Memorandum submitted by Alliance &
Leicester
INTRODUCTION
1. Alliance & Leicester welcomes the
opportunity to contribute to the Treasury Committee's inquiry
into cash machine charges.
2. Alliance & Leicester is one of the
UK's major financial services groups. Our whole business approach
is based on delivering our four brand values to customers. We
aim to offer them "Better Value" products, to have "Simple
and Straightforward" products and processes, and to be "Friendly
and Approachable" to deal with; finally we aim to "Recognise
Existing Customers" by offering them access to better deals
for our products. Our "Simple & Straightforward"
and "Friendly and Approachable" values demonstrate our
commitment to providing clear financial information and ensuring
our customers understand our products.
3. Alliance & Leicester operates both
so-called "free" and "surcharging" machines.
We also have very close links with the Post Office, having first
formed a link with Post Office branches in 1983 and subsequently
through our purchase of Girobank in 1990. Some implications of
these points are covered in our submission.
SUMMARY
4. The current status of the ATM market
reflects many drivers, and the result is a competitive market
which offers the UK public an unprecedented number of ways in
which to access cash.
5. All Alliance & Leicester ATMs are
free to use for all Alliance & Leicester customers.
6. Alliance & Leicester is committed
to providing ATMs free of charge to all users wherever possible.
Alliance & Leicester charges a fee to non-Alliance & Leicester
customers at ATMs only where it would not be economic for us to
offer these services to these customers based on income from interchange
fees alone.
7. It is very important that customers are
aware of the cost of the transaction they are making and we regularly
keep this under review.
8. Earlier this year, LINK members agreed
to implement one of two options to help address concerns over
transparency of charging. The two options were to either place
a sticker on members' ATMs or introduce an up-front on screen
message warning of a charge. Alliance & Leicester has implemented
both of these recommendations.
9. We supplement our branch network and
ATMs by providing our customers with free access to cash through
all UK Post Offices. Our degree of access to the Post Office is
unique to Alliance & Leicester and provides free access to
cash in a wide variety of areas, including those of social or
economic deprivation which are well supported by the Post Office
network.
MARKET BACKGROUND
10. The ATM market in the UK has changed
dramatically over the past decade, from a position when there
were only a few providers, to one with significant competition,
choice and diversity. At headline level, the quantum of that change
can be demonstrated with a few statistics:
— The number of ATMs in the LINK network
has more than doubled from 26,165 in September 1999 to 53,178
in September 2004.
— There are now 32,494 free machines
in the LINK network, an increase of more than 24% since 1999.
There are 20,684 machines which surcharge.
— 10 years ago, 90% of ATMs were installed
at bank premises and owned by financial institutions. At the end
of 2003, 57% of all ATMs were installed at non-bank premises,
with 30% of these owned by so-called Independent ATM Deployers
("IADs").
11. Despite the changing variety of ATM
machines in the market, the vast majority of customers do not
pay to withdraw cash when they use an ATM. Data for 2003 showed
that over 97% of all ATM transactions in the market were free
for the customer. For the remaining 3%, where a charge does apply,
customers are warned of the charge and given the option to cancel.
12. The increase in the number of surcharging
ATMs in the market over recent years has not been at the expense
of non-surcharging machines. Most surcharging ATMs are new ATMs
and, as stated above, the number of "free" ATMs installed
has increased significantly over recent years.
13. Change in the ATM market has taken place
in the context of a very significant increase in the number of
places through which the public can access cash for free. As well
as the circa 53,000 ATMs, customers now have a far greater
ability to use the national network of around 15,000 Post Offices
and are also able to obtain cashback from a wider variety of other
retail locations. This is in addition to access through bank and
building society branches.
14. The economics of running ATMs has also
developed, reflecting a number of influences including changing
customer behaviour and the opening up of competition encouraged
by the Cruickshank Review on Competition in the Banking Industry
("the Review"), published in March 2000.
15. The response to the Review included
reform to the interchange fees paid by banks and other financial
institutions, and an opening up of the national ATM network (LINK)
to non-bank providers, so that non-financial services organisations
may, subject to meeting objective technical, security and commercial
requirements, become members of the network. It was also confirmed
that any member of LINK choosing to raise a surcharge from customers
should not also receive an interchange fee for that transaction.
16. These changes were designed to increase
competition in the market and customer choice—they succeeded
in doing so.
17. However, over the period since the Review,
there have been reductions in the interchange fees received for
ATM transactions. Since mid-2000 the interchange fee for withdrawals
from branch-based machines has fallen from 28p to 19.3p, and for
non-branch based machines from 40p to 30.2p. One consequence of
this reduction is that some providers, particularly smaller providers,
have found ATMs an increasingly expensive channel to maintain,
and some financial institutions have recently outsourced some
or all of their networks to specialist providers to help reduce
their costs.
TERMINOLOGY
18. Before moving on to consider each of
the three issues explicitly requested by the Committee, it is
helpful to simplify the terminology used in this memorandum.
19. For simplicity of wording in the remainder
of this memorandum we will refer to machines which do not charge
any account holder as being a "free machine", and a
machine which levies a charge to an account holder who is not
an Alliance & Leicester customer as being a "surcharging
machine". For similar reasons of simplicity, we will refer
to accounts which can access ATMs (typically current accounts
and some savings accounts) as "bank" accounts, whilst
clearly recognising that the issuing institution may not be a
bank, but could also be, for example, a building society.
20. It should also be noted that transactions
from foreign accounts (ie an account held with a non-UK institution)
and credit card transactions almost always incur some form of
fee for the customer from their issuing bank or building society,
even at "free machines", and that these charges vary
between bank/building society. The Select Committee has separately
reviewed credit cards, and this point is not considered further
in our memorandum.
THE PRINCIPLE
OF CHARGING
AND THE
TREND TOWARDS
CHARGING
21. Unlike many other high street banks,
Alliance & Leicester operates many more ATMs than we have
branches—currently we have more than 2,500 ATMs and just
over 250 branches. As a result of our history and our product
range, a far higher proportion of our customers bank with us through
the so-called "direct" channels of the internet, telephone
and ATMs than the UK average. The provision of a comparatively
large ATM network provides our customers with convenient and free
access to their accounts, and also provides a service for the
customers of other banks. All Alliance & Leicester ATMs are
free to use for all Alliance & Leicester customers.
22. In 1999 we had around 470 free ATMs.
Since then, we have almost trebled the number of our free machines,
to around 1,400. This is supplemented by a further 1,100 surcharging
machines. A high proportion of our ATMs are located in premises
which we do not own, principally retailers including the Post
Office. We pay the host organisation a fee for hosting the ATM—whether
"free" or "surcharging".
23. When considering potential locations
to site ATMs, our preference is to operate a "free machine".
Our decision does, however, reflect the cost of installing and
maintaining the machine, taking into account the requirements
of the host retailer and the expected transaction volumes, which
depend on the specific location involved and matters such as the
proximity to other ATMs.
24. When a potential location is such that
the costs of siting a "free machine" are not economic,
we will consider the option to site a "surcharging machine".
If we did not consider this option, we would simply not site any
machines in areas where the economics are marginal. We believe
siting machines in such locations increases customer choice, particularly
for our own customer base, but also for any other users who may
wish to have the convenience of a machine in their area.
25. All our surcharging machines are installed
in the premises of other organisations, notably retailers, for
which we pay a rental fee. These host organisations value the
machines as a source of income in their own right and very often
also because the increased footfall into their stores which the
machines generate increases their opportunity to sell other products.
This source of income and footfall can be an important part of
the viability of some retailers.
26. An important retailer is the Post Office
branch network. In addition to providing free access to cash at
all 15,000 post offices (as discussed further below), we also
operate around 1,000 ATMs on Post Office premises, of which about
400 are surcharging.
27. In 2004 we will pay around 15% of total
income, before costs, from surcharging machines to the third party
site owners, additional costs include buying, installing and maintaining
machines, and after accounting for these, our net income represents
a low single-figure percentage of the total income generated by
these machines.
28. The economics of our machines can be
summarised as follows:
— All Alliance & Leicester customers
can withdraw money, as well as performing a number of other transactions,
for free at all our machines.
— All users are able to check the balance
on their accounts at all our ATMs. If the user is checking the
balance on a non-Alliance & Leicester account, Alliance &
Leicester receives an interchange fee from the issuing bank. This
is the approach taken for the entire LINK network, whether machines
are surcharging or free.
— Withdrawals of cash by non-Alliance
& Leicester customers at free machines result in Alliance
& Leicester receiving an interchange fee from the issuing
bank, but no fee from the user.
— At surcharging machines, Alliance
& Leicester receives a fee from the user if they are not using
an Alliance & Leicester card. Under these circumstances, Alliance
& Leicester does not receive an interchange fee for that transaction—ie
does not receive payment twice. The surcharge at our surcharging
machines is currently £1.25 or £1.50.
— For both free and surcharging machines
sited in locations not owned by Alliance & Leicester, the
site owner receives income from Alliance & Leicester for hosting
the machine. This takes the form of a rental or a fee-based on
transaction volumes.
29. In summary, Alliance & Leicester
is committed to providing ATMs free of charge to all users wherever
possible. Alliance & Leicester charges a fee to non-Alliance
& Leicester customers at ATMs only where it would not be economic
for us to offer these services to these customers based on interchange
fees. The hosting organisation receives fees for hosting our machines,
whether free or surcharging.
30. Our view, therefore, on the principle
of charging is that running an ATM network incurs costs, and these
costs need to be funded somehow. We believe the principle of charging
allows for greater choice and convenience for customers, by making
locations which would otherwise be marginal into viable locations
for ATMs.
TRANSPARENCY
31. Alliance & Leicester is committed
to providing our customers with clear and comprehensive information
on all our products and services.
32. All Alliance & Leicester surcharging
machines have three means of informing non-Alliance & Leicester
customers of the charge.
33. Firstly, each machine displays a sticker,
next to the keyboard, that informs non-Alliance & Leicester
customers that there will be a charge for using the machine.
34. Secondly, all users are alerted by an
up-front, on screen message as part of the welcome sequence which
states that a fee will be charged to non-Alliance & Leicester
users.
35. Thirdly, an on screen message appears
before the transaction is completed to further alert the customer
of the charge and give the amount. At this point the customer
is given the explicit option to quit the transaction without charge.
Users can abort their transaction, without charge, at any point
up until this final confirmation.
36. Earlier this year, LINK members agreed
to implement one of two options to help address concerns over
transparency of charging. The two options were to either place
a sticker on members' ATMs or introduce an up-front on screen
message warning of a charge. Alliance & Leicester has implemented
both of these recommendations.
37. We continually review our means of communicating
with customers, further to improve customer understanding. Indeed,
we are currently reviewing our advice stickers on machines with
a view to enhancing the awareness of customers.
38. Our view on transparency, therefore,
is that it is very important that customers are aware of the cost
of the transaction they are making and we regularly keep this
under review.
FINANCIAL EXCLUSION
AND LOCATION
39. Any assessment of potential implications
for financial inclusion should consider the wide variety of ways
in which the UK public can withdraw cash. Customers can withdraw
cash through ATMs, but also through the Post Office, cashback
from retailers and from bank branch networks. The number of locations
through which customers can access cash—for free—has
never been greater.
40. Looking, for example, at the Post Office.
Several UK banks have now followed Alliance & Leicester's
lead by making arrangements with the Post Office network to allow
customers to transact at Post Office counters for free. This provides
customers with access to 15,000 locations where they can withdraw
cash for free.
41. The degree of customer access available
through the Post Office network varies from bank to bank, with
Alliance & Leicester's customers able to make a wider variety
of free transactions than any other institution. We have worked
closely with the Post Office as they have developed and deployed
the counter technology which is now present in all UK Post Offices.
As a result of this, in common with many other banks, Alliance
& Leicester current account customers are able to withdraw
cash and perform other transactions. Uniquely to Alliance &
Leicester, our savings account customers with a plastic card are
also able to make deposits and withdrawals for free at the Post
Office.
42. UK banks, including Alliance & Leicester,
have also supported the Government in addressing an important
element of financial exclusion through the provision of Basic
Bank Accounts, which can be accessed for free through the Post
Office.
43. All UK current account holders are also
able to access their money free of charge through cashback services
provided at many retailers. The number of cashback transactions
increased from 164 million in 1999 to 256 million in 2003 and
this volume is expected to continue to increase according to APACS
predictions.
44. Our view on financial exclusion, therefore,
is that there are a wide variety of places across the UK in which
consumers can access cash free of charge.
6 December 2004
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