Memorandum submitted by Association for
Payment Clearing Services (APACS)
BACKGROUND
The Treasury Select Committee has decided to
undertake a short inquiry into cash machine charges, to examine
the principle of charging for cash withdrawals, the clarity and
presentation of these charges, and the impact that the spread
of charging may have on low income households. APACS has been
invited to respond on behalf of its Members.
APACS is the UK trade association for payments.
It provides the forum for the UK's financial institutions to come
together on non-competitive issues, to develop banking systems
for the future and to provide innovation and developments in payments.
It is also the banking industry voice on payments issues such
as plastic cards, card fraud, cheques, electronic payments and
cash.
APACS' involvement in the ATM market dates back
to 1993 when it created the APACS ATM Group to engage in high-level
industry non-competitive business, governance and regulatory issues
relating to cash machines. Today, the majority of the UK's largest
estate owners are members of this group.
1. INTRODUCTION
APACS welcomes this inquiry as an opportunity
to clarify the payment industry position with respect to charges
levied on consumers for the cash machine service.
We believe it is important that the inquiry:
— re-iterates the need for a clear
and effective set of guidelines to promote transparency of charging
for cash machines;
— recognises that charging remains
a marginal component in the market overall with 97% of cash withdrawn
during 2003 being from cash machines at which no charge was made;
and
— makes clear that the great majority
of cash machines for which charges are levied are in "convenience"
locations (where a machine would not exist at all otherwise).
This evidence is based upon the APACS ATM Survey
2004, the most comprehensive analysis regularly undertaken of
activity in the ATM sector. A copy of the survey is attached.
(Not printed).
2. MANAGEMENT
SUMMARY
— 97% of withdrawals from cash machines
in the UK were free in 2003.
— £140.5 billion from the total
of £144.1 billion was withdrawn from machines for which no
charge was made.
— The total number of transactions
undertaken at these bank and building society (BBS) machines was
2.3 billion (£140.5 billion).
— The total number of transactions
undertaken at Independent ATM Deployer (IAD) machines was almost
80 million in 2003 (£3.6 billion).
— 75 cash withdrawals were made every
second.
— At the end of September 2004 there
were 55,346 cash machines installed in the UK, of which BBSs owned
33,175, and the IADs 22,171, showing an increase in numbers for
both sectors since end-2003.
— Cash machines were relied upon to
supply more than half (53%) of all cash obtained by individuals
in 2003.
— In total 45 institutions deploy cash
machines in the UK, of which 31 are BBS and 14 IADs (see appendix
1 of the ATM Survey 2004 for details).
— The UK cash machine market is the
fastest growing in Western Europe.
3. UK ATM MARKET
3.1 Background
The UK's first cash machine, also known as an
Automated Teller Machines (ATM), was installed by Barclays Bank
Plc in 1967. The early machines had limited functions, dispensing
fixed amounts of cash in exchange for tokens. In the early 1970s
magnetic stripe technology enabled plastic cards to be used to
withdraw cash.
As each year has passed since, cash machines
have become more technologically advanced, and today they offer
a wide range of banking and other services 24 hours a day, including
cash withdrawals, cheque book and statement ordering, account
enquiries, payment of bills and, more recently, the top-up of
mobile phones.
There are currently two types of institution
that deploy machines in the UK. The first are the traditional
banks and building societies (BBSs) and the second the non-financial
organisations more commonly known as Independent ATM Deployers
(IADs) although these are occasionally referred to as Independent
Sales Organisations (ISOs).
3.2 History
Up until 1999, three networks processed cash
machine withdrawals in the UK: LINK, provided network services
to building societies; 4 Bank, looked after the interests of Barclays,
Lloyds, Bank of Scotland and Royal Bank of Scotland; and MINT,
a network operated on behalf of HSBC, NatWest and the former TSB.
Current account customers were not charged for cash machine services
within their own network, eg an HSBC customer was able to use
a NatWest machine without charge. However, this customer was unable
to use another networks machine free of charge as the networks
were independent of each other. At this time all cash machines
were operated by bank and building societies.
In 1998, after a series of bank mergers and
negotiations all banks agreed to join LINK Interchange Network
Ltd. Today, LINK is wholly owned by 22 of the UK's largest banks
and building societies. It has two constituent parts: the Operating
Company provides the services (including settlement) that make
cash machine sharing possible throughout the UK; the Card Scheme
determines the operating rules that define the terms of trade
between members. All UK payment card issuers issue LINK-enabled
cards and these can be used in virtually all cash machines in
the UK (except for a very small number of privately-owned cash
dispensers).
One feature of all BBSs joining the LINK Scheme—and
UK wide reciprocity—was the emergence of fees where BBSs
began to charge their own customers for using another BBS cash
machine. These fees were typically set at a level to cover the
cost of the interchange[1]
fees payable by card issuers.
During the latter part of 1998 one of the most
significant changes in the UK cash machine market took place,
when a number of IADs, the first being Bank Machine, entered the
market by placing standalone machines in convenient locations,
such as local convenience stores, entertainment venues and petrol
stations etc, ie new locations where BBSs typically could not
make a sustained "business case" and where machines
had never previously been sited.
In 2000, following a good deal of public scrutiny,
including that of the Treasury Select Committee, the BBSs agreed
not to levy a charge on any customers withdrawing cash from another
BBS machine.
4. CURRENT SITUATION
4.1 ATM deployment
As at the end of September 2004 there were 45
institutions deploying cash machines in the United Kingdom, of
which 31 are BBSs and 14 are IADs. The number of cash machines
installed amounts to 55,346 of which 33,175 were BBS owned and
22,171 IAD owned[2].
Back in December 1999, shortly after IAD installations first began,
these figures stood at 29,102 and 3,898 respectively.
It is interesting that in the last five years,
both types of cash machines have increased in number although
the real growth is largely attributed to the IADs and this trend
looks set to continue as they experiment with the location, commercial
and operation models for surcharging machines, although not all
IAD machines surcharge. It is important to note that throughout
this time the size of the BBS owned estate has continued to increase
albeit at a slower pace than before. This trend was always projected
as the market could not support a surfeit of machines in some
locations.
Chart 1 illustrates the growth in the total
number of cash machines in the UK since 1993. Chart 2 covers the
same period and illustrates the shift in ownership.
According to the European Central Bank's Blue
Book, the UK cash machine market grew by 11.3% against an average
across the EU of just 6.2% in 2002, making the UK the fastest
growing cash machine market in Western Europe.
4.2 Cash withdrawals
In 2003, cash machines in the UK dispensed £144
billion in 2.4 billion transactions, 4.6% more withdrawals than
in the previous year. This trend has continued into the first
nine months of 2004 where values of £114.2 billion have been
dispensed, an increase of 7.8% on the same period in 2003. During
2003 the average cash withdrawal value was £61 (1999: £55)
at BBS machines and £46 at IAD machines. While BBS cash machines
accounted for just over two-thirds (69%) of all machines in the
UK, they handled 97% of all ATM cash withdrawals by UK customers
last year.
Table 1 sets out the volume and value of transactions
splitting out the BBS and the IAD estate.
Table 1
VOLUME AND VALUE OF TRANSACTIONS AT UK CASH
MACHINES
| Year | Number of transactions (mns)
| | Value of transactions (£mns)
| | Average value (3)
|
| BBS | IADs
| Total | BBS |
IADsTotal
BBS
IADs
Total
|
| 1993 | 1,242 | ..
| 1,242 | 60,200 | ..
| 60,200 | 48 | ..
| 48 |
| 1994 | 1,335 | ..
| 1,335 | 65,170 | ..
| 65,170 | 49 | ..
| 49 |
| 1995 | 1,471 | ..
| 1,471 | 72,090 | ..
| 72,090 | 49 | ..
| 49 |
| 1996 | 1,599 | ..
| 1,599 | 80,235 | ..
| 80,235 | 50 | ..
| 50 |
| 1997 | 1,745 | ..
| 1,745 | 89,994 | ..
| 89,994 | 52 | ..
| 52 |
| 1998 | 1,850 | ..
| 1,850 | 98,230 | ..
| 98,230 | 53 | ..
| 53 |
| 1999 | 1,968 | ..
| 1,968 | 107,852 | ..
| 107,852 | 55 | ..
| 55 |
| 2000 | 2,027 | ..
| 2,027 | 113,013 | ..
| 113,013 | 56 | ..
| 56 |
| 2001 | 2,135 | 39
| 2,174 | 125,669 | 1,759
| 127,428 | 59 | 45
| 59 |
| 2002 | 2,215 | 53
| 2,268 | 133,915 | 2,449
| 136,364 | 60 | 46
| 60 |
| 2003 | 2,294 | 79
| 2,373 | 140,503 | 3,621
| 144,124 | 61 | 46
| 61 |
| | |
| | | |
| | |
4.2.1 Bank and building societies
In summary, the aggregate value of cash withdrawn annually
from BBS cash machines in 2003 reached £140.5 billion from
2.29 billion transactions, an increase of 5% and 4% respectively
on the 2002 volumes and values. On average each BBS machine dispensed
£4,387,291 per annum, from 71,231 transactions, or about
£500 per hour. This equates to an average of £4,500
per annum per regular ATM user, or about £85 per week.
4.2.2 Independent ATM deployers
The total number of transactions at IAD cash machines in
2003 was almost 80 million, with a total cash value of £3.6
billion. This achievement was a 48% increase both in volumes and
values on 2002. The average annual cash value withdrawn during
2003 amounted to £250,830 per machine (less than 6% of a
BBS machine); the average frequency of use was 5,472 transactions
per machine per year (a 1/14th of BBS machines).
In terms of total share of the UK cash machine market, the
IADs' share remains small—approximately 3% by both volume
and value, although the figures above suggest that they fulfil
a specific niche in the overall market.
Chart 3 illustrates the total values withdrawn during 2002
and 2003 and the split between BBS and IADs.
Chart 3: Total values withdrawn in 2002 and 2003
The important issue to remember is that although the fee-charging
estate has increased to amount to in excess of one-third of the
current market and commentators forecast this to grow to over
half of the market, the absolute number of free machines has also
grown so that customers have increased choice in the machines
they can use.
5. TRENDS AND
FORECASTS
5.1 Cash machine density and demographic distribution
By the end of 2003 UK coverage had reached 780 cash machines
per 1 million inhabitants. Research undertaken in 2002 as part
of the background to the Chip and PIN Programme, indicated that
some 91% of people in the UK have access to cash machines within
one mile of their home, 93% within one mile of their place of
work, and 98% whilst using a supermarket.
The geographical distribution of cash machines within the
United Kingdom, based on data at June 2003, is illustrated in
Chart 4. This is based on the number of machines per 1 million
of population by postcode area[3].
The heaviest density is to be found in central London and the
City of London, where there is an average of 2,303 cash machines
per 1 million inhabitants. However, this density is a factor of
the relatively few inhabitants compared to the large number of
people working there.
In some areas of relatively low population, eg Inverness,
North Yorkshire, Devon and Cornwall, cash machine densities are
above the national average—reflecting the need for a greater
number of machines to cover the larger geographical area.
Chart 4: Geographical distribution of ATMs within the
United Kingdom
5.2 Cash machine use
According to the APACS Payment Markets Report 2004, nearly
two-thirds of adults are regular cash machine users, with the
proportion rising to 90% in the 25-to-34 age band. Usage is lower
as one moves up the age range and along the socio economic spectrum.
This reflects the fact that direct receipt of cash in state benefits
and pensions is a higher proportion of income for the over-65s
and for adults in socio economic groups D and E, and hence there
is less need to get cash from a cash machine.
Demographic trends will continue to be long-term drivers
of growth in cash machine use. The number of regular users is
projected to increase from 31.6 million last year to 36.5 million
in 2013, or 73% of adults. The forecast is that the total volume
of cash withdrawals will grow from 2.4 billion last year to 3.1
billion in 2013. In 2013 cash machines will dispense £189
billion in 2003 money, including 75% of all cash acquired by individuals.
Relatively high daily allowances for cash machine withdrawals,
greater convenience of their siting and wider availability of
cashback, are inducing customers to shift away from using cheques
and passbooks as the means by which they withdraw cash from their
accounts.
The Direct Payment Programme[4]
is expected to have a significant impact upon cash machine use.
Some of the customers who previously went to the post office to
receive their state benefits or pensions in cash will switch to
cash machines once these payments are made directly to their bank
account giving the Government considerable cost savings.
The migration of National Savings accounts to card-based
rather than passbook-based will also be a factor going forward.
It is estimated that around £2 billion was withdrawn from
National Savings account in 2003, and many of these transactions
will take place at cash machines once the transition is complete.
6. CASH MACHINE
CHARGES
6.1 Introduction
The principle of charging customers for making withdrawals
at cash machines has been the subject of much debate over recent
years.
Historically there were two types of charges. The first,
mentioned previously, where a customer was charged by their BBS
for using another BBS's machine, known as a "disloyalty fee".
The second, where a customer was charged by the ATM-owning BBS,
(assuming it was different from their own BBS) known as a "surcharge".
6.2 Review of banking services in the UK 1998
In November 1998, Don Cruickshank led an independent investigation
into banking services in the UK. The investigation looked at levels
of innovation, competition, and efficiency in the industry and
how well it served the needs of business, other consumers and
the UK economy.
Cruickshank concluded that unregulated systems, including
the ATM system, result in limited competition within the marketplace
and unfair charges for customers which were not a true reflection
of the actual costs of providing the service. In addition, cash
machine owners were advised that details of any charge incurred
must be clearly displayed on machines, replacing the upfront screen
message which was subsequently moved to a screen prior to the
cash being withdrawn.
At that time a small number of BBSs were charging their own
customers a fee for using other machines and other BBS customers
a "surcharge fee". In some cases it was possible that
the customer could have been charged twice for one transaction.
Following the conclusion of the investigation BBSs ceased to impose
disloyalty fees and, in all but a few locations, surcharges.
The OFT welcomed the findings of the investigation and subsequently
announced that the cash machine market should be opened up with
more supermarkets, petrol stations, and shops being able to provide
cash machines for their customers. Essentially the OFT were inviting
organisations other than BBSs to install machines away from the
traditional sites.
6.3 Current situation
Today, there is generally no charge for a cardholder withdrawing
cash from their current account at a cash machine supplied by
their own bank or building society. However, a very small number
of machines operated by BBSs do charge cardholders for withdrawing
cash. In addition, cardholders withdrawing cash from IAD machines
typically incur a charge.
The number of cash withdrawals that carried a fee during
2003 was approaching 80 million. The charge levied is typically
between £1.00 to £1.75, although in some cases can be
as much as £3.00 per transaction, depending on the location
of the cash machine. In accordance with the LINK Scheme rules
any member choosing to raise a surcharge is not paid an interchange
fee.
According to one particular IAD a large majority of their customers
are regular users of their machines and are therefore fully aware
of the charges for using the service.
6.4 Comparison with Europe
To draw a comparison with some countries throughout Europe,
it is understood that personal banking customers either pay an
account fee for their current account/cash machine card or are
charged per transaction. The account fee may include a certain
number of cash withdrawals undertaken at machines other than those
owned by the customer's own bank but when that number is exceeded,
charges are levied.
The largely free current account service provided to customers
in the UK is believed to be unique within Europe.
7. COMMITMENT TO
TRANSPARENCY
APACS' members are committed to providing clear and concise
information on cash machine charges to their customers and are
fully supportive of the LINK principle that this information should
be upfront and transparent to the customer.
One of the many ways in which this commitment is communicated
is via The Banking Code, a voluntary code which sets out standards
of good banking practice for financial institutions when they
are dealing with personal customers in the United Kingdom.
The current Banking Code sets out the information that financial
institutions are committed to provide to customers on cash machine
charges. This commitment is listed below (for illustrative purposes
"you" means the customer and "we" means the
financial institution the customer deals with).
— "We will give you details of any charges
we make for using cash machines when we issue the card
— You will not be charged more than once for any
transaction at one of our cash machines
— When you use a cash card at one of our cash machines,
a message on the screen will tell you, before you commit to making
a withdrawal, the amount, (if any) you will be charged for the
transaction and who is making the charge.
— When you use a card other than a cash card at
one of our cash machines, a message on the screen will tell you,
before you commit to making a withdrawal, the amount (if any)
we will charge you for the transaction. The message may also tell
you that the card issuers may charge you for the transaction.
— We will show cash machine charges on your statement
of account."
8. CASH ACQUISITION
Cash is the most popular method of making payments in terms
of volumes, and withdrawals from cash machines are the most popular
way to acquire cash. However, there are alternatives, the most
popular being cashback at retailers and withdrawals over BBS counters
and post offices.
8.1 Debit card cashback
Obtaining cashback on debits cards from retailers accounted
for 2% of all cash value acquired during 2003. However, customers
view cashback primarily as a topping up mechanism, with the average
transaction value being less than half that at cash machines at
£24. Over half of all cashback transactions are for exactly
£10 or £20. Cashback is generally a free service provided
by retailers who are seeking to re-cycle their cash takings as
well as providing an added value service.
8.2 Cash withdrawals at branch counters
Credit, debit and cash machine cards are also used to acquire
cash over the counter in bank and building societies. Over 6 million
adults are estimated to have withdrawn cash in this way last year,
making 69 million withdrawals to a total value of over £20
billion.
8.3 Basic bank accounts
The Post Office provides a facility whereby all basic bank
account holders and some banks' current account holders are able
to draw cash without charge over the counter using a LINK-badged
card. It is estimated that around 400,000 cardholders drew cash
in this way during 2003.
9. COST COMPONENTS
OF RUNNING
A CASH
MACHINE ESTATE
The costs of running a cash machine estate are not insignificant.
There are a number of elements which make up the total cost including:
— hardware (the machine itself)
— software and technology upgrades
— telecommunications and system connectivity
— site surveys and installation
— maintenance and cleaning
— cash supply/replenishment/re-banking
— rates (especially remote/convenience sites)
— security/fraud prevention
These costs vary per installation depending on location;
cash supply costs, maintenance and rates incurred. 2004-05 will
see a large level of investment made in both hardware and software
at cash machines as these are upgraded to chip and PIN in line
with all our credit and debit cards. This will limit the risk
of fraud.
10. IMPORTANCE OF
CASH MACHINES
With the so-called cashless society still a long way off,
cash machines are expected to remain an integral part of everyday
life for many years to come. Withdrawing money from cash machines
has become a normal routine for the majority of adults in the
UK and APACS believes that cash machines will remain the primary
channel for dispensing cash through this decade and beyond.
With the way in which the cash machine market is developing and
consumers' awareness is increasing we believe the two key components
that the Inquiry should consider are choice and transparency and
that there is a strong case for understanding better what informs
and drives consumer behaviour.
Further to the above, APACS would be pleased to provide additional
information to assist the Committee with this Inquiry if required.
December 2004
1
Interchange fees are the fees paid by a card-issuing institution
to the owner of the ATM which provides the service to their customer. Back
2
These figures have been provided to APACS by its members. It
is possible that this figure might differ slightly to that reported
by LINK as a result of data being provided at different times. Back
3
Source: 2001 Census, [postcode headcounts]. Back
4
The Direct Payment Programme, introduced by the Government in
2003, relates to the payment of benefits and pensions directly
into a bank account or a post office card account, replacing the
benefit book system. Back
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