Memorandum submitted by HM Treasury
This memorandum aims to provide evidence on
the key issues the Treasury Committee is investigating in respect
of cash machine (ATM) charges. The Treasury has overall responsibility
for banking and payments policy, including ATMs. However, there
are some issues relevant to the inquiry for which other departments
and the Office of Fair Trading have lead responsibility: the Department
for Work and Pensions is responsible for benefits issues, the
Department of Trade and Industry is responsible for strategic
policy and political issues relating to the Post Office as well
as misleading prices, and the Office of Fair Trading is responsible
for competition regulation and chairs the Payments Task Force.
These departments and the Office of Fair Trading have made contributions
to this paper.
1. INTRODUCTION
1.1. Over the past four years there have
been significant changes to access, pricing and transparency of
charges in the ATM industry. These changes have been prompted
by a number of factors including media and public pressure as
well as concerns raised by the Cruickshank report of March 2000.
[7]
1.2. The Government welcomes the changes
because they have made the industry more competitive, with clear
benefits for consumers. The number of ATMs has risen sharply and,
within that, the number of free ATMs has also continued to increase.
Where outstanding concerns remain, the Government has put in place
mechanisms to ensure that they are addressed. Officials maintain
regular contact with LINK and other interested parties to keep
up to date with developments in the ATM industry.
2. THE PRINCIPLE
OF CHARGING
2.1 There are costs to supplying an ATM
service and it would not be commercially viable for an ATM operator
to offer the service if these costs could not be recovered. However,
the Government believes that, as far as possible, this should
be done in a way that does not inhibit competition and market
efficiency or allow larger players to exploit their position.
2.2 In 2000, the Cruickshank Report noted
that there was very little relationship between prices charged
in the ATM industry and underlying costs. Interchange fees were
heavily weighted against smaller players, especially firms who
might want to specialize in acquiring, and issuer charges were
both discriminatory and opaque.
2.3 The Government is pleased to note that
there has been progress in these areas. From July 2000 LINK members
agreed to ban double charging, so that an ATM user cannot be charged
by both their card issuer (issuer charge) and the ATM supplier
(acquirer charge). In late 2000 virtually all high street banks
and building societies also made a commitment to abolish issuer
charges for withdrawals from a bank account, with effect from
1 January 2001.
2.4 Prior to January 2001 banks and building
societies had been operating a complicated and discriminatory
system of charges for their customers' use of another bank's ATM.
The larger banks were generally offering their customers very
limited free access to ATMs outside their network, whereas institutions
with a small ATM network would often be obliged to give customers
free access to other banks' ATMs. High, discriminatory issuer
charges therefore enabled the large banks to exploit and sustain
their competitive advantage.
2.5 However, the Government welcomes the
fact that this is no longer the case. As a result of the changes
made, customers of virtually all the main banks and building societies
can now withdraw cash for free at almost all ATMs run by these
institutions. LINK figures show that there are 33,700 such free
ATMs in the UK (63% of the total number of ATMs), with 19,655
at branches of LINK members and 14,045 at other locations. In
the UK over 97% of LINK transactions are free of charge to the
customer.
2.6 Another concern raised by Cruickshank
was that there were substantial entry barriers in the ATM industry.
In particular, he highlighted the fact that firms wishing to supply
ATMs without also issuing cards were prevented from becoming members
of LINK. However, in February 2000 the LINK board made the decision
to open up membership to non-card issuers.
2.7 The Government is positive about the
removal of this barrier. It has meant that the ATM market has
been opened up to independent operators, becoming more competitive,
with a significant increase in the number of ATMs offered to consumers.
In 1999 there were 21,684 bank owned ATMs in the UK, of which
16,443 were located in bank branches and 5,238 were remote machines.
[8]LINK
figures show that by October 2004 there were 19,655 ATMs in bank
branches and 33,704 in other locations. There are therefore many
new ATMs to be found in places like pubs, shops and garages, where
previously there was no cash machine and where customers are now
presented with a choice about whether to use such a service. The
cashback facility has also greatly increased consumer choice on
access to cash.
2.8 A large proportion of the new ATMs not
found in bank branches are run by independent operators and there
is usually an acquirer charge (surcharge) for withdrawals from
such machines. There are now 19,659 Surcharging ATMs in the UK
and there has been some growth in the number of withdrawals made
from such machines. In the majority of cases the surcharge would
seem to be commercially justified. There are relatively high fixed
costs to running an ATM but low variable costs. Therefore, if
the ATM is in a "convenience" location where only a
small number of withdrawals are made the LINK interchange fee
would probably not be sufficient and it would be difficult for
an independent operator to recover the high fixed costs without
a surcharge. LINK figures suggest that most surcharging ATMs are
in such locations: in October 2004 the average number of withdrawals
at a surcharging ATM was 440, compared with 6,900 at a free ATM.
2.9 The Government is aware that some banks
have recently sold off a small number of free ATMs to independent
operators. However, there is no evidence to suggest that this
is a general trend, or that free ATMs are under threat. Although,
for example, HBOS recently sold off 816 machines to the independent
operator, Cardpoint, the latter has stated that it is introducing
a surcharge at only about a third of these. And LINK figures do
not suggest that there is a need to fear the disappearance of
free ATMs. In the year October 2003 to October 2004, the number
of free ATMs in the UK grew by 3.5%. In addition to new free machines
being deployed, over the same period 111 free ATMs did become
surcharging but 100 surcharging ATMs also became free.
2.10 The Government believes that charges
are a commercial matter for ATM operators. Direct regulation of
retail prices should only ever be a last resort, implemented where
it has been very clearly established that competition is not feasible,
or where a monopoly supplier would be the most efficient option.
There is good reason for this. Regulators face severe difficulties
in assessing the correct level of prices, as those they regulate
have an information advantage about, for example, their own costs.
Also, price regulation can itself inhibit or prevent competition.
For example, regulatory price caps can become a "focal point"
for pricing, assisting the formation and maintenance of cartels.
3. THE OFFICE
OF FAIR
TRADING AND
THE PAYMENT
SYSTEMS TASK
FORCE
3.1 The Payment Systems Task Force was created
following the Chancellor's Pre-Budget report in November 2003
which said that the OFT would take on an enhanced role on payment
systems for a period of four years. The Task Force identifies,
considers and seeks to resolve competition, efficiency and incentive
issues relating to payment systems, particularly looking at network
effects of the existing payment mechanisms. Where appropriate,
issues affecting consumers which derive from, or are associated
with, features of payment systems will also be considered. The
Task Force will take account of previous work on payment systems,
including the "Cruickshank" report of 2000 and OFT report
on "UK Payment Systems" of 2003, but will also take
account of later developments. More information on the Task Force
can be found at www.oft.gov.uk.
3.2 The Task Force has identified several
workstreams which it will examine over its four year life span.
Among these are the access and governance of the Link network,
transparency in payment systems, and price inefficiency in payment
systems. The scope and timing of these workstreams has not yet
been decided, and will be agreed by the Task Force, rather than
the OFT. Currently, the Task Force is concentrating on low value,
high volume electronic clearing.
3.3 It is possible that the workstreams
above may cover some of the same ground as the TSC's inquiry.
For instance, the Task Force will examine access and governance
arrangements for the Link network. If issues affecting end users,
such as cash machine charges, are affected by the access and governance
arrangements of the Link network, this will fall within the remit
of the Task Force. Currently, the Link access and governance workstream
is scheduled for the second half of 2005. Until then, it is not
possible to say to what extent the work of this workstream and
the TSC inquiry will overlap.
3.4 Similarly, the Task Force plans to form
a workstream to address transparency in payment systems in 2007.
"Transparency' covers a whole range of issues, through wholesale
fees to the governance of the scheme itself, and the Cruickshank
report of 2000 raised the issue of the transparency of charges
made by ATM operators to end consumers (para 3.147).
3.5 Price inefficiency in payment schemes
was also raised in the Cruickshank report. Cruickshank considered
that payment schemes run by member banks, such as Link, had an
incentive to raise wholesale prices to erect barriers to entry
for businesses wishing to offer current accounts. Furthermore,
Cruickshank considered that this led to an effect on the geographic
distribution of ATMs, with resulting under-supply in poorer and
rural areas (para 3.122). Cruickshank said that changes to Link's
fee structure, introduced before the publication of his report,
could have a positive effect on some of the concerns raised. The
Task Force currently plans to start a price inefficiency workstream
in 2006, and it is likely that such a workstream would assess
the extent to which Cruickshank's concerns remain justified.
3.6 It should be noted that the Task Force,
not the OFT, decides on the scope and timing of workstreams. It
is not possible to determine the precise extent to which the Task
Force's workstreams will overlap with the TSC's inquiry until
a workstream has been started and the terms of reference have
been decided. However, the Government is committed to seeing competition
in payment systems improve and we will legislate in four years
if progress has not been made through the OFT Task Force.
3.7 The Government is aware that the Treasury
Select Committee has also shown interest in the OFT's regulation
of LINK under the Competition Act 1998. Evidence on this, provided
by the OFT, can be found in the Annex to this paper.
4. TRANSPARENCY
4.1 The Government strongly believes that,
where applied, ATM charges should be transparent so that consumers
can make informed choices about whether to use an ATM.
4.2 The Government considers that good progress
has been made recently on the issue of transparency. At the time
of the Cruickshank report in 2000, banks and building societies,
who were then the only operators of LINK ATMs, were operating
a complicated, discriminatory and opaque system of both issuer
and acquirer charges. Consumers were poorly warned of these charges
(although they would still be told the amount of the charge and
given an option to cancel just before the end of the transaction)
and as a result there was general confusion about when they would
be applied.
4.3 With the removal of issuer charges (except
for credit cards, which account for only about 3% of transactions)
this situation has been greatly simplified. And where surcharges
are levied, improvements have been made on warnings and signage.
4.4 As mentioned above, where charges have
been applied there has always been a warning of the amount of
the charge and an option to cancel without charge just before
the end of the transaction. LINK have noted that the UK is the
only country in the world where this is the case.
4.5 In April 2004 transparency was improved
when LINK members agreed that a customer should be warned before
inserting their card that a machine might charge them. This sign
should be either on-screen or on the ATM itself. The Government
believes transparency is of great importance and is aware that
there has been concern that this additional rule has not always
been properly applied. As the Treasury Select Committee will be
aware, the Financial Secretary to the Treasury recently wrote
to the Chief Executive of LINK indicating that the Government
welcomes the introduction of this new rule but is concerned that
it should be properly applied and that charges should be transparent.
4.6 The Government is pleased to note that
LINK have taken additional steps recently on the issue of transparency.
At their members meeting of 14 December LINK agreed that, with
effect from 1 July 2005, the following changes will take place:
— All surcharging ATMs must carry a
message on all screens in the "idle" sequence before
a card is inserted stating that "This machine will charge
you £xx.xx for LINK cash withdrawals
— All surcharging ATMs must carry external
signage saying "This machine will charge you for LINK cash
withdrawals." The sign must be:
— within the normal eye line close to the
ATM screen, and
— use a font size consistent with that
used for similar information and of at least font size 14, and
of contrasting colour to the background.
— Where there is signage away from
a surcharging ATM that directs towards it, this sign must include
the words. "This machine will charge you for LINK cash withdrawals."
— LINK will undertake periodic sample
surveys of ATM signage and idle screens and report non-compliance.
— In the case of persistent non-compliance,
sanctions such as fines, a refusal to allow the Member to install
any more ATMs, disconnection of the non-compliant ATMs or all
the Member's ATMs will apply.
4.7 The Government welcomes these changes
and will be monitoring their effect in the coming year.
5. FINANCIAL
INCLUSION, LOCATION
OF ATMS
AND DIRECT
PAYMENT OF
BENEFITS
5.1 The Government is committed to tackling
financial exclusion. Much progress has been made since the 1999,
Policy Action Team 14 (PAT 14) Report. The PAT 14 report made
recommendations on basic banking, credit unions and insurance
with rent. Many of the recommendations are now in place.
5.2 The Pre-Budget Report and the supplementary
document "Promoting financial inclusion", published
on 2 December, 2004 set out the next steps on tackling financial
exclusion. The Government has announced a Financial Inclusion
Fund of £120 million to support measures to address financial
exclusion and a Financial Inclusion Taskforce, chaired by Brian
Pomeroy, former Chairman of the National Lottery Commission, to
monitor progress in three key priority areas: increasing access
to banking services, to affordable credit and to free face to
face money advice. The Terms of Reference and the membership of
the Financial Inclusion Taskforce will be published shortly.
5.3 "Promoting financial inclusion'
sets out analysis suggesting that financial exclusion is particularly
concentrated in certain areas of the country. For example, looking
at families with low levels of financial activity we can see that
25% of the excluded live in the 3% of postcodes with the highest
concentrations of financial exclusion. These postcodes are concentrated
in areas including parts of East and South-East London, Middlesbrough,
Manchester, Birmingham, Glasgow and Liverpool.
5.4 The first priority for the Government
in addressing financial inclusion is reducing the number of individuals
who have no bank account. Considerable progress has been made
on this recently. All the major banks now offer a basic bank account.
Basic bank accounts are an important means of dealing with financial
exclusion and are a gateway to wider, mainstream services. As
the proportion of those with bank accounts increases, it should
make the provision of banking services in areas which currently
have a high level of financial exclusion more commercially attractive
to banks.
5.5 Recent figures from the British Bankers'
Association show that there has been a steady growth in the number
of basic bank accounts opened. At the end of September 2004, 5.53
million basic bank accounts were open. Of these, 1.85 million
can be operated through the Post Office.
5.6 From April 2003, the accessibility and
availability of basic accounts was extended with the introduction
of universal banking services, where people can use basic accounts
at post offices, including for the payment of benefits. This has
increased choice for many individuals as to how they operate their
finances. Since Post Office access became available in April 2003,
over 1 million accounts have been opened and 87% of those can
be accessed at Post Office counters. This is an important feature
of such accounts, giving account holders free access to their
cash in areas where banking facilities may be unavailable.
5.7 Payment of benefits directly into an
account has been an option for customers since the early 1980s.
Over the years it has become an increasingly popular method of
payment. Before the start of the main move to Direct Payment in
April 2003, 43% of customers were receiving their payments this
way—this compared to only 26% in 1996. Four out of five
people now have their benefits and pensions paid into an account.
Payment directly into a bank account has increased financial inclusion.
It is safer and has given benefit recipients greater choice in
respect of when and where they can access their money.
5.8 In addition, the Government is spending
£1 billion to provide the Post Office card account over the
lifetime of the contract (2003-10). This is an ultra simple account
which can be used by those who do not yet feel able to use a High
Street bank account. The banking industry made a contribution
of £182 million towards the development of the Post Office
card account.
5.9 Independent research has show that Direct
Payment is proving very popular, with nine out of 10 saying they
like being paid by Direct Payment. Customers are finding it easy
to open new accounts and pensioners are using PIN numbers successfully.
And most people think that the new way they are paid their money
is better than order books or cheques.
5.10 The move to Direct Payment and the
introduction of universal banking services has also helped to
reduce the number of adults in the UK without a bank account.
Citizens Advice have praised the Government's efforts in this
area. In their booklet on financial inclusion (published in December
2003)—"Beyond Bank Accounts: full financial inclusion"".
They said:
"The government, the banking industry
and the Post Office should be commended for the progress they
have made in establishing Universal Banking Services. The ambition
to enable all people to own the most basic of financial services—a
bank account—is one we share." [Foreword—David
Harker and Nick Pearce.]
5.11 There are a number of options available
for those receiving benefits by Direct Payment to gain free access
to their cash. There are 33,700 free ATMs in the UK as well as
the cash back facility available at supermarkets. In addition,
DWP has been working with the Association of British Credit Unions
Limited (ABCUL) to implement formal arrangements for the safe
and secure payment of benefits into the accounts of credit union
members. Payment in to customer accounts at participating credit
unions commenced during mid 2004.
5.12 As well as the basic bank accounts
described above, the Post Office has made commercial arrangements
with a number of banks (Alliance & Leicester, Barclays, Lloyds/TSB,
Clydesdale, Co-operative, Bank of Ireland and smile), to give
personal current account customers electronic access to their
personal current accounts. As a result of these steps, 21 million
people can access their bank account electronically and free of
charge at the Post Office.
5.13 As the Post Office stated in their
written evidence to the Treasury Select Committee, Post Office
Ltd has "the network and the ambition to become the universal
provider of free cash, over its counters, to personal customer's
of any financial institution." The Government has invested
2 billion pounds in the Post Office network over five years and,
even after the current restructuring of the network, 95% of people
in urban areas will still live within one mile of a Post Office
branch.
5.14 DWP has not received any feedback from
its customers or its front line staff that a large proportion
of benefit income is being spent on ATM charges. DWP leaflets
sent to those converting to direct payment explain in some detail
how they can gain free access to their money. DWP customers can
also consult free help lines for advice. We have not seen any
solid evidence to support the assertion that there is a real problem
with benefit customers incurring significant costs through ATM
charges. Should such evidence become available, DWP will work
with all interested parties to ensure their customers receive
all the necessary information to make a properly informed choice
about where and how they choose to access their cash.
6. CASH MACHINES
IN POST
OFFICES
6.1 As the Post Office stated in their written
evidence to the Treasury Select Committee, in February 2000 there
were only 160 ATMs located in Post Office branches. By November
2004, this figure had grown to 2,493, increasing choice for consumers
by providing ATMs in many new locations. Although the Post Office's
preference has always been to introduce free machines where possible,
this growth would not have been commercially viable without the
option for many of these ATMs to levy a surcharge to recover their
costs.
6.2. However, of these 2,493 ATMs, 637 are
still free of charge. This means that since February 2000 the
number of free ATMs in Post Offices has substantially increased.
The Government believes that, bearing in mind the progress that
has been made recently on transparency of charges and the fact
that so many bank accounts are now accessible free of charge over
the counter at the Post Office, surcharging ATMs in Post Office
branches have increased choice for consumers without compromising
their option to gain free access to their cash.
12 January 2005
7 The Banking Review was announced by the Chancellor
of the Exchequer in November 1998 and culminated with the Cruickshank
report, "Competition in UK Banking," in March 2000.
Its purpose was to examine competition, innovation and efficiency
in the UK banking sector and to consider whether there were options
for change. Annex D4 of the Cruickshank report covers charging
and access to ATMs. It can be found on HM Treasury's website:
http://www.hm-treasury.gov.uk/documents/financial-services/banking. Back
8
APACS 1999 ATM Survey. Back
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