Conclusions and recommendations
Cash machines in the UK
1. Cash
machines are the most important method of cash withdrawal in the
UK and are used by millions of consumers every week. Projections
from APACS indicate that cash machines will continue to be an
important source of cash for many people for the foreseeable future.
The move to Direct Payment of benefits will result in many benefit
claimants using cash machines to access their benefits. (Paragraph
9)
2. Cash
machines are not a service from which only the consumer is the
beneficiary. They also help banks by providing a cheaper alternative
to bank counters or branches for the provision of access by customers
to their accounts (Paragraph 15)
The principle of charging
3. There
are a number of different ways of funding cash machine provision
and it is appropriate for a variety of models to exist in a transparent,
fair and competitive market. We recognise that cash machines which
charge consumers are a legitimate business model. Their introduction
has increased the overall availability of cash withdrawals and
helped sustain small businesses. However, while these machines
do increase provision of "convenience" locations that
had not previously justified a cash machine, there is evidence
that they are now spreading—appearing alongside, and in
some cases displacing, machines that were previously free to the
consumer. This gives rise to an issue of public policy, namely
whether this trend is desirable and what response to it there
needs to be. (Paragraph 21)
Trends in the ATM network and prospects for the
future
4. The
number of charging cash machines has grown strongly in recent
years, reaching 37% of the total number of cash machines in the
UK. Although only accounting for around 3.6% of total cash withdrawals
in October 2004, it is estimated that over the past twelve months
consumers have paid around £140 million in cash machine charges.
The number of free machines has also increased in recent years.
But while this should represent an increase in consumer choice
of non-charging locations for cash withdrawals, there is some
question—because of such factors as increased concentration
of machines—of how far this is actually the case. There
is a need for LINK to conduct research to assess the extent to
which the growth in free machines has increased access to free
machines in terms of the number of generally available and genuinely
different sites. (Paragraph 28)
5. The number of free
cash machines located in bank and building society branches has
remained broadly constant in recent years. Given the continuing
numbers of branch closures, it is likely that this has resulted
in an increased concentration of the remaining free machines inside
a lower number of branches. Provided the LINK agreement remains
in force and banks continue to offer free banking for personal
customers, at present there seems little threat to continued free
access to all cash machines located in bank and building society
branches. (Paragraph 32)
6. The independent
charging operators are engaged in a commercial attempt to expand
their business. While this will result in cash machines in previously
unserved or "greenfield" locations, it will also result
in a trend of free machines being forced out of sites and replaced
with charging machines. There was a consensus that the trend of
free machines being forced out by charging ATMs would continue,
although there were different views as to how far. Quieter low
volume locations, with no other free ATMs or bank branches nearby,
may be at particular risk of conversion to charging. (Paragraph
37)
7. The sale of 816
free machines by HBOS and the conversion of around 250 of them
to charging is a noteworthy development. Banks and building societies,
as with HBOS in this case, will have an incentive in terms of
profit-generation to go down this route, with the consequences
in terms of higher charges being picked up by the consumer. If
others follow suit, there could be conversion of a large number
of free ATMs to charging and significantly lower access to free
cash withdrawals for many consumers. There may be alternatives
to such deals which would result in the continuing availability
of free cash withdrawals at some of these locations, although
we note comments from Mr Crosby that if HBOS had not sold many
of these machines, they would have been forced out of the sites
anyway over the next two years. (Paragraph 45)
8. The mechanism by
which the interchange fee is calculated may give banks an incentive
to pursue efficiency savings by reducing the availability of free
cash machines in low footfall areas, although there were differences
of opinion amongst witnesses about the significance of this incentive.
We are not, however, persuaded that allowing the charging operators
to receive the interchange fee, in addition to the surcharge,
would be an efficient way of addressing the issue. (Paragraph
51)
9. The attitude of
the site owner is very important in determining whether a cash
machine on their premises is free of charging. In some circumstances
site owners will identify a financial advantage in introducing
charging rather than free machines. This adds a further concern
over the long-term sustainability of a comprehensive free network.
(Paragraph 55)
10. The public sector
has a particular responsibility as site owner in respect of negotiation
of contracts for the installation of machines. Public sector managers
and employers will wish to take into account the extent to which
their employees (including those on night shifts in hospital for
example) and other site users may find it difficult to access
free cash elsewhere. This does not preclude them from making financially
advantageous arrangements with independent operators to install
a free machine, though in some cases where there are not enough
transactions to support a free machine a charging machine may
be appropriate. Public sector site owners should consider their
charging policy, and monitor the amount of any charges closely.
(Paragraph 57)
11. The large network
of free cash machines in the UK provides considerable benefits
both to consumers and to the banks. We welcome continued commitments
from major banks that they will not introduce charges for any
of their machines. Currently, the availability of free machines
at bank branches seems assured, although the overall number of
bank branches may decline. However, we have concerns that, away
from existing branches, free access to cash withdrawals could
decline as banks sell or close their existing network and remaining
machines become concentrated in fewer locations. (Paragraph 63)
12. The evidence we
have received indicates that the dynamics of the market will continue
to lead to some conversion of free machines to charging machines
in locations away from bank branches. All witnesses agreed that
the number of charging cash machines and the number of withdrawals
made from them will continue to grow, although opinion differed
as to how far this trend would go. Where such machines are additional
provision, in areas served by free machines, then this will be
beneficial to consumers. If they displace free machines and reduce
access overall to free cash withdrawals, particularly in areas
where there are no bank branches, then they would have a detrimental
effect on consumers. This will lead to public policy concerns
if areas of the country are left without adequate access to free
cash withdrawals—particularly if this exacerbates existing
financial exclusion (which we consider later). Whether this happens
will to a large extent depend on the attitude taken by the banks
to the provision of free cash machines in these areas. It is therefore
important that the Government monitors the situation very closely
to ensure a fair and competitive market, and to be ready to respond
if necessary. (Paragraph 64)
13. It would be extremely
helpful, to enable government and others adequately to monitor
trends in the cash machine market, for the quality of the LINK
database to be improved. LINK should regularly publish on their
web-site the number of free and charging machines and how the
numbers have changed in recent years (indicating the numbers which
have been converted from free to charging, and data on concentration
of free machines), with information on the number of withdrawals
that attract a charge. We also recommend that the OFT payments
system taskforce should conduct research into the geographical
distribution of cash machines as part of its work into the efficiency
of payment systems. (Paragraph 66)
Transparency of charges: the present situation
14.
In areas where there is sufficient access to free cash withdrawals,
it is fundamentally a matter of choice whether a consumer uses
a charging cash machine. The industry has a duty to provide consumers
with sufficient information to enable them to make an informed
choice. Poor standards of transparency surrounding ATM charges
are detrimental to consumers, in that they result in charges being
incurred unnecessarily and make the practice of shopping around
to find the cheapest cash machine difficult. They also hinder
competition in the cash machine industry. The importance of transparency
becomes all the greater as the number of charging machines increases.
(Paragraph 68)
15. The way interchange
fees are paid by a customer's bank to the charging machine operator
gives the charging machine operator an incentive to delay notification
of charges until the last minute. This is clearly against the
consumer's interest. This increases the importance of clear and
enforceable rules being applied by LINK to ensure that charging
machines display clear and prominent warnings concerning the charge
before the card is inserted, as we discuss below. (Paragraph 70)
16. To provide information
about charges at knee height or in hard to read small print is
totally unacceptable. That such practices have been allowed to
persist reflects badly on LINK and on the industry. (Paragraph
72)
17. In the overwhelming
majority of cases the consumer will be charged as a result of
using a [charging] machine, whether that charge is levied by the
machine or by the card-issuer. The notice that the machine "may"
charge is disingenuous and does little to inform consumers. (Paragraph
73)
18. There was a broad
consensus amongst consumer groups and the high street banks and
building societies that the requirements currently applicable
to LINK members for notification of charges were inadequate and
that standards needed to improve. (Paragraph 75)
Transparency of charges: improvements needed
19. We
welcome the new improvements to transparency agreed by LINK, which
we believe show a welcome recognition by much of the industry
of the need to improve standards. It is important, however, that
the commitment to improved standards is held, and honoured, right
across the industry. It was disappointing to learn that some of
the independent charging cash machine operators voted against
the limited new transparency requirements. We hope that this does
not imply a lack of commitment on their part to the process of
raising standards. Their degree of commitment to implementing
the new arrangements will enable us to judge. (Paragraph 78)
20. The new improvements
to transparency agreed by LINK do not go far enough to ensure
that the amount of the charge is clearly visible to consumers
before they begin to use the machine. We recommend that the amount
of the surcharge should be clearly indicated on external signage
and any signs that advertise the presence of the machine. A larger
minimum font size should be set for these warnings so the sign
is visible from a distance. (Paragraph 83)
21. We welcome continuing
moves by banks to indicate clearly that their cash machines do
not impose a surcharge on consumers, and would encourage all ATM
operators to do this for their non-charging machines. (Paragraph
84)
22. We support the
idea of standardised labelling for free (non-surcharging) and
charging machines. We recommend that LINK and the consumer groups
explore the feasibility of this idea, examining the costs and
benefits. (Paragraph 85)
23. Prominently advertising
'free' balance enquiries can be a deliberate attempt to confuse
consumers. We believe the word 'free' should not be permitted
on any cash machine that levies a surcharge to the consumer. The
word 'free' should also not be permitted on any marketing or advertising
material informing consumers of the presence of the charging cash
machine. (Paragraph 86)
24. When a machine
is converted from free to charging it is important to give consumers
advance notice of the change. We recommend that the LINK rules
should be amended to require a clear and prominent warning at
least 30 days in advance where a machine which was previously
free is to be replaced by a charging machine. We welcome the move
by HBOS to place such notices on the machines that it is transferring
to Cardpoint. We believe that such a notice should be required
under the LINK rules. We note the requirements in the Banking
Code for banks to notify customers when closing the last branch
within a specified distance. We believe that similar requirements
should be introduced when removing the last free cash machine
within a specified distance. We ask the BCSB to develop proposals
for this before the end of 2005. (Paragraph 89)
25. We are concerned
that a small recent study suggested that amongst the charging
machines surveyed there was only 50% compliance with the LINK
requirements. If voluntary regulation is to be effective, it is
essential that there is an adequate programme of monitoring and
enforcement in place to identify failings. The LINK process of
enforcement has been ad hoc and inadequate to protect consumer
interests. (Paragraph 90)
26. We welcome moves
by LINK to strengthen its capability to monitor and enforce the
requirements for transparency of cash machine charges. LINK should,
before the end of this year, publish details of the way it has
monitored and enforced its transparency rules, so the effectiveness
of these rules can be judged. (Paragraph 91)
27. Different views
were put forward concerning consumer awareness of charges. Independent
research into consumer awareness of charges and the factors that
drive consumer behaviour when deciding which cash machines to
use would be beneficial. We recommend that this should be undertaken
by LINK in conjunction with the consumer groups and published
in full. The research should also examine the approaches taken
by the charging cash machine operators to implementing the new
LINK transparency requirements and make recommendations for change.
(Paragraph 92)
Regulation of the ATM industry
28. LINK
should take steps to improve consumer representation within its
organisation. Consumer groups could be invited to attend relevant
meetings of LINK or invited to sit on working groups, so that
their views can be taken into account. Openness would also be
improved if the details of how member organisations had voted
on consumer issues were made known. (Paragraph 94)
29. The approach by
LINK to self-regulation in respect of enforcement, illustrated
by the absence of a systematic mechanism for enforcement of its
transparency requirements (already discussed above), is totally
inadequate for a part of the financial services industry used
by millions of consumers each year. An absence of effective self-regulation
beyond this year would not be acceptable. (Paragraph 95)
30. We recommend that
the Banking Code be amended to ensure that it applies automatically
to any of the main subscribers' subsidiaries which are engaged
in banking-related businesses. (Paragraph 97)
31. The Banking Code
is a good model of self-regulation. It is independently reviewed
taking into account the views of consumer groups, industry and
government. The Banking Code Standards Board conducts a systematic
programme of monitoring and enforcement. We believe that negotiations
should begin immediately for the Banking Code to be extended to
cover all charging cash machine operators, with a view to the
negotiations being concluded by the end of the year. The Code
should be amended to include the new transparency requirements
agreed at the LINK meeting on 14 December 2004. All charging cash
machine operators should sign up to the Banking Code, and become
subject to its processes of monitoring and enforcement. (Paragraph
100)
32. Excessive notice
periods for the removal of a free-standing charging machine and
unduly long contracts could be hindering competition. We recommend
that the OFT conduct a short investigation into the length of
contracts between small business owners and charging cash machine
operators to determine whether they are 'hindering, restricting
or distorting' competition. (Paragraph 102)
Financial exclusion: general
33. We
note the work being undertaken by the Government to tackle financial
exclusion and to improve access to bank accounts, and the continued
funding and support from the financial services industry for this.
As part of this strategy, it is important that vulnerable and
low income consumers are not subject to disproportionate costs
as a result of cash machine charges. We note that consumers with
basic bank accounts may lack a debit or credit card, giving them
less choice in relation to payment mechanism, and will be unable
to obtain cashback from retailers. (Paragraph 106)
34. As part of an
agenda tackling financial exclusion, it is very important that
those on low incomes have access to free cash withdrawals. We
note evidence that the cash machines most likely to be converted
to charging are those away from existing bank branches in low
footfall locations. If there were to be a substantial reduction
in the availability of free cash machines then that could exacerbate
existing financial exclusion and the Government needs to keep
developments under review. As part of its work, the Government's
Financial Inclusion Task Force should examine the issue of access
to free cash machines in low income areas. (Paragraph 109)
35. If the Treasury
is going to spend public money identifying areas of concentrated
financial exclusion, it seems unhelpful not to share this information
with those organisations that might be able to make improvements
in those areas. We recommend that the Treasury negotiate permission
to share the list of postcodes where there is concentrated financial
exclusion with the Post Office and other organisations that can
help tackle the disadvantage that people living in those areas
face. (Paragraph 111)
36. We note calls
for the surcharge to be calculated on a variable rather than fixed
basis. Although this might be fairer to consumers withdrawing
small amounts, we note that due to the high fixed costs of a cash
machine any sliding scale would start at a high level. We also
note that a sliding scale (unless calculated on the same basis
across the industry) might reduce transparency as consumers would
have difficulty knowing how much they were going to be charged
before using the machine. The fact that fixed surcharges can impact
disproportionately on those on low incomes enhances the importance
of ensuring that such groups have sufficient access to free cash
withdrawals. (Paragraph 114)
37. Competition between
operators should ensure there is no need for a cap on pricing,
provided there are sufficient numbers of free machines and there
is clear signage concerning the level of charges. (Paragraph 115)
Financial exclusion: the role of the Post Office
38. We
ask the Government to indicate whether it was always envisaged
that over 75% of the cash machines installed in Post Offices would
charge the public up to £1.50 to make cash withdrawals; it
would be helpful to know when the decision was taken by the Post
Office, what other options were considered and why they were rejected.
(Paragraph 120)
39. The Post Office
has given control over the terms on which ATMs are deployed in
post offices to the independent ATM deployers. This is leading
to greater numbers of charging machines in post offices than would
otherwise be the case, exacerbating problems of financial inclusion.
We are concerned that, where a machine is installed, the Post
Office negotiates and imposes the terms of the agreement without
allowing sub-postmaster competitive freedom to negotiate either
a viable contract for a non-charging machine or the terms for
a charging machine. (Paragraph 125)
40. Under the present
arrangements, post office users are incurring significant costs
(over £10m) in the form of ATM charges, thereby threatening
efforts at addressing financial exclusion—with apparently
little contribution being made to the viability of individual
sub-post offices or the Post Office network. The Post Office could
have entered into different arrangements to ensure cash machine
provision, such as contracting out cash machines provision while
keeping control over charging policy. (Paragraph 127)
41. We note that at
least 38% of people using a charging cash machine in one post
office in a low income area could have made a free cash withdrawal
over the counter. There is a need for the Post Office to make
additional efforts, by placing signs next to the charging cash
machines, to inform customers of some banks that they can make
free cash withdrawals at the post office counter. (Paragraph 130)
42. While we recognise
that it is a benefit that consumers (of some banks) can obtain
cash free of charge over the counter, members of the public may
question why they may have to queue for a service that would be
far more efficiently delivered through a free cash machine. We
note evidence that no other financial institution would consider
installing charging cash machines in their branches as this would
result in increased queues and increased cost. No bank does this.
We also note that requiring consumers to undertake a less convenient
and less efficient transaction at the counter goes against attempts
to improve the quality and efficiency of public services. (Paragraph
131)
43. We note that some
major banks have not yet signed up to allow their current account
customers to withdraw cash free over post office counters, a state
of affairs which does not help promote access by the financially
excluded to their accounts. We also note that while some banks
have problems regarding the cost of such access, which presumably
can be overcome through negotiations, for others it is a fundamental
principle that the Post Office is a competitor in the sale of
financial products. We hope these problems can be overcome and
that HSBC, RBS, and HBOS will soon allow their current account
customers to withdraw cash over the post office counter. This
would convince us of their commitment to tackling financial exclusion.
(Paragraph 133)
44. When fully implemented,
Direct Payment will save the government around £400 million
each year. It will also result in many benefit recipients using
cash machines to access their benefit. The benefits system aims
to provide a minimum standard of living for recipients. If benefit
recipients have problems getting free access to their money then
they will have less benefit available for other essentials. Immediate
government research into the effect of Direct Payment should specifically
examine the issue of cash machine charges and the Government should
ensure that the switch to direct payment of benefits does not
disadvantage recipients in the way they access their cash. (Paragraph
138)
45. The DWP leaflet
informing benefit recipients about the move to Direct Payment
does not contain any mention that some cash machines (including
over 75% of those in post offices) will levy a charge to people
accessing their benefit. We recommend that the DWP revises its
guidance to make it clear to benefit recipients that they may
be charged for using cash machines and provides them with clear
information about how to withdraw their benefit free of charge.
(Paragraph 139)
46. The large network
of the Post Office and its presence in many locations without
a bank branch gives it a unique opportunity to tackle financial
exclusion. The Post Office needs fundamentally to re-examine its
policy concerning charging cash machines. Delegating all decisions
regarding cash machine charges to the independent operators will
not provide the result that is in the best interests of the local
community or the sub-postmaster. Given the role of the Post Office
both in the delivery of benefits and in sustaining local communities,
it has a particular responsibility to ensure that (if commercially
viable) a free machine is installed in areas that lack access
to free cash withdrawals. (Paragraph 140)
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