing my views in terms of research.
I started my interest in this area of research based on a personal experience. I was a PhD student at Queen's University--I had moved from Waterloo--and when I was on Queen's campus I couldn't find an ATM machine for the Royal Bank, my bank. The only ATM machine that was available around the building was TD. After paying the fee a few times, I decided I was going to avoid this and I switched from Royal Bank to TD.
Then I sat back and asked what the issue was and why banks tend to do this. I picked my thesis and I wrote three papers, published in top journals, A journals, and basically what I looked at was the following. I looked at banking competition on two fronts. The first one was basically the provision of the general banking services like credit cards, ATM machines, mortgages, and all different services. The second one was just the ATM service.
It is a competitive environment. What I found was that banks actually, in a competitive environment, provide an ATM surcharge higher than the marginal cost. This is the first finding. The second finding is that banks usually subsidize their members. The price can even go to zero. A possible solution is to go to zero. The third finding is the banks over-provide the ATM network.
Then I collected U.S. data and I tested those findings, and I found support for those results. What I found from my empirical testing is that banks that charge higher fees manage to increase their market share. This is a result of switching. Also, I found that smaller banks, if they increased their ATM surcharge, don't manage to increase their market share.
The economic explanation behind these findings is the following. Banks set their ATM fee based on two factors. The first factor is the direct impact of the revenue generation from the ATM service. The second impact is their expectation of consumer behaviour: if I expect the consumer to change his behaviour, then I should increase the ATM surcharge. What we found was that the indirect impact has a stronger effect than the direct impact. This is all driven based on competition, but the main competition is not the provision of ATM service, but the provision of general services like bank accounts, mortgages, and many other services if you choose to be a member of that bank.
In addition, one of my studies was to look at the U.S. experience with the ATM surcharge. In the U.S. what happened was that in 1996 the bank Interac laws were removed and banks were allowed to surcharge. Immediately, the year after, more than 50% of banks started to surcharge the ATM fee, and by the year 2001, 90% of those banks had started to charge. Consumer activists started to look at this issue. We're talking about 1998-99. They said this was anti-competitive, anti-consumer, and it hurt smaller banks in comparison to larger banks. They started to look at those issues. Some communities, such as Santa Monica and San Francisco, actually took action and backed initiatives to ban the surcharge. They took the case to the Supreme Court, and the Supreme Court decision in May 2003 basically ruled against the ban.
If we look at the U.S. experience, it has been going on for the past 10 years. Our reaction was a little bit late and came just recently.
My view is the following. It is competitive. And I'm not supporting banks; this is based on economic theory. This is not research, but I looked at empirical regularity. I looked, for example, at a comparison with the U.K. In the U.K. they don't surcharge for using different ATM machines, but in the U.K. it's not banned.