House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

 

 

Cash machine charges

 

 

Tuesday 21 December 2004

MR PHILIP CULLUM, MR LAURENCE BAXTER, MS TERESA PERCHARD and MS JENNY HICKSON

MR JOHN HARDY and MR HOWARD AIKEN

Evidence heard in Public Questions 1 - 254

 

 

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Oral Evidence

Taken before the Treasury Committee

on Tuesday 21 December 2004

Members present

Mr John McFall, in the Chair

Mr Nigel Beard

Angela Eagle

Mr Michael Fallon

Mr David Heathcoat-Amory

John Mann

Mr James Plaskitt

________________

Witnesses: Mr Laurence Baxter, Senior Policy Adviser, Which?, Mr Philip Cullum, Deputy Chief Executive, National Consumer Council, Ms Teresa Perchard, Policy Director, Citizens' Advice Bureau, and Ms Jenny Hickson, Financial Skills Tutor, examined.

Q1 Chairman: Good morning. Welcome to this first evidence session on the cash machine charges inquiry. What is your organisation's position on the strong growth of charging cash machines that we have seen in 1999-2000, and has this development been advantageous for the consumer given that there is a growth in areas where there is a convenience machine and people have the opportunity to get a hand?

Ms Perchard: Looking at the evidence, particularly the evidence put forward by Which?, which I think is very helpful in giving us a factual context for some of the views that we have put forward and the views that NCC have put forward, I think overall mixed feelings on the impact for consumers of the growth in these machines. On the one hand, they are introducing a facility for access to cash in areas that either have been left by the banks or where consumers did not have easy access to cash, perhaps in a more secure environment, in a shop or a post office, where people have become quite fearful in some areas about using cash machines on the street, but on the other hand, where these machines are and who may be using them or for whom they may be intended carries a price, which people on low incomes will be ill able to afford. So I think in terms of overall views on the strong growth, they are mixed, and I think worrying about where we might end up with charging machines.

Mr Cullum: I absolutely share that view. I think there are some situations where it has been helpful; it has extended people's access and given them choice in some circumstances. I think we are quite concerned about this term "convenience", which I am not sure really captures the range of experience that people have. There are, I think, circumstances where there are lots of high streets in London which have lots of banks which are free. If you are in a shop or a pub or a shopping centre and you think, "Do I want to pay £1.50 and use the machine that is nearby or do I want to walk a couple of hundred metres down the road?" that is clearly a matter of convenience and that is a useful option for consumers to have. I think when we are talking about areas where there are not any banks and the charging machines are the only ones which are there, whether that is a low-income area or a rural area, there are much more severe issues, and I think it is unhelpful to talk about those as being convenience; that is about access. We are concerned about the extent to which there is a kind of blurring of the free machine market and the paid for machine market, particularly with people like Royal Bank of Scotland owning Hanco, who provide a lot of the paid for machines. What does that say about the way some of the banks think about cash machines? Is it about service or is it just about trying to make money out of a particular service?

Q2 Chairman: Given the Royal Bank of Scotland situation and Hanco, and also the 800 cash machines owned by HBOS, are you worried about any trend that is building up here?

Mr Cullum: We are worried about it, and the question is what does that say about the mindset of the banks? Would that put them off trying to extend their network? We would argue that there are areas which are not well served at the moment that the banks should be trying to get into and provide a free service. Clearly, if there is an imperative where they say, "Our other arm can provide this and we can earn money from it," that would suggest that they might not provide that sort of service.

Q3 Chairman: Laurence Baxter, you have given us the most detailed submission of all. Is there not a lot of brouhaha here for nothing? What are your main concerns regarding the growth of charging cash machines? Surely it must be good for the consumer?

Mr Baxter: In a sense, yes, but on the other hand, it could be potentially bad for consumers. Which?'s position on charging cash machines is that we think all consumers should not be denied free access to their own money. It is that simple. We have no particular concern with the principle of convenience machines, provided they meet three conditions: first, we think that all ATMs, both free and charging, should be suitably labelled as such. This is not happening, and Which? has developed a solution to this which we would like to share with you this morning. Second, we think that charging machines should not threaten consumers' free access to their own money, no matter how well labelled they are. We are concerned that many consumers simply cannot make the choice of using a free or charging machine, even if they want to, owing to the rather aggressive growth of charging machines in the last few years. Finally, we think the charge itself is disproportionate to the actual cost of the transaction. This is not really reflective of a situation that benefits consumers at all.

Q4 Chairman: So you are looking for a sliding scale?

Mr Baxter: We would like both a sliding scale and a cap, and I would like to get on to that later this morning. The growth of charging machines could constitute a threat to consumers. We are seeing a fast growth in the last few years as charging machines right now, already, constitute the majority of all the ATMs away from branches. Yes, indeed, there is a three per cent growth in free machines, and I am the first to say that, but charging machines have been growing much faster and it is not inconceivable to see a situation in the future where virtually all the cash machines in the non-branch network are dominated by these charging, independent providers, and those would threaten the free machines that do still exist.

Q5 Chairman: If I can get the gist of your answers, are you concerned from a public policy point of view regarding the future of free and charging cash machines? Is that the issue here?

Mr Baxter: Absolutely.

Q6 Mr Fallon: I am struck by the fact that it is the same consumers' lobby that was fretting a few years ago about bank branch closures that is now fretting about the fact that machines have popped up to take their place. Is it not a little naïve to worry about consumers having free access to their money when the cost of them having access to that money through inefficient bank branches was, of course, greater? There is no such thing as free access to your money, is there? There is a cost to running a branch, a banking network, whether it is a machine or whether it is a branch.

Mr Baxter: Of course, you have to consider the operating costs of bank branches of machines.

Q7 Mr Fallon: It cannot be free in any case; it is a rather misleading term to use, is it not?

Mr Baxter: Non-surcharging. Free not to use, to actually withdraw your money. I must also emphasize that cash machines have become more efficient in the last few years. The LINK interchange fee, which is basically the cost of transactions between the free cash machines operated by the banks and building societies, was about 38-39p per transaction about four years ago. It is down to 31p now. This shows that the cost of the transactions is actually coming down. The LINK interchange fee seems to work very well for consumers, and it encourages banks to be more efficient about the way they site their machines. What is skewing this equation here is the entry of these charging machines that are able to charge £1.50 or £1.75 - basically what they want - and threaten that free access.

Q8 Mr Fallon: Who are you to decide what the test of convenience is? You began by saying you were not sure that some of these locations really were convenience locations. If they are inconvenient, and the charges are clear, consumers will decide for themselves whether to not to pay, will they not? The test, surely, is transparency, whether the charges are clear or not.

Mr Cullum: You are right in identifying that one issue. It feels like there is a groundswell of opinion, both on the consumer side and increasingly in the industry, that there does need to be clarity of labelling. It is not very clear at the moment. "You can check your balance for free" is a slightly disingenuous way of putting it. It is a bit like food being 92 per cent fat-free. But I think there are issues about the location of the machines and whether people are really getting a choice. To go back to the point I was trying to make, it is fine if you are in an area where there is a choice of free machines and not free machines. If you are in an area where there is only one that charges, that is not a choice and it is not really a question of convenience. That is about access and getting a service.

Q9 Mr Fallon: It is also about central planning. Have you written the same sort of paper telling people where to put their petrol stations?

Mr Cullum: What we have done is looked at areas like - and there are rules on it - post offices and the location of post offices. There is a procedure. Some of these services are essential. One of the points, going back to the charging issue, is that arguably, we have already paid for all of this. One could envisage an entirely different banking system in Britain which is more equivalent to other countries, where you pay per transaction, you pay for each direct debit, you do pay every time you withdraw money, and you have a higher interest rate because you pay as you use the system. That was a perfectly imaginable system; it is just not the one we have, but it does feel like the institutions are increasingly trying to have their cake and eat it. They are trying to run the service with a fairly low or often no interest rate on the premise that we then get everything thrown in for free, but then they are starting to charge for individual items. We are uncomfortable with that.

Q10 Mr Fallon: Processing individual items has always had a cost to it. It cannot be free in any case.

Mr Cullum: No, it cannot be, and that is why consumers are effectively paying for it already, as I say, by the fact that they are foregoing the interest rate that they would get in another situation.

Q11 Mr Fallon: You have said this morning that this is potentially bad; that it could constitute a problem. Are you here to actually present us with a problem or not?

Ms Perchard: This issue really crystallises: here we are in SW1. There is one of these machines in the QEII Centre, round the back, near the cloakroom, but then there are some bank ATMs within a few hundred yards' walk. If I do not want to use that one, I can nip outside, go up Victoria Street, and try a series of ATMs for free. But if I live in North Speke, which is where Jenny, my colleague, comes from, all I have is convenience cash machines, and they are miles apart. One of them is in the post office, and I have just been encouraged by the DWP to have my benefit paid into a bank account, and I can take cash out at the post office. There are huge queues, and it is of benefit to the Post Office for me to get my cash out from this machine, but I get quite a hit in the charge if I am taking out a small amount, as the DWP advocate - "Don't take it all out in one lump; take it out in two or three lumps a week because that will be safer, madam" - and I am paying £1.50, maybe £1.80 a time. Coupled with that, this is often presented in a way that you may see "Free balance inquiry", it is quite a way into the transaction, and you have queued up to use the machine before you realise what the charge is, and it is quite embarrassing to pull away, and you do not have a bank ATM that is not going to charge you within a few hundred yards' walk; you have got a bus ride. I do not know if Jenny would like to say any more about that.

Q12 Chairman: Did you say there are no free machines in Speke?

Ms Hickson: Our office is centrally based in the Parade. The nearest one is a one and a half mile walk. The second nearest one is three miles. There are two or three charging ones within the Speke estate. The Speke estate is actually quite isolated.

Q13 Mr Fallon: It follows from that that you would like to see the banks obliged to provide free machines by law in disadvantaged areas. That is what you want.

Ms Hickson: I think it would make a vast difference, yes.

Ms Perchard: John was right when he said this raises a public policy concern. We have the collision of a social policy interest with a market, market forces, and how do you get the balance between that, when you have consumers and different choices open to them and different abilities to pay, and a different experience of the charge proportionate to their transaction? We are perfectly legitimate in raising a concern that this might hit most heavily those people on lowest incomes.

Q14 Mr Heathcoat-Amory: I understand that consumer organisations always want everything to be free, but these are real costs that have to be borne by someone. It seems to me that it is a rather healthy development that the independents, IADS, have come into the market to provide charging machines in the areas which the others have not reached. I understand the free machines are still increasing in number, though slowly, but what we have really seen is the growth of these independent charging machines. Certainly in my area, in Somerset, the convenience stores have come to rely on those as bringing customers in. I have not actually had any complaints from either side about the charging. Are you asking for a cross-subsidy here? Let us be clear what you want. You want to interfere with the market and make them all free, and transfer the cost somewhere else. Is that your request?

Mr Baxter: I would like to answer that.

Ms Perchard: We all have slightly different views on this issue. We all want very clear labelling on the outside, before you start, so you do not get sucked in. Certainly, from our perspective at Citizens Advice, we really think the DWP and the Post Office should sort something out about the charges on these machines so that people using them in post offices, who predominantly withdraw benefit, are not paying a charge to do so. That obviously involves some kind of subsidy, or who is paying basically is the issue. At the moment, the costs are being displaced on to the consumer. Perhaps they should be met, if not in full, possibly in part by the Government, which is promoting banking, and post offices, which are getting a queue-busting device in the post office. What Laurence's evidence highlights is some good questions about whether the charges are too high anyway, so how do you get the charge to the lowest it could possibly be? There is no real choice in some areas driving down price.

Q15 Mr Heathcoat-Amory: I want to be clear here. There is a cost, and you want that cost transferred. I think you have to be specific about who is going to pick up that cost - the Government, the Post Office, the banks, the convenience stores. It is very easy to say it has got to be free. The difficult thing - and I do not think you have answered this yet - is what are these costs that you want to transfer and who is going to pay those costs?

Mr Baxter: First of all, let us just get the facts of what is actually happening clear here. We are seeing the introduction of these charging convenience machines. Most of them in the last four or so years have been new installations in convenience stores, and this is good in some respects because they provide consumers with access to money that they would not otherwise have, as my colleague says. These machines have been growing considerably in the last four years, quite aggressively, at a rate of about 3,500 new machines, or 10 per cent of the entire ATM network in the UK, per year. These machines will keep growing, because the charging companies, the IADs, are looking to further access this market. They will only grow as far as there will be places to put these new machines. Eventually, they will start cutting into the free network, the existing free machines, and that is already starting to happen.

Q16 Mr Heathcoat-Amory: I am going to stop you: so it is a potential development you are worried about? I am trying to pin you down about what is happening now.

Mr Baxter: No, it is already happening. This worst case scenario is already beginning to happen. HBOS this year sold 82 per cent of its non-branch network, virtually all its machines away from branches, to Cardpoint. Customers of HBOS will now be charged for many of those machines, and Cardpoint is looking to make more charging; their CEO said that in their annual report just a few weeks ago. This is a problem, because a free machine is basically turned into a charging one, and that is causing the other banks to consider "Maybe we could get out of this whole LINK interchange fee thing and cut our costs here, possibly get rid of the rest of our non-branch machines."

Q17 Mr Heathcoat-Amory: You keep saying about the future. This is Mr Fallon's point. He asked you about this, because it is not the future we are worried about; it is here and now. We hear in the evidence that the number of free machines is still going up.

Mr Baxter: Very slightly though, but much less so than the charging machines.

Q18 Mr Heathcoat-Amory: Is it not a good thing to have competition coming in? Normally consumer groups are afraid of big banks and big building societies dominating the market. I am very influenced by my own rural area in Somerset, I have to accept. I have seen the growth of this competition, which helps the convenience stores, helps keep them open, which is my concern, and they do charge, but people use them. They do not have to, but they do use them. It seems to me rather a dynamic development.

Mr Baxter: There are three issues related to competition. Competition is a situation where consumers can actually make a choice an informed choice of a transaction before they get into it, and have a choice of using a charging machine or a free one. That is not happening. First of all, many consumers simply cannot make the choice; they have to get their money out of a charging machine. Secondly, they are not even aware, in many cases, that the machine is going to be charging until later in the transaction. Research that Which? conducted said that fewer than one in five consumers know which machines are charging and which are not, and that clearly shows that the labelling is simply not working.

Q19 Mr Heathcoat-Amory: We are going to come on to that. I want you to answer the question I started with: what costs do you want to transfer on to other people? Have you quantified the costs and who is actually going to pay them, if they all become free, as you appear to want?

Mr Baxter: What we are trying to do is protect more consumers from having to pay this charge, which is, by and large, grossly disproportionate to the actual cost of the transaction.

Mr Cullum: I think one of the issues is that you do not know what the costs are. Don Cruickshank looked at it in his review. He put it as 15-30p for providing it. We know that the typical charge for a charging ATM is £1.50. What I think would be really helpful when you are interviewing other people is to shed a bit of light on how much the costs are and what is reasonable. Again, when Cruickshank did his review, he talked about extremely high and discriminatory prices from machines. He also talked about inefficient geographic distribution of ATMs, and that is one of the issues that relates to your point, what we think there is but we are not sure, and again, it would be great to shed some light on the clustering effect and perhaps try to get some sort of mapping of where the free machines are, where the charging machines are, map that against socio-economic indicators and geographic mapping, and just try and tease it out. For all of us, our hypothesis, but we were not absolutely sure, is that a lot of the free machines tend to be in the same places, or all on the same high streets, and then the ones which charge are all clustered together as well, so, as Laurence says, there is not real choice for consumers.

Q20 Chairman: So you are looking for a map?

Mr Cullum: I think that would be really helpful.

Mr Baxter: We would also like to see some actual information from these charging providers as to exactly how these cash machines work in terms of costs.

Q21 Chairman: One point you made about the selling of machines by banks to the independent companies. Did you imply there is a double advantage there for the banks? If they have their own free machines, they will pay the LINK interchange fee of 31p, but if they sell them, does that mean that any customer taking money out will not be charged to the bank?

Mr Baxter: Yes, there is a sort of false economy if the machine remains free. You need to understand the LINK interchange fee in order to answer that question.

Chairman: Do not worry about that. We have people coming to deal with that. We will wait for them to come before we ask for your interpretation.

Q22 Mr Beard: You have already said that the current LINK code of practice requiring charging cash machines to display a notice is not really working. The normal form of words is "This machine may charge you for LINK cash withdrawals." "May" is wrong anyway, because if it is going to charge you, it will charge you. You have already said that this wording is not adequate, but you have also said that it is not adequate that customers are only warned about the actual amount they will pay when they have entered their PIN number. When are you saying it would be proper to warn people it is a paying cash machine?

Ms Perchard: They are quite large bits of equipment standing on their own, and it ought to be possible to have this very clearly on the outside of the machine, in very large, clear numbers or letters.

Mr Baxter: Labelling is a critical issue, not only on the screens themselves, but actually physically on the machines, so that consumers can see from a distance, before they start queuing, for example. We have actually come up with a solution. We would like to propose, if we may, that one solution to this could be some sort of universal standardised labelling, some sort of clear indication such as this, (indicating) a standardised triangle with the charge on it, and if it is free, it would look like that (indicating).

Q23 Mr Beard: That would be a matter for negotiation. You are actually saying that this is not adequate and it ought to be something that you could detect before you start queuing up. That is the main principle.

Ms Perchard: Absolutely. Just to add to that, why that might be needed, certainly for people who are just transferring to using banking services, who rely on benefits, perhaps people who are older and have not been used to using ATMs, and might use the one in the post office because it is a safe environment, they feel they might be able to take their time or there are people they can ask if it goes wrong, it is very important to have clear information for them about what their options are on getting cash out of a machine.

Q24 Mr Beard: Many cash machines at the moment are misleading and they display a sign saying "Free balance inquiry," so that you are just enquiring about your balance. Do you think that use of the word "free" in that context is deliberately misleading?

Mr Baxter: Yes, most definitely.

Mr Cullum: It is marketing rather than information.

Q25 Mr Beard: Did LINK actually consult consumer groups like yours when they introduced their code of practice?

Mr Baxter: They did, and I must say they have communicated with us quite regularly on this sort of thing. I think it is very much an issue of enforcement. The LINK code of practice was certainly quite useful in terms of improving labelling but in a lot of cases it is simply not used.

Q26 Mr Beard: Are you saying that LINK took your views into account at the time that you were consulted?

Mr Baxter: Yes, they did indeed.

Q27 Mr Beard: But it is not being practised?

Mr Baxter: Unfortunately not. What we would like to see is either LINK doing something about improving their enforcement and actually making sure that banks and independent ATM deployers are actually labelling properly. If that does not work, we would like to see all the IADs brought under the Banking code, because the Banking Code Standards Board seems to be working quite well.

Q28 Mr Beard: Can we come to that now? If the voluntary arrangement is not working, what form of regulation is required?

Mr Baxter: Self-regulation in the first instance.

Q29 Mr Beard: Self-regulation through what? That is a bit vague.

Mr Baxter: Through the Banking Code. We would like to see the independent ATM deployers signing up to the Banking Code because, after all, they are providing a banking service, just like the banks and building societies.

Q30 Mr Beard: Is that a general view amongst all of you?

Mr Baxter: Yes.

Ms Perchard: It would be a very helpful way of linking them into what is a network issue, and if it was possible to bring them within the scope of the Banking Code, that also brings with it the auditing system that is run by the Banking Code Standards Board, which has been incredibly helpful in highlighting issues about compliance with the Banking Code, and that is what would be essential, to have a trusted system.

Q31 Mr Beard: Your experience of working the Banking Code in other respects is that that would be a way of making sure that they were properly labelled and properly operated? Is that right?

Ms Perchard: It is probably fair to say the Banking Code is probably the best of its type as a self-regulatory system. It is regularly reviewed by an independent reviewer. There is a separate auditing system which publishes findings and helps to keep people on their toes really.

Q32 Mr Beard: That is everybody's view, is it?

Mr Cullum: Yes. It has responded quite well over time and has gradually improved, and that is a positive sign. I guess the point is from a consumer perspective, why does the consumer need to know who owns the machine in order to know what their rights are and the standards it needs to meet? From a consumer perspective, it is just another cash machine.

Ms Perchard: Particularly the fact that the LINK logo is a universal logo that you will see across all the machines is something that consumers might not be ready for, the fact that they are different. You think you are part of the system, have the same protection and consumer rights.

Q33 Angela Eagle: What worries me about the growth of charging machines is that they seem to be over-represented in areas where there are no bank branches. Is that the impression that you get? You talked about having a map earlier, but do you not think there is a problem of real choice for people if the branchless areas are over-represented in the charging machines, which is basically meaning that deprived communities, where transactions are likely to be frequent and of low cost, are actually the ones that are paying the most for access to their own cash?

Mr Baxter: Absolutely. Mapping would be very useful, and especially when free machines turn into charging ones, we would like to see some information as to where these machines are going to be. I am talking post codes here. We did a very rudimentary piece of research. We received a random sample of about 58 communities which had been identified by the Campaign for Community Banking Services as branchless in the last few years, and what we did was we used the LINK ATM locator on their website to find out where the closest free and charging machines were, and not surprisingly, only four communities had no ATM in the area, so ATMs are pretty much in all communities, but for 24 of those communities, the closest free ATM was 4 km away from the centre, and that is very similar to other evidence you are hearing at this table. It shows that when you look at it from the economics of the whole thing, free ATMs are all very well and good in busy areas, where they will attract a lot of volume, but in quieter areas they are less commercially viable and as a result, you will see the very people who need free machines the most are the very people who are targeted not to get them.

Q34 Angela Eagle: We have a situation where there is lots of competition: people will say you can get cash free out of the supermarket, you can get it out of bank branches, but in areas like Speke, there is not a supermarket, there is not an open branch of a bank and there is not a free cash machine. Is that right, Jenny?

Ms Hickson: That is right.

Q35 Angela Eagle: So what do people in Speke do to try to get hold of their own money?

Ms Hickson: They have the choice of the post office cash machine, which charges, or they join the queue for the post office, or they have to walk a mile and a half at least, or maybe three miles to the nearest supermarket/shop, but that is not 24-hour access; the car park will close and those free ones will be closed down. Even the free ones are not accessible all the time.

Q36 Angela Eagle: Is there an issue here for older people as well, who maybe do not have access to their own car?

Ms Hickson: Yes.

Q37 Angela Eagle: How does that tie in with bus routes and costs?

Ms Hickson: The buses in Speke, for example, are OK between 7 o'clock in the morning until 5 o'clock at night but at weekends and evenings it is not a reliable service, and you also have the cost of the bus fare. If it is going to be costing you 60p for the bus, you might as well pay the £1.50 and not have to go out. It is leaving people with very little choice about what to do.

Q38 Angela Eagle: Part of the evidence we have is that 97 per cent of cash transactions are free, and yet we also know that these new companies made £66 million of profit charging people to get their own cash out last year. The only way I can understand those two figures, putting them together, is that poorer people, who are using frequent but low withdrawals, are paying maybe 10-15 per cent of each withdrawal, and providing these companies with the vast majority of their profit.

Ms Hickson: For elderly people, for example, they may go to the post office three or four times a week and use the cash machine, because they only want to withdraw small amounts, and each of those trips is going to cost them some money. You are also talking about people in communities like Speke that are on very low incomes. They may only have £10 or £12 in their account, and they need £2 or £3 for the children's dinner money, but they have to take out the whole £10 and use the ATM and they are losing £1.50 of their money because they have had to use a cash machine because they have not managed to make the previous withdrawal last the whole week and you have to send the children to school with some bus fare or some dinner money. There just is no choice for them but to go and take that money out and pay that charge.

Mr Baxter: It is also worth pointing out that people on lower incomes tend to use cash proportionally more than other people. They will tend to take out smaller denominations of cash, but they usually have no choice but to use cash because, for example, basic bank accounts do not have debit cards, which other people enjoy, and they do not qualify for credit cards - and we all know the problems about credit cards, do we not? So they are basically forced to use cash, and they cannot use debit cards because they do not have them, so they tend to take out smaller denominations, so they will use ATMs proportionally more than other people would.

Q39 Angela Eagle: Perhaps the solution here, if we cannot have free machines - and I think there is a case for having free machines in certain areas, even if you have to subsidise them - is that perhaps we need to look at the charges and look at whether they should be proportionate to the amounts taken out.

Ms Perchard: Yes. Certainly that is something. We have suggested a number of thoughts in our evidence about proportionality between the value of the transaction, because you pay the same regardless of the amount you are taking out. I understand the reason for that may be the recovery of the high capital costs and the maintenance of the machine, and those costs flow irrespective of the value of the transaction, but here we have what we see as really a social policy issue arising in some areas, where, particularly with the post office machines, the Government is accruing significant savings in benefit handling by transferring people on to banking, and perhaps there should be a recognition that people will need more support with being able to draw money out through machines, which, as people use machines more, will lead to a reduction in counter staff as well. So helping people to use technology to get their cash out by subsidising the price that they pay is something we think should be really seriously looked at by the Post Office and DWP.

Q40 Angela Eagle: Finally, can I ask this. There is a dynamic that worries me going on in this market. There may be people watching this who have cars and think, "It's OK, I can get my own money out free because I can go round to other machines that are free," but there is a dynamic here that worries me which could lead to the end of free access to cash for everybody if this substitution of the existing free networks continues to happen either because banks decide to cut their costs even more - and remember, they cut their costs in the first place to get rid of branches and introduce cash machines free. They are now seeking to cut their costs further. If they do this, there is a possibility, do you think, within a few years - because this has all happened from nothing in the last four years - that we might lose free access to cash completely for everybody?

Mr Baxter: That is very realistic. I think there is a fast scenario and a slow scenario. The fast scenario is the LINK interchange fee. That is up for renewal in December of next year. This time next year the LINK members will be deciding whether or not to keep the LINK interchange fee, and if that does not survive past next year, that will be a disaster for consumers. The slow scenario is basically the non-branch network progressively becoming more and more dominated by these charging ATM providers, the IADs will be buying more and more machines, and eventually the free branch ATMs will be literally surrounded on all sides by a non-branch network, virtually controlled by the IADs, charging, basically, what they want. It will simply no longer be commercially viable for anybody to hold a free machine anywhere, and then you will start seeing the branch machines disappearing as well.

Q41 Angela Eagle: Once that happens, of course, the charges could rocket.

Mr Baxter: Absolutely.

Mr Cullum: I think we are already seeing signs of the banks abiding by the letter rather than the spirit of their promises not to charge, so if you put your card into a Royal Bank of Scotland machine at the moment it says "We don't charge." Yes, that is true if you are using a Royal Bank of Scotland branded machine, but not if you are using the machines which they own via Hanco, which do charge, so there is a blurring, and I think it does betray the mindset, of them seeing this as a separate business which they can earn money out of rather than as an overall service. Just to go back to one point that you mentioned earlier and others have picked up on about subsidy, I think you are right. I have a lot of sympathy with Teresa's arguments about post offices and subsidising them and where they are in rural areas they are the only...

Q42 Angela Eagle: Or urban areas like Speke. This is not a rural area issue necessarily.

Mr Cullum: I think they are two different things. I was going to say there are the rural areas and there are areas where there are lots of people withdrawing their benefits, but I think we need to be careful about the use of the word "subsidy." What these are are networks. We may have favourite machines that we use regularly, but there will be machines which we will use only once in our entire lives, but we depend on the idea that they are located all over the place and that we can easily use them. So I am not sure it is about subsidising the machines that lots of people use and the machines that not so many people use. That is just a network benefit. We all contribute to it. We are paying, and the costs are spread. So we should be careful about describing that too overtly as a subsidy.

Q43 Mr Plaskitt: Miss Hickson, you were talking about the community in Speke. What sort of population are you talking about? Roughly how many people?

Ms Hickson: Roughly about 15,000.

Q44 Mr Plaskitt: How many of those would you say are on benefit or very low income?

Ms Hickson: Two-thirds of the population would be on benefit.

Q45 Mr Plaskitt: So about 10,000 people in the Speke area. What is the withdrawal charge generally of the charging machines in the area?

Ms Hickson: They are £1.25 and £1.50. I do not think they go above £1.50.

Q46 Mr Plaskitt: You said that some people would visit the machines two or three times a week to make withdrawals. If my maths are right, in the course of a year, those 10,000 people on low income are handing over £250 in fees to access their own cash. So 10,000 people handing over £250 a year to the charging companies. They are drawing quite a lot of money out of the Speke community are they not? That is £2.5 million a year from giving 10,000 people in the Speke community access to their own cash. That is what is happening.

Ms Hickson: I would not know how accurate the figures are.

Q47 Mr Plaskitt: What would £2.5million do if it were invested in the Speke community?

Ms Hickson: I think it would make a big difference. I do not know how to describe the community any more. It is basically a post-war estate that has been built on the south edge of Liverpool. The centre of Speke is a parade of shops. The biggest name is Iceland. There is a convenience shop, a little local shop, a post office and a credit union, and that is basically all that exists in Speke, and around the outskirts of that there may be another two or three convenience stores, and you have to literally drive out of the area or get a bus out of the area to access any kind of banking service. The nearest branch is three miles away.

Mr Cullum: One of the things that is really interesting is that there is a parallel universe. There is the one which has just been described, where people have to pay to get access to their own cash, and then there are the ones we mentioned earlier, where people have debit cards, where people can easily pop into Tesco's or Marks and Spencer's or a whole range of shops and they are desperate to give you money, and they want you to take cash back because they know that it costs them money to handle cash, and so they would much rather you took it away and they got an electronic credit for it. So there is some really odd dynamic going on where in one system, it benefits people for you to take the money for free, and in another system you have to pay to access it.

Q48 Mr Plaskitt: Was there ever a point in the middle of the community in Speke where there was free access to cash?

Ms Hickson: The last bank closed in about 1998. The post office obviously is free access if you do not use the cash machine, and the credit union if you have your benefit or your wages paid directly into the credit union. That is pretty much as open as a post office, but not outside of 9-5 hours, no.

Q49 Mr Plaskitt: So for five or six years there has not been free at the point of access cash dispensing in that community?

Ms Hickson: The ATMs are new. They have only been there two or three years.

Q50 Mr Plaskitt: The ATMs have been there two or three years?

Ms Hickson: I would say about two years, yes. I am not exactly sure of the timescale, but about two years.

Q51 Mr Plaskitt: So they have sucked about £5million out of the community so far?

Ms Hickson: Possibly.

Q52 Chairman: On that issue of credit unions, would there be any initiative whereby banks could work along with credit unions to put free cash machines into credit unions?

Ms Perchard: In the context of the recently announced financial inclusion fund, anything ought to be possible. People in the credit union movement should know that the Government is very interested in seeing a major investment take place to improve the viability and services provided by credit unions. We would be very pleased to see that sort of thing take place.

Q53 John Mann: Mr Cullum said about supermarkets reducing their overhead costs by not having to handle cash. Presumably that is the same for a convenience store, where they would have to go greater distances to transport the cash. Presumably there is a comparable relative saving there for a convenience store owner or chain of convenience stores owner.

Mr Cullum: That is right. Going back to Teresa's point, I think the spirit of this is that there clearly are issues about access to machines full stop, and to free machines in particular. There is lots of innovative thinking going on. There is a real opportunity to think a bit differently about it. There are issues with people on low incomes less likely to have debit cards, so that would clearly be something that would need to be tackled, but you could imagine a system where you would take more advantage of that and, rather than just using cash machines, start to think a bit more innovatively like that about trying to get people to get access to their own money for free.

Mr Baxter: Also, if I may add to that, I think we must remember that there are other ways of making a free cash machine viable. Some of the banks and building societies are beginning to explore new ways of getting money out of these things, for example, providing new services such as mobile phone top-up and all that, and advertising on the actual machines. These are alternatives to selling the machines off. I am not telling banks how to run their businesses. However, we must remember, following from Teresa's point, that banks have been given an implicit social responsibility by having benefits and pensions - and salaries and wages for that matter - transferred directly into the current account. People have got to be able to access these things. Banks have been effectively given an implicit social responsibility, and so we have the commercial side of it and we have ways of mitigating the operating costs, and on the other hand we have a social responsibility.

Q54 Chairman: If I could sum up the points that you have made, you still have an issue with transparency, but you are not against charging machines per se. In terms of convenience machines, it is a definition of convenience that you are looking at there, and it is good if the consumer has adequate information in order to exercise an informed choice. In terms of a map, you would like a map from LINK to look at the issue of equity and help establish if there were free machines in poorer areas. The selling off aspect with the banks and others you have suggested to us would be doubly advantageous in that there would be a charge for the IADs but there would be no payment for the banks to LINK, so that trend is something worth watching. In terms of financial inclusion, you are suggesting to us that at a time when the Government is encouraging people into the financial community, this establishment and this increase in charging machines could have a regressive effect on that, and particularly in relation to the DWP and the Post Office. Lastly, on the charges, you consider them arbitrary and something should be done to look at that. Is that a fair summary of what you have told us this morning?

Mr Baxter: That is a very good summary.

Chairman: Thank you very much.

Witnesses: Mr John Hardy, Chief Executive, and Mr Howard Aiken, Director, LINK card scheme, LINK Interchange Network Limited, examined.

Q55 Chairman: Good morning and welcome to our second session. For background, could you briefly explain the structure and purpose of the LINK organisation.

Mr Hardy: Yes, indeed. LINK is effectively the body which sits in the middle of the banks and the independent deployers and card issuers and facilitates the universality of interchange between the various parties. LINK has existed since 1986 and has grown to the point where there are 54,500 cash machines in the UK, and all but seven of them are embraced in the LINK system. The fundamental operating rule is that any LINK card should be usable in any LINK ATM. The system is highly dependent on the interchange fee which was referred to earlier.

Q56 Chairman: How much is that?

Mr Hardy: The interchange fee is at the moment divided into two categories: a fee for non-branch machines, which is about 31p, and a fee for a cash withdrawal at a branch-based machine, which are cheaper to operate, which is just over 19p. There are also separate fees for non-cash withdrawals, balance inquiries and rejected transactions.

Q57 Chairman: How much is it for a balance check?

Mr Hardy: For a balance check at a branch machine it is about 9.5p and at a non-branch machine it is about 19p. The fees are reviewed on an annual basis and they are actually on a cost basis, so we mandate all members who are part of the interchange system to tell us what their costs are and work out an average cost, so that by definition, those members which are less efficient are actually acquiring transactions at a fee which is below the reward they are gaining. In 1999, following the Cruickshank review, we encouraged the development of independent deployers, and it is worth saying at this stage, I think, that it is fairly unusual in shared ATM systems throughout the world for independent deployer type companies to be full members of the network. We made them full members of the network, and the current operating rule, encouraged by the OFT, is if they raise a surcharge, they do not get the interchange fee, since the interchange fee is designed to pay the full cost of operating the ATM system.

Q58 Chairman: You do not have any control over what level of surcharge they make?

Mr Hardy: Absolutely none, and it would be illegal for us to do so. The number of surcharging machines is growing fairly rapidly, because obviously it is an immature market; it only started in 1999. Currently about 38 per cent of the cash machines in the country do raise charges, but it is important to realise that they only actually affect about three per cent of the transactions. So the number of surcharging machines is, without a doubt, increasing rapidly because it is an immature market.

Q59 Chairman: Have you any concerns about that at all, or are you quite happy with it?

Mr Hardy: No, I really do not. The market is actually free. It is a very competitive market, and the surcharging machines are actually additional facilities. The number of free machines is still increasing.

Q60 Chairman: What if somebody came to you and said "In Speke the operators are charging £10 for each withdrawal"?

Mr Hardy: I do not think they are charging £10.

Q61 Chairman: No, but what if they said that to you? What would go through your mind?

Mr Hardy: There is no evidence that I can see that ----

Q62 Chairman: I am just asking you that question. At £10, what would go through your mind?

Mr Hardy: I think that is obviously a very high amount.

Q63 Chairman: That is it?

Mr Hardy: Yes.

Mr Aiken: The point is that under competition law, we are not allowed to determine the amount of the surcharge. We are forbidden by law.

Q64 Mr Beard: What amount do the charging companies pay to you when they use your facility?

Mr Hardy: To facilitate the transaction?

Q65 Mr Beard: Yes.

Mr Hardy: We have a thing called the switching fee, which is paid to us, and on average it is less than a penny.

Mr Aiken: But the point is, that is paid by the bank that issues the card. That is not paid by the independent deployer.

Q66 Mr Beard: So the people who charge pay you less than a penny?

Mr Hardy: No, they do not pay us anything. The card issuer pays us less than a penny.

Q67 Mr Beard: But the banks, the free machines, pay you 31p?

Mr Hardy: No, it is the same fee. There are two fees to look at, in a sense. There is the interchange fee, which is paid by the card issuer to the ATM owner, and that is the 19p or 31p. The card issuer pays LINK something less than a penny on average to facilitate that transaction.

Q68 Chairman: What is the relationship between LINK and the banks and building societies and charging companies, and how independent of your members are you?

Mr Hardy: There are essentially two parts to LINK. There is the commercial company, if you like, which sits in the middle and which facilitates the technology and the finances, and there is the bit which Howard runs, which is the card scheme, which is essentially a member-owned organisation. It is an association, if you like, governed by a vast body called the Network Members' Council, which I think at the moment has 53 members on it, and which debates the terms of trade, if you like, the rules applying between them.

Q69 Chairman: Your website notes that you have "vast experience and detailed understanding with regard to the establishment and growth of shared ATM networks by balancing the needs of consumers, acquirer banks and card issuers."

Mr Hardy: Yes.

Q70 Chairman: How do you take account of the needs of consumers in your policy development?

Mr Hardy: We seek to encourage openness and transparency from all of the members, and we have strict rules about transparency and about notification.

Q71 Chairman: Do you have any consumer representatives on your board?

Mr Hardy: No, we do not. We do talk to them.

Q72 Chairman: Do you invite consumer groups to your members' meetings when you are discussing relevant issues such as providing clear warning of charges?

Mr Hardy: We have never done that, but we have spoken to the consumer groups on numerous occasions.

Q73 Chairman: It would not be a bad idea, would it, if you further engaged with consumers?

Mr Hardy: I have no objection at all to it.

Q74 Chairman: No objection indicates that you have no objection, but you are not going to do anything about it.

Mr Hardy: It does not mean that at all.

Q75 Chairman: So what do you mean?

Mr Hardy: I mean I am quite happy for them to come along if they want to come along. Essentially the Network Members' Council is a member-owned organisation and if the members are happy to have consumer affairs people coming along, that is fine by me.

Q76 Chairman: So if a consumer phoned up and asked when the next members' meeting was and invited himself along, you would have no problem with that?

Mr Hardy: I think inviting themselves along is different.

Q77 Mr Plaskitt: Who writes the rules of the LINK organisation?

Mr Aiken: Essentially it is the members, the members write the rules, but our rules have been, and were, submitted to the Office of Fair Trading back in 2000. They spent 14 months looking at those and gave us an individual exemption in respect of interchange fees, but what we do in terms of interchange fees and all our other rules is very closely regulated by the Office of Fair Trading under competition law.

Q78 Mr Plaskitt: So it is the members of LINK who write the rules of the organisation?

Mr Aiken: Yes.

Q79 Mr Plaskitt: When decisions are made within the organisation about those rules or any changes to those rules, how does that actually happen?

Mr Aiken: That happens by means of a vote and, depending what the issue is, there are various majorities that have to be achieved.

Q80 Mr Plaskitt: By means of a vote did you say?

Mr Aiken: Yes.

Q81 Mr Plaskitt: How is the voting arranged?

Mr Hardy: The percentage of votes each member has is dictated by the volume of transactions they put through the system.

Q82 Mr Plaskitt: So it is weighted voting?

Mr Hardy: Yes.

Q83 Mr Plaskitt: So who has got the heaviest votes in the LINK organisation?

Mr Aiken: It is the big banks because they both issue more cards and their customers do more transactions and they tend to have more ATMs or more transactions out of ATMs, so they have the biggest votes.

Q84 Mr Plaskitt: So when a proposition is put to the LINK Board, if it is not supported by two or three of your largest members, it cannot get support?

Mr Aiken: No, there is a cap on voting, so no member has more than 15 per cent of the vote.

Q85 Mr Plaskitt: So just tell us, who has the biggest block vote then?

Mr Aiken: The Royal Bank of Scotland, Barclays, Lloyds, HSBC, HBoS. They are the largest ones.

Q86 Mr Plaskitt: So between them they will have about 50 per cent of the vote then?

Mr Aiken: Yes, about that.

Q87 Mr Plaskitt: So the four or five biggest operators can basically carry the organisation or determine its direction?

Mr Hardy: No, that is not so. If there are fundamental changes to the rules, it requires an 80- per cent supermajority in the Network Members' Council, so it has to be pretty well unanimous.

Q88 Mr Plaskitt: When a proposition was put to the Board a couple of years ago that all the charging ATM machines should have external signage, do you recall that?

Mr Aiken: Yes.

Q89 Mr Plaskitt: What was the outcome of the deliberation on that?

Mr Aiken: That was almost unanimous. Only one member voted against that.

Q90 Mr Plaskitt: Against?

Mr Aiken: Against having external signage.

Q91 Mr Plaskitt: No, when it was first put to the Board.

Mr Aiken: Yes, a rule came into effect from April of this year ----

Q92 Mr Plaskitt: Yes, but a couple of years before that, the idea was put to your Board. What decision was made then?

Mr Aiken: I do not recall that. The decision introduced in April was made about nine months previously to that.

Mr Hardy: I am uncertain as to which decision you are talking about.

Mr Aiken: I do not recall a vote prior to that.

Q93 Mr Plaskitt: I will drop you a note about that. Can I ask whether LINK has a consultancy arm?

Mr Hardy: Yes, we have a small number of people, two or three, who are capable of doing market research and statistical analysis.

Q94 Mr Plaskitt: Who do they do that for?

Mr Hardy: Members or non-members who want to take advantage of it.

Q95 Mr Plaskitt: Is it a sizeable part of LINK's business?

Mr Hardy: No, it is not.

Q96 Mr Plaskitt: What is LINK's definition of "convenience" when we are talking about a "convenient location"?

Mr Aiken: We do not have a definition of "convenience".

Q97 Mr Plaskitt: No definition?

Mr Aiken: No, because in our rules we have branch and non-branch and those were definitions which the Office of Fair Trading have looked at and have agreed to, so we have branch and non-branch and there is no definition of "convenience".

Q98 Mr Plaskitt: So, as far as you are concerned, the term "convenience" in this context does not actually have a meaning?

Mr Aiken: Well, I think it has a generally accepted meaning ----

Q99 Mr Plaskitt: Which is what?

Mr Aiken: ---- but it has no place in the LINK rules.

Q100 Mr Plaskitt: What do you think its generally accepted meaning is?

Mr Hardy: I think the general meaning is that there are machines which are in sites which are convenient to some consumers and where the volume of transactions we would anticipate is relatively low. A full, through-the-wall cash machine typically operated by a bank would cost about £26/27,000 a year to run. Providing it achieves a certain throughput of transactions measured in the scores of thousands of transactions per year, that machine can operate sensibly on an interchange fee basis. There are only so many sites which will generate that kind of traffic from a cash machine. Most convenient machines operate on perhaps 8,000 or 10,000 transactions per year. They have very much lower traffic levels and generally that is what we understand by a "convenience machine".

Q101 Mr Plaskitt: How do you respond to the situation which we heard described in evidence earlier this morning that you can find non-charging machines almost adjacent to charging machines in some areas of the country? Does that not suggest to you that there is a problem with the concept of convenience machines?

Mr Hardy: I do not think it does actually.

Q102 Mr Plaskitt: Why not?

Mr Hardy: For a start, LINK has no ability to determine where the machines are. That is a decision which is entirely down to the machine-owner. I would suggest that in normal circumstances, if there is a charging machine adjacent to a free machine, and remember there are labels on all machines and you cannot complete a transaction at a charging machine without specifically agreeing to pay the fee, then the surcharging machine is either going to be very inconvenient for some reason, ie, it is across the road and you do not want to cross the road, or it is going to go out of business.

Q103 Mr Plaskitt: Does LINK have a policy decision on external signage on cash machines?

Mr Aiken: Yes, we do. As we said earlier, a rule came into force six months ago that required surcharging ATMs to have, in addition to what has always been there and is mentioned, that in the transaction you are told the precise amount of the charge and you have to specifically accept it or reject the charge. Because of the concern that was expressed that people might start to use the machine and, in essence, waste their time and suffer inconvenience through not being told, we introduced the rule which said that there had to be an up-front sign which warned that the machine will charge and that had to be either by means of an on-screen message or labelling on the machine which was clearly visible. That came into effect six months ago. We have recently, just a week ago, reviewed how that is working and in fact the Network Members' Council of LINK has voted and with effect from June of next year, all machines must have an on-screen message which says, "This machine will charge you", and then it will give the amount of that charge and it will probably say up to the amount because in terms of the charges that the members levy, they can levy those in any way they like. It can be an ad valorem charge or it can be a fixed charge and the rules of the OFT require that we cannot dictate the method in which people levy the charge.

Q104 Mr Plaskitt: Are all of your members compliant with the rule that you established from April of this year about signage?

Mr Aiken: I do not think they are, but we notice machines that are not properly labelled and we bring it to the attention of the member. In other cases other members of LINK notify us and indeed I noticed that in your invitation for evidence to this Committee, you did ask members of the public to submit information of machines and we would be very happy to receive such returns as you have got.

Mr Hardy: It is worth mentioning that two national newspapers ran articles suggesting that members of the public notify us when they saw machines which were not properly labelled and over a period of six months we had 50 individual notifications and one of those was actually about a machine in Cyprus, which had nothing to do with LINK at all.

Q105 Chairman: Yes, but I think the thing is that it sounds as if there is an ad hoc element to this rather than a systematic approach. For example, I have just got an email which says, "An interesting example is the northbound service area at Warwick on the M40. This service station long had a free NatWest ATM on an outside wall. Two machines then appeared inside, both requiring payment to withdraw money. Recently a third has appeared, and the free ATM has been removed. The new machines now carry small stickers saying, disingenuously, that the user 'may' be charged." Now, here you are, I am not involved in the LINK network, but just sitting as the Chairman of the Treasury Select Committee and people email me, so it is an ad hoc approach rather than being systematic.

Mr Aiken: That rule has been in effect for six months, just over six months. We have reviewed that and we had decided a number of things. One is ----

Q106 Chairman: Well, this email was dated the beginning of December.

Mr Aiken: I understand, but the Network Members' Council agreed at a meeting last week that there would be a number of changes to that which take effect from June of this year. One of them is that there will be an up-front screen which says the amount of the charge.

Q107 Chairman: Well, I would suggest on the way back home if you are passing Warwick on the M40 that you get it sorted tonight. Okay?

Mr Aiken: Well, thank you for telling us about one, but, to continue, in addition there will be signage on the machine which will say, "This machine will charge you for cash withdrawals".

Q108 Mr Plaskitt: As an organisation, do you have any sanction over any member who is non-compliant?

Mr Aiken: Indeed we do.

Q109 Mr Plaskitt: What is it?

Mr Aiken: That is a part of the agreements that were reached last week.

Q110 Mr Plaskitt: At the moment what sanction have you got over a member who is non-compliant with the rules?

Mr Aiken: In the extreme, we can expel them from the network.

Q111 Mr Plaskitt: How many have you expelled?

Mr Hardy: We have not expelled any.

Mr Aiken: None, but the point is that in every case where we have brought this to the attention of the member, they have redressed the matter.

Q112 Mr Fallon: If I can just be clear about the market itself, if you add LINK members to the independents, what share have you got of the total?

Mr Hardy: The total cash machine operators?

Q113 Mr Fallon: What share have LINK got of the total market?

Mr Hardy: In terms of the number of machines deployed, it is so near 100 per cent that it does not matter. There are 54,500 cash machines in the country and all but several of them are in LINK. In terms of the volume of transactions which properly ----

Q114 Mr Plaskitt: You are misunderstanding me. If you put the LINK members against the new independent deployed machines, what percentage has LINK got?

Mr Aiken: But the independents are part of LINK.

Q115 Mr Plaskitt: I know, but what percentage have the original members got who are not independent?

Mr Hardy: Perhaps I can readdress the question because you are confusing us with the terminology, I suspect. Are you asking what percentage of the total network do the large banks, building societies and financial institutions have?

Q116 Mr Plaskitt: Yes, what percentage have you got?

Mr Hardy: About 60 per cent. It is not us, it is them. We are the network sitting in the middle. There is no difference between the independent deployers and the banks.

Q117 Mr Plaskitt: But had the cartel not been broken up earlier, there might have been. We might in fact have had lower charging machines, might we not?

Mr Hardy: I am not quite sure which cartel you are talking about.

Q118 Mr Plaskitt: Well, Cruickshank presumably wanted the LINK arrangements loosened and liberalised, which is what has happened.

Mr Hardy: And we were entirely in favour of that.

Q119 Mr Plaskitt: Well, you were then when he told you to do it, but if it had been done earlier, presumably we would have had more independents and probably a freer and more rational market, would we not?

Mr Hardy: I think that is probably unlikely actually. Independents as a concept only really started to emerge in America in 1996 or thereabouts. It is a relatively recent idea that non-banks should put out cash machines and charge for access to them.

Q120 Mr Heathcoat-Amory: As I understand it, almost all the IADs, the independents, use the LINK network.

Mr Hardy: Yes. By definition, they have to because they do not issue cards themselves, so in order to get access to customers, as it were, they have to be part of the network.

Q121 Mr Heathcoat-Amory: To what extent are the IADs a rising source of competition for the banks and building societies? Do you see them in those terms?

Mr Hardy: No. In essence, the banks and building societies have two roles in LINK as both issuers of cards, so their customers use the network, and providers of service and they have other ATMs that other customers can use. The independent deployers essentially only act as suppliers, so they do not make the cards, but they only supply machines. They are paid, in essence, to provide a service to the other members of the network.

Q122 Mr Heathcoat-Amory: But although the number of free machines run by the banks and big building societies is increasing, there is this very large increase in the independents.

Mr Hardy: Yes.

Q123 Mr Heathcoat-Amory: Do you see that the free machines will in time actually start to decrease in number and switch over to the charge-type machines?

Mr Hardy: I see no evidence of that. In the last year about 100 machines which were free became charging machines, but, equally, about 100 machines which were charging became free.

Q124 Mr Heathcoat-Amory: Now, if there was intervention by government or by agreement in the market to try and ensure the further spread of free machines, do you think this would be workable or would we be the victim of unintended consequences, heavy-handed, bureaucratic control mechanisms which might have curious side-effects? What is your general attitude towards being told to cross-subsidise, in other words?

Mr Hardy: I think it would be very difficult to put into effect. There are approximately 41 or 42 organisations which supply cash machines in the UK and, in essence, there are 41 or 42 competing institutions, all of which are looking for the best sites. The result of that is that at a micro level, ie, from the point of view of one of the supplier institutions, they are effectively optimising their delivery system. From the point of view of the system as a whole, the macro view, the system is probably not optimised, to be honest, because too many people are trying to gain transactions in the same place, so you do get a relatively high level of over-supply in town centres and in big shopping areas and you get a relative under-supply in other areas where there actually are not enough transactions to justify free machines.

Q125 Mr Heathcoat-Amory: So you do not think it is workable that some central authority should deem that a certain area is under-provided by free machines and should direct this or do you think you could bolt that on to the system you run?

Mr Hardy: I think it is not beyond the bounds of possibility that you could do that, but it would have to be a decision which existed at a macro level, if you see what I mean. It would have to be a deliberate decision to say that as an act of social policy, the collective of LINK or whatever are required to provide X, Y or Z machines in A, B and C areas. It is not entirely impossible, but it would be very difficult.

Q126 Mr Heathcoat-Amory: Could LINK do that, and you know more about this network, or would there have to be a separate regulator called 'Ofcash' or something to do it for you?

Mr Hardy: I think given direction, LINK would be the logical organisation to do it. It would probably breach competition laws, so there would need to be some Office of Cash Regulation or whatever, Ofcash perhaps or Oflink.

Q127 John Mann: Mr Hardy, you, like me, are not very keen on competition. To help me make a rational choice, can you tell me, you said that one of your members voted against improved signage, so which one was it?

Mr Aiken: I think that is confidential to the LINK meeting.

Mr Hardy: To be honest, I cannot actually remember.

Q128 John Mann: Perhaps you could send us a note. It might be my bank and I would be keen to take it up with them if it was the case. Do you not think I should have the right to know?

Mr Aiken: I think it would be a breach of confidence for us to discuss it here.

Q129 Chairman: You cannot speak on behalf of other people, can you?

Mr Hardy: No.

Chairman: That is the diplomatic way out!

Q130 John Mann: Perhaps you could put it to your committee that they should send us the minutes so we can see who voted against because if it was my bank, I would like to know. What arguments did that unnamed bank put against improved signage?

Mr Hardy: I genuinely cannot remember who it was, but you are in a sense jumping to a conclusion and assuming it was a bank. It may not have been.

Q131 John Mann: What argument did this institution of whatever kind put against improved signage?

Mr Aiken: I cannot remember. I think it could have been along the lines that it did not go far enough.

Q132 John Mann: Perhaps you could take back a two-tier option, one being that you send us the full minutes and the second being to send us the full minutes with the institution's name blanked out, a kind of partial disclosure, so we can see what the arguments were against improved signage.

Mr Aiken: It could be death by boredom!

Q133 John Mann: We are patient people, so perhaps you could take that back to your committee and let us know their response on that.

Mr Aiken: I think the point on signage is that that has now been superseded. We have now moved on from that to this additional signage which has now been agreed and what I did not get a chance to complete was that also we are going to commission mystery shopper-type exercises where we will choose an area.

Q134 John Mann: I was coming on to that and obviously I want to offer to assist you in that, but we would be keen to get those minutes, so perhaps you could take that back. I am taking a little break and I am going to Snowdonia. I have not been there for a long time, so I have no idea where the cashpoint machines are. I will be going on Thursday, so when I go to try to draw out cash, how am I going to find out which machines are free and, of those which charge, which are the cheapest for me to draw cash out from?

Mr Aiken: At the moment you will have to do that by using the machine and then seeing what the amount of the charge is.

Q135 Angela Eagle: Right at the end of the transaction.

Mr Hardy: Yes, there is an important reason for that. In an effort to be transparent, we actually built a system which is unique. I am sorry, I need to be a bit technical here, but, in essence, there is the potential for two types of retail charge. The cash machine can raise a surcharge, ie, which goes to the ATM-owner, or the card-issuer can also raise a charge and in the case of credit cards, which are used in the LINK system too, they will also because they are advancing cash. We agreed with the Government in 1999 that there would never be a case where two charges, two retail charges, were applied to the same transaction. Now, in order to do that, that implies that when the card is put into a surcharging machine, the machine knows it is going to charge £1, but it has to determine whether the card-issuer is also raising a charge, so as part of the message, asking for authorisation, the card-issuer is asked, "Are you going to raise a charge?". Then because of internal LINK rules, one of the charges is disabled, so it is actually because the machine has to communicate with the card-issuer before it knows the full picture.

Q136 John Mann: But I am looking at a much simpler scenario because I am a rational consumer, I am not going to draw money out on my credit card because I know the charges, well, I do not know the charges, but I know there will be charges, although they will not tell me what the charges are overall, but I know there will be charges, so I can make a partially informed decision that I will not be drawing money out on my credit card, but I will be using my debit card. So what you are saying is that if there are in the village I am staying in, let's say, two machines, one at one end of the village and one a mile down the other end of the village, what I have to do is go and put my card into both machines to determine which of the two machines I should use to be an informed consumer?

Mr Aiken: I think it is two things actually.

Q137 John Mann: Is that what you are saying?

Mr Aiken: You could look on the LINK website and that would tell you.

Q138 John Mann: No, hang on a minute, look on the LINK website? Where I am staying I suspect does not have Internet access and I will not be taking my laptop with me, so, as a fairly average consumer, I would suggest, therefore, who does not have, visiting an area that I do not live in, a computer readily available, am I going to have to stick my card into these two or more different machines to work out which is the cheapest or the free one?

Mr Aiken: Well, the answer is that at the moment you do and from June of next year you will not because the up-front screen on the ATM before you put your card in will tell you what the amount of that charge is likely to be.

Q139 John Mann: So the improvement which one of you was against, but the rest were in favour of was for the screen before I put my card in?

Mr Hardy: With effect from next June, the machine will say, "This machine may charge you", or "will charge you up to ----"

Q140 John Mann: Will charge you or may charge?

Mr Hardy: Will charge.

John Mann: You said, "may charge".

Q141 Chairman: And "up to" - up to what? Could you finish that?

Mr Hardy: Whatever the charge is.

Q142 Chairman: So you do not even know the precise charge.

Mr Aiken: Well, you cannot know because the mechanism exists within LINK for the issuing bank to actually contribute something towards that surcharge.

Chairman: But Mr Mann is asking you something specific here.

Q143 John Mann: Well, how will it be clear, the situation? Let's say I go back in June. We will give the benefit of the doubt and we know it is rather a mess at the moment and I will not be able to find out until a long way into the transaction, so we come to June and I am in the same village in Snowdonia that I do not know, or I will know it then of course, but I will go somewhere else because I have visited Snowdonia, so I am somewhere else in the wilds of England, let's say, I am in the Lake District and I go into a village and I do not know what the banks are or the machines and there are two or three there. What exactly will happen? I will have to put my card into the machine, will I?

Mr Aiken: No, the screen, before you put your card into the machine, will say, "This machine will charge you up to", whatever the value of the surcharge is.

Q144 John Mann: Up to? Up to what?

Mr Aiken: Well, if the machine levies a £1.50 charge, it will say, "up to £1.50".

Mr Hardy: Or if it levies a £1 charge, it will say, "up to £1". The reason for that Howard was explaining earlier.

Q145 Chairman: But this is confusing because you could have four machines which each say, "This could charge you up to £2", but when you put your card in each machine, you could maybe be charged 50 pence on the one card, £1 on the other and £1.50. Would it not be better just to put on the machine, "This machine charges X amount?"

Mr Hardy: No, because that would actually reduce the transparency in a funny sort of way because it then denies the card-issuer the ability to contribute to that surcharge. We built that system precisely ----

Q146 John Mann: So it is against my interests to know?

Mr Hardy: No, it is not. What we are saying is that it is very, very difficult to tell you the exact amount. We built a system which was designed to be as transparent as possible and to give the card-issuer ----

Q147 Angela Eagle: But it is not transparent.

Mr Hardy: We built a system so that the card-issuer could contribute towards subsidising the surcharge if he wanted to do so.

Q148 John Mann: It seems to me that the attempt is to give the maximum amount of information in the most difficult way. Why not have a big sign stamped on the machine which says, "A charging machine", and then I will not even have to go and look at the screen, never mind put my card in and I will be able to see, as I am in Snowdonia this week, a big red sign which says, "Charging machine", and perhaps a big green sign on another one which says, "Free machine", and I then would make a rational decision.

Mr Hardy: But that is another part of the rules that come in in June, that as well as all the late message in the transaction, the early message which says the amount of the surcharge, there will be a physical sign on the machine and, incidentally, on any external signage that directs the customers towards the machine, saying, "This machine will charge you for LINK cash withdrawals".

Q149 John Mann: And how big will that sign be?

Mr Hardy: Well, there are so many different styles of ATMs that it is difficult to say.

Q150 Chairman: You have got us mixed up actually because there is no clarity here. Let me give you an example. I was going home to my constituency last week, thinking about cash machine charges, and I was passing along the dual carriageway and on the left-hand side of the dual carriageway there was a garage with a sign saying, "LINK machine and Little Chef", and on the right-hand side there was another one saying, "LINK machine" and another restaurant, but the Esso garage on the left-hand side for unleaded petrol was 80.9 pence and the BP garage on the right-hand side was 82.9 pence, so a rational choice by me would be to divert into the Esso garage and get 50 litres of petrol at 2 pence a litre less. I cannot do that with charging machines because I have got to go to them to understand. Why can you not have them up loud and clear, like they have for petrol stations? Why is it not as simple as that?

Mr Hardy: Because the charges may vary. As I keep saying, we actually built a system so that the card-issuer could, if they so desired, subsidise the surcharge.

Q151 Chairman: But you are not as fair to the customer as petrol stations are, and that is the whole point about this, that there is a lack of transparency here and I think that is the point Mr Mann is pushing.

Mr Aiken: But once again from June that sign which says, "LINK cash machine here" will also say on it, "This machine will charge you".

Q152 John Mann: But it will not say how much it will charge and we do not know how big the sign will be. Is there a minimum and a maximum font size on the sign?

Mr Aiken: Yes, there is because what we said on those signs is that it must be of a font size that is commensurate with other wording on the sign and it cannot be less than 14 point as a minimum.

Q153 John Mann: And you will be advertising widely who is charging and who is not?

Mr Aiken: Well, the sign on the ATM will say ----

Q154 John Mann: In addition to the ATMs.

Mr Aiken: You mentioned the signage outside which says, "LINK cash machine here" and that sign itself from June must say, "This machine will charge" if it applies.

Q155 John Mann: What is your estimate in five years' time of the number, the percentage of the machines compared to now which will be charging?

Mr Hardy: I would have said that we probably will see about 50 per cent of the machines will be surcharging at that point in time.

Q156 John Mann: What is the percentage now?

Mr Hardy: It is about 37/38 per cent. I think there is probably a relatively large amount of growth left in the marketplace for machines which operate on a very low number of transactions.

Q157 John Mann: I personally seem to be in the minority because I disagree with the Consumers' Association and the National Consumer Council, and my constituents agree with me. My view is that there should not be charges for me to get my money out of a machine. Do you not think that the British public are of the view that they ought to be able to get hold of their money for free, particularly considering the record profits of the banks and financial institutions at the moment?

Mr Hardy: I think that is a question to be addressed to the banks, not to the network. I am not supposed to comment on retail charges.

Mr Aiken: One of the conditions of our exemption is specifically that we must permit surcharging, we must permit charging.

John Mann: Well, can I make a suggestion because you know how we politicians like to keep in touch with trends in society. I have noted that the machines in this building are all currently free. Would it not be a good idea also to include a charging machine here to give us a proper consumer choice? Perhaps we can have the free machines in the House of Lords and the charging machines in the Commons -----

Mr Fallon: The other way round!

Q158 John Mann: ---- or vice versa, and then we could make rational or irrational consumer decisions.

Mr Hardy: Would you like me to convey your request for a charging machine to the independent deployers?

John Mann: That would be very kind of you because I think that might concentrate the minds of policy-makers.

Chairman: I say what it would do. It would give us an understanding of the mindset of these independent machine operators and see if it is worthwhile putting one in here. That is the only reason for it.

Q159 John Mann: You see, I am all for assisting your research, but what research are you carrying out into the views of consumers or are you carrying any out into the views of consumers on this slow trend in the market towards charging them to take out their own money?

Mr Hardy: I do not think there is a slow trend in the marketplace. I think there is a growth in the number of surcharging machines fuelled by a willingness on the part of a percentage of customers to pay for convenience.

Q160 John Mann: A willingness or a compulsion, in essence?

Mr Hardy: I think in the vast majority of cases there is a willingness. I think in some cases there undoubtedly is compulsion, but that is a matter of economic question and a social policy question, is it not?

John Mann: Well, it is economic and social policy. It is also one which consumers might view in the light of bank profits.

Q161 Chairman: Mr Hardy, if you had the opportunity to take money out of a free machine and out of a charging machine which was 50 yards away, out of 100 times you went to it, how many times do you think you would go to the charging machine?

Mr Hardy: It would depend if it was across the other side of the road and it was raining or not.

Q162 Chairman: No, just alongside it, say, just the other side of this room, how many times would you go to the charging machine?

Mr Hardy: I would probably go to a free machine.

Q163 Chairman: All the time?

Mr Hardy: Yes.

Q164 Chairman: The opaqueness of information that is provided and will continue to be provided after June, from what you are telling us, helps people to be driven down the road of charging because, unlike the petrol stations where you see immediately what it is and you are able to make an instant decision and that is the utmost transparency, I wonder if we are going to get that.

Mr Hardy: I think I do need to emphasise that the organisation is very keen to ensure the maximum amount of transparency. As an organisation, we are ----

Chairman: Well, I tell you what you can take back from us. You can take back the suggestion of the petrol stations and just write us a letter back as to why it is not convenient for you to do that. Okay? That would be good and you will be able to explain to the whole world then.

Q165 Mr Beard: What type of costs are involved in running cash machines?

Mr Hardy: It basically depends on the size of the machine, how heavily armoured it is and whether it is through the wall. A typical bank machine in a through-the-wall location might cost about £26/27,000 per year to run. A small machine ----

Q166 Mr Beard: Just the running costs, not the capital costs.

Mr Hardy: That will include depreciation. Depreciation is probably 20 per cent of that. The costs of running a relatively small machine inside a grocery store or a pub might be £7/8,000 a year, I would guess. Cash machines are relatively highly fixed cost, so it is the cost of the machine, the depreciation, the telecommunication lines and the computer systems needed to run them which exist whether there are transactions or not.

Q167 Mr Beard: Why is there a big difference between those two in that way?

Mr Hardy: It is just the nature of the machine. The costs of making a hole in the wall, which in some cases is quite expensive, a through-the-wall machine will be very heavily armoured, will have a lot more cash in it, for example, and be more comprehensive, whereas a simple machine inside a grocery store will be relatively small, will have a relatively modest amount of cash in it and be lightly armoured.

Q168 Mr Beard: How much does the average cash machine cost to purchase and install?

Mr Hardy: Again it is very difficult to give an answer to that. A through-the-wall machine probably is anything between £20-35,000, depending on the functionality and how heavily armoured it is. An interior machine is probably in the region of £4-8,000.

Q169 Mr Beard: Could you explain to us how this interchange fee system operates? How is the fee calculated and what have been the recent trends in this level of fee?

Mr Hardy: When we set up the current system, we discussed it heavily with the Office of Fair Trading and we agreed that the fee should be cost based, on a fully allocated cost basis. In order to get that level of fee, we had mandated all of the members who participate in the interchange system to give us on an annual basis their full costs of operating the system. We aggregate all of those together, all the high cost ones and all the low cost ones, and we come to an average fee in the middle and that is used to determine the interchange fee. Over the past four years that that system has been in operation, the net effect of that has been to reduce the level of interchange fee by about 20/25 per cent.

Q170 Mr Beard: Over a period of what - five years?

Mr Hardy: Four years.

Q171 Mr Beard: So how much does it cost to operate the network of free ATMs throughout the United Kingdom which are funded by the LINK interchange fee?

Mr Hardy: Probably about £1 billion.

Q172 Mr Beard: What determines the difference between the interchange fee paid when withdrawals are made at branch machines and non-branch machines?

Mr Hardy: It is largely the additional cost of servicing the cash-in-transit people and of course the site rental.

Q173 Mr Beard: And the capital costs will make a difference?

Mr Hardy: The capital costs would probably be more or less the same.

Q174 Mr Beard: Would a higher differential between the branch and non-branch interchange fees encourage the development of more non-branch machines in areas that are not well served by bank branches?

Mr Hardy: Well, it might, but of course remember that the system at the moment is based on the actual costs and that is by agreement with the OFT.

Q175 Mr Beard: Has any work been done to determine whether there is any sensitivity to these costs?

Mr Hardy: Yes.

Q176 Mr Beard: What is the answer?

Mr Hardy: The answer is that the costs are actually extremely sensitive to site rentals.

Q177 Mr Beard: Why is it that you have to charge a fixed fee or a fixed fee has to be charged by the charging machines? Why could they not operate on a percentage fee?

Mr Hardy: They could do.

Mr Aiken: There is nothing in the LINK rules and in fact the LINK rules are forbidden by the Office of Fair Trading from determining that the charge is always calculated. It is perfectly feasible to have an ad valorem or some other.

Q178 Mr Beard: We have heard earlier this morning that the fixed fee has great penalties for people on low incomes or benefits because they pay the fee on probably withdrawals of £10, £15 or £20, so is the industry not sensitive to this at all?

Mr Hardy: I think there is absolutely nothing to prevent that happening, but, as I said earlier, cash machines are relatively highly fixed cost, so the actual cost of the transaction does not very materially change from dispensing £20 to dispensing £100.

Q179 Mr Beard: But you could vary the way in which it is raised?

Mr Hardy: Yes.

Q180 Mr Beard: When these ATMs were first brought in, they replaced the bank cashier who cashed cheques for people in the bank, so the bank must have had some sort of allowance really for the costs of that operation.

Mr Hardy: Yes.

Q181 Mr Beard: Why is that not used as a discount on this?

Mr Hardy: I do not think there is any evidence at all to suggest that banks actually substantially reduced the number of cashiers.

Q182 Mr Beard: But they closed a lot of banks.

Mr Hardy: They closed a lot of banks, that is true, but I do not think those were necessarily directly the result of introducing cash machines. When ATMs were first introduced, which is quite a long time ago now, banking life was considerably simpler than it is now. People use banks much more and for a lot more services, so it is very difficult to actually draw a direct comparison.

Q183 Mr Beard: But it is not difficult to infer that what is happening with this trend towards banks selling off their network of free machines is that when this started, the justification for it was that they wanted to have a cheaper way of people gathering their cash than the bank clerk cashing cheques, and they got that.

Mr Hardy: I think in fact the original justification was a more convenient way.

Q184 Mr Beard: Well, now they are going to abandon those costs altogether if they have passed the cash machines on and the net effect of this change is that instead of them paying the costs out of their own fees, instead of them paying it, they are already passing it to the customer.

Mr Hardy: I think that is a view that you could take. I think that only one example has occurred, one significant example has occurred of a bank selling machines off. The machine industry is quite dynamic. Machines are put in and machines are taken out all the time because a lot of installers actually manage machines individually by profit, and in some cases they are taken out because they are simply not used.

Q185 Mr Beard: If operators were to receive the interchange fee back from the LINK, they could knock that off the charge that they are making from the customer, could they not?

Mr Hardy: They could.

Q186 Mr Beard: Why can that not be done?

Mr Hardy: The current LINK arrangements were agreed with the Office of Fair Trading and in fact at that stage it was agreed with the Office of Fair Trading that where a surcharge was raised, the interchange fee would not also be applied. The primary reason for that was that the interchange fee was specifically designed to cover the costs of operating the machine. To introduce a partial recovery, ie, a surcharging machine, would produce an incredible amount of complexity and would probably upset the whole system.

Q187 Mr Beard: Well, it is complexity, but it does not have to be electronic complexity and it can be just in the accounting, can it not?

Mr Hardy: It is much more complex than that. It is all about how the costs are charged. I think another point is that, as we said earlier, the mechanism already exists where if the bank that issued the card wants to refund part or all of the surcharge, it can do that and the mechanisms are in place, so that could be done now.

Q188 Mr Beard: But the agreement is stopping it? Is that what you are saying?

Mr Hardy: No, that can be done now and we cannot regulate those prices, but I think the fact that there is no interchange fee when a surcharge applies is part of the conditions under which we have got an individual exemption. I think the Office of Fair Trading like the surcharge in the sense that it is a charge that customers are aware of when they incur it. The interchange fee is a hidden charge because customers, I guess, in the end have to pay it one way or the other. I do not think that they would like to have the issue confused, to have, if you like, a transparent charge and a hidden charge on the same transaction.

Q189 Mr Beard: One charging cash machine operator has suggested that it may be possible to vary the interchange fee between customers of different types, say, customers on benefits and other customers. In your opinion, is this technologically possible? Is it a feasible thing to do?

Mr Aiken: I think the answer is that it is feasible, but it would be in contravention of our current exemption were we to do so because it is predicated on it being a cost recovery basis and if we are saying that we are going to recover the costs in an asymmetric way, recover more from some customers than others, that is certainly not part of the exemption that we got from the Office of Fair Trading.

Q190 Mr Beard: Well, that may be, but just dealing with the technicality and whether it is feasible or not, how are you going to know? Say, it is someone on benefits, just for the sake of argument, how are you going to know that the person who is withdrawing cash is on benefit?

Mr Aiken: Because in that circumstance the bank that issued the card would have to send a message to us to say, "This is perhaps someone who is a lower interchange".

Q191 Mr Beard: So it is entirely do-able?

Mr Hardy: It is do-able. It would probably be quite complicated.

Q192 Mr Beard: But it is quite complicated if people only withdrawing £10 are being charged £1.50 three times a week, is it not?

Mr Aiken: Sorry, complicated for them? That is a different issue. If you are talking about the surcharge, the surcharge can be varied now. It does not have to be a fixed amount.

Q193 Mr Beard: Why do charging cash machine operators receive a payment of 20 pence from the consumer's bank for each balance enquiry?

Mr Aiken: Because the agreement we have with the OFT says that on a surcharged transaction there will be no interchange fee. There is no surcharge on a balance enquiry, therefore, they get the interchange fee.

Q194 Mr Beard: Does that fee of 20 pence equate with the cost of the enquiry or what?

Mr Aiken: Yes, it does because we spend enormous sums of money each year having a very comprehensive study done of the costs of operating ATMs and in order to arrive at the interchange fee, we are obliged to do that by the Office of Fair Trading.

Q195 Mr Plaskitt: You say you study each year?

Mr Aiken: Yes.

Q196 Mr Plaskitt: Why do you have to restudy it?

Mr Aiken: Because the costs change during the year. That is the whole principle upon which I believe the Office of Fair Trading gave us an exemption, that the interchange fee is cost-reflective and ----

Q197 Mr Plaskitt: But your answer to Mr Beard's question was that it was cost-reflective because you were recovering the cost of studying what the cost was.

Mr Hardy: No, it is the cost of the operation we are looking at.

Q198 Mr Plaskitt: But you said you have to study it each year.

Mr Aiken: We do, yes. We have to do a cost study. We are obliged by the OFT to do a comprehensive cost study every year because the costs change and, as we said, the costs have come down and that is one of the effects that the Office of Fair Trading expected to see, that it would encourage efficiency and reduce costs.

Q199 Mr Beard: If a consumer selects to withdraw, but then cancels when they realise there will be a charge, does the cash machine operator receive a fee from the consumer's bank?

Mr Aiken: They do. That is the same fee as for a balance enquiry.

Q200 Mr Beard: So their interest is to make these things as obscure as possible there, is it not?

Mr Aiken: You could construe that, but the changes that we have made and the change we have just made are addressing precisely that issue.

Q201 Mr Beard: Do you think this provides a disincentive for operators to clearly communicate it? There is no real reason why they should put these signs on at all, is there?

Mr Aiken: Well, there are because now they are mandated to under the LINK rules.

Q202 Mr Beard: You mentioned several times your restriction by the arrangements with the Office of Fair Trading, so your suggestion is that if these questions that we are posing today were to be properly addressed, any solution would have to be negotiated with the Office of Fair Trading? Is that right?

Mr Aiken: I think if you are going to interfere with the charging, yes.

Mr Hardy: I think it depends on the nature of what you suggest, but potentially yes.

Q203 Angela Eagle: Some of the biggest fees that we have come across on these cash machines are in fact, I think rather unsurprisingly myself, found in pubs which often charge up to £5. Does that worry you at all?

Mr Hardy: We do not have a view on it because we are not supposed to have a view on it. It is a retail charge.

Mr Aiken: We cannot say if a particular location shall or shall not surcharge and we cannot say what the amount of the surcharge is. We are forbidden from doing so by law.

Q204 Angela Eagle: It does reflect on your LINK system though, does it not?

Mr Aiken: But we have to comply with the law.

Q205 Angela Eagle: What is the justification? Is this the OFT that is telling you that you cannot have an opinion on price?

Mr Hardy: Well, we are trying to avoid the operation of a cartel. By definition, a payment system is quite like a cartel because you have got competitors who have to co-operate in order to operate the system.

Q206 Angela Eagle: Yes, but there are benefits to that which is presumably the balance that we are talking about here.

Mr Aiken: Yes, but the regulation of the OFT applies to the interchange fees that flow between members and we cannot, as a group of banks and others, get together to fix the price of the customer charge in any way whatsoever.

Q207 Angela Eagle: No, I understand that, but I am asking whether you have an opinion on the highest. It is an interesting coincidence, shall we put it that way, that in this system that is so untransparent with charging that the highest fees that we have come across are actually charged in pubs where people are perhaps even less likely than usual to be clear about what the charges are likely to be, and £5 quite often for the machines in pubs.

Mr Hardy: There is nothing we can do about it. It is entirely up to the cash machine operator.

Q208 Chairman: So that is outwith your responsibility?

Mr Hardy: Absolutely.

Q209 Angela Eagle: But you are saying the OFT demand that you do not take a view on that because it is the law?

Mr Hardy: We cannot, as a group, regulate the charges.

Q210 Angela Eagle: I think that there is a very, very interesting figure here and one of you, I think John Hardy, quoted it earlier, that 97 per cent of transactions are free in cash terms and yet £66 million of profit was made last year, charging people to have access to their own money.

Mr Aiken: I do not know where the £66 million came from. It is not profit. That presumably was an estimate that someone has made of the surcharges paid, so that is income, I assume. I do not know where that figure came from.

Angela Eagle: Nationwide, and they said profit, they did not say income.

Q211 Chairman: I think the latest one was £140 million.

Mr Hardy: But that is revenue. It is not profit.

Angela Eagle: Well, £66 million profit is what I have heard.

Q212 Chairman: I think it went £60-odd million in 2003 and up to £140 million revenue in 2004.

Mr Hardy: I do not know where the £66 million came from. I cannot verify it.

Q213 Angela Eagle: Even if it is revenue, that means that 3 per cent of transactions are making the vast majority of the revenue for these charging and surcharging machines.

Mr Hardy: Yes.

Q214 Angela Eagle: And we have heard from evidence earlier today that quite a lot of fees, and we will wait to have a look at the map, are actually in the most deprived areas in the country which means that profits are being made out of the people that can least afford to give them over in conditions where they have no real choice, as you or I would express the meaning of that word. Is that not true?

Mr Hardy: I think there are undoubtedly a number of areas of social depravation where there are very few facilities and where the machines which have been installed are operating on very few transactions, and really that is the whole point, that the average surcharging machine operates on a very small number of transactions per year. As I said earlier, the cash machines are largely fixed cost and if there are only a few transactions, by definition, the cost per transaction is significantly higher.

Q215 Angela Eagle: So John Mann wants a charging machine here, but is it not true that if we had a charging machine here where there are lots of free machines already available, it would make virtually no money? The charging machine in Speke makes a vast profit because, as we heard earlier from the evidence, those who have no real practical access to free cash machines and who have to pay maybe a bus fare or go miles to get access to cash, whose bank branch has closed down a long time ago and who may have to go to the machine more than once a week because they cannot afford to take out large amounts of cash at a time, they are the people who are being squeezed by the charging system as it is now, are they not?

Mr Hardy: I think they are, although I strongly suspect that the figures that were quoted are probably somewhat spurious. I have no doubt that the charge per transaction is £1.50. Frankly, if their own machine in an area like that that was doing thousands of transactions per month, every other independent deployer would be rushing in to put machines in to charge the same amount. The fact that there is only one machine indicates that there probably is not a great deal of traffic.

Q216 Angela Eagle: There are two machines.

Mr Hardy: Well, it would be interesting to look at that machine and determine what the level of traffic is, but I suspect that the volume is nowhere near what you were suggesting.

Q217 Angela Eagle: But are you not worried that that is the shape that the system is taking and that the rational thing for these charging companies to do is to place their machines in areas where people have no choice but to use them and people are being charged a very high percentage of the cost in charges for the size of their transactions? It is not fair by any definition that I can think of.

Mr Hardy: But the independent deployers are economic entities. They are supposed to make a profit.

Q218 Angela Eagle: Out of those who are the poorest, so the poor have to pay for access to their cash while people who have more choices do not?

Mr Hardy: Well, I think the lady from Speke was pointing out that there are no supermarkets in the same area and there are very few facilities indeed.

Q219 Angela Eagle: Well, lack of choices tend to pile up on one another.

Mr Hardy: I entirely agree with you and I am very sympathetic to it, but I think it would be unfair to expect the independent deployers to have a social conscience when you are not expecting supermarkets to.

Q220 Angela Eagle: Just stop the sentence there. I do not think they do have a social conscience! The threat to the rest of the free cash system is real though, is it not, with the dynamics of the growth of this market?

Mr Hardy: No, I do not think it is.

Q221 Angela Eagle: Do you not think it is conceivable that free cash machines will be unavailable for the rest of us potentially in the next few years because of the dynamics of this market?

Mr Hardy: I think that is extremely unlikely.

Q222 Angela Eagle: Why?

Mr Hardy: The number of free machines has actually increased.

Q223 Angela Eagle: Very, very slowly though.

Mr Hardy: But we have already indicated that the free machine market is essentially mature and that the charging machine market is immature and is going and is providing convenience.

Q224 Angela Eagle: So what do you think about HBoS which just sold off most of its free network to a charging operator?

Mr Hardy: That is entirely a decision for HBoS and whoever bought the machines.

Q225 Angela Eagle: Does this not show the dynamic of the market that is now being created and is that not a threat to free cash machines?

Mr Hardy: It shows the market dynamic.

Q226 Chairman: But it is outwith your remit.

Mr Aiken: We cannot insist people put machines in at all, let alone free machines, and we cannot regulate the charge.

Q227 Angela Eagle: You said earlier that you have 40 or 41 organisations and they were all competing institutions but you failed to mention that certainly Hanco is mainly owned by a bank, so there is some overlap there, is there not?

Mr Hardy: Hanco was an independent deployer in the sense it was owned by Hanco until earlier this year ‑ April or May I think, I cannot remember - when it was bought by the Royal Bank of Scotland, and that is for the Royal Bank of Scotland to answer.

Q228 Mr Beard: Who have sold off their machines to it.

Mr Hardy: No, they have not.

Mr Aiken: I am not aware of any machines ---

Q229 Chairman: --- That is HBoS.

Mr Aiken: That was their decision but I am not aware that any have moved.

Q230 Angela Eagle: So it is certainly possible and we have got one example there whereby some of the members of your board actually have a big interest in the independent deployers as well as having their own networks, so it is not 40 organisations competing against each other, is it, some organisations are owning each other?

Mr Hardy: There is only one example of that.

Q231 Angela Eagle: So far.

Mr Hardy: Yes.

Q232 Angela Eagle: But that is conceivably something that could increase?

Mr Aiken: I think that is something you would have to ask the institutions concerned. It is not for us to answer what their opinions might be.

Q233 Angela Eagle: Just one final question. If we wanted to look at how all of this worked for regulation, it is the OFT that we would have to talk to, is it, because they are your regulator effectively?

Mr Aiken: Competition law is our regulator, yes, and the Office of Fair Trading decision is a public document. It is on the Office of Fair Trading web site which is obviously available to anyone to examine.

Q234 John Mann: Just one question. I was just reflecting on your 14 point print size on machines. I wonder how easy you could read 14 point.

Mr Aiken: We said that is a minimum.

John Mann: I wondered whether you could read the 14 point. I have made it easier and crossed off everything else and I have put a big star rather larger than 14 point. That is the 14 point.

Chairman: What one? Let me try again!

John Mann: The one I have not crossed out is 14 point. I wondered whether it might be necessary to actually go rather close up to the screen, perhaps get in the queue at the cash point to queue up to check whether one could work out where the 14 point print was and whether something a bit larger might be an appropriate size?

Mr Plaskitt: How about making that font the minimum?

Q235 John Mann: So the consumer could make a competitive choice rather than be struggling up at the screen to find this small print saying we will be charging you.

Mr Aiken: As I said, that is an absolute minimum size. What we have said is that the font size must be commensurate with other ‑‑‑

John Mann: --- Perhaps you could take that back to your board as well and they might want to reflect on whether the 14 point size is quite large enough or whether something rather bigger might actually encourage competition.

Q236 Chairman: Thank you, John. The Banking Code is a voluntary code and all your members are included in that but subsidiaries of companies are not included. Is that correct?

Mr Aiken: In LINK terms, we have a set of LINK rules and these things that we talked about on signage are rules, they are not a Code of Practice, so anyone who participates in LINK is bound by those rules.

Q237 Chairman: We will maybe come back to that. Mr Hardy, on this issue of transparency and the petrol stations with machines, are there any technological or systems barriers that would stop issuers clearly indicating the amount of charge in the way that consumers can see before inserting their cards?

Mr Aiken: There are no real systems barriers to that other than that the charge may in some circumstances be variable if for example members went to an ad valorem charge.

Q238 Chairman: You have said it is difficult to provide up‑front notice of the charge of the card issuer - for example, the credit card company may issue a charge - but is it ever likely to be below £1.50? What I am getting at is this: would it not be possible to put a sign on the machine saying you will not be charged less than so‑and‑so for using this machine, in other words a minimum payment, and that would make it easy for everyone?

Mr Aiken: You would not know ‑‑‑

Q239 Chairman: Mr Hardy is indicating you could do that.

Mr Hardy: You could do that. There might be some circumstances in which there might be issues with that.

Q240 Chairman: What we did with the banks is we asked them to put minimum repayment scenarios on their accounts and Barclays and Lloyds have moved on that and that is a really big advance for consumers because if they are making a minimum repayment it could take 25 or 30 years or maybe forever if they are not paying the capital off. Once that is there in front of everyone saying "this will take you x amount of years to pay off" it focuses the mind. It is the same here. If we had that transparency in a minimum payment that would focus people's minds, the same as for the petrol station.

Mr Aiken: I think it is impossible for the ATM to know what the minimum payment is because in the event ‑‑‑

Q241 Chairman: But Mr Hardy is it not agreeing with you, he is saying it could be done, you could have a minimum payment.

Mr Aiken: I think the point there is if it is a charge card or a credit card the ATM owner cannot impose a surcharge and the issuing bank has to decide how much it is going to charge their customer. The ATM owner cannot possibly know up‑front before they got the message back from the issuer the amount of that charge.

Q242 Chairman: There should be a code here surely? If you are making investigations every year on machines, in answer to James's question, then banks could provide information that this will be the charge over the next year and that can be incorporated and you could have the minimum charge.

Mr Hardy: It depends on the transaction. If it is a debit card ‑‑‑

Q243 Chairman: Let me tell you that what we want is for you to look at that very seriously and write back to us on it because that is a fundamental aspect of our inquiry and we will be looking at that in great detail. If you could do a memo for us on that, that would be terrific. On the issue of transparency I note the Building Societies Association are still saying that it is vague, bland and non‑specific so those are people within the industry that are saying that, and I think there is something to be taken up there. If I can get a summing up with you before you leave, it is the case that consumers still cannot shop around at the moment because they do not know what charge will be levied until they have almost completed the transaction. That is the situation?

Mr Aiken: But, as I say, from June before they put the card in the machine there will be something on the screen which tells them what the charge is.

Q244 Chairman: Even if there are four machines at each corner of this room, after June you would still have to go to each machine ‑‑‑

Mr Aiken: --- And you have to look at the screen of each machine.

Q245 Chairman: Exactly, so therefore they cannot stand in the middle of the room and say A, B, C or D. They cannot make that single decision. They have got to go to all these machines. Is that correct?

Mr Aiken: Yes.

Q246 Chairman: They have still got to do that, right. Regarding the points that my colleagues brought up about financial inclusion, it would indicate that more research needs to be carried out into access to free machines, particularly in poorer areas. Is there any help that you can give us on that, particularly producing a map of where the machines are? Could you do that?

Mr Hardy: We can do that.

Mr Aiken: I think you need to identify to us what are the postcodes of the poor areas.

Q247 Chairman: But you could do that?

Mr Aiken: Indeed.

Q248 Chairman: It would be good if you could do that. Regarding the Code of Practice, the current Code of Practice is inadequate and we welcome the review announced today on that. If you could keep in touch with us on that area I think that would be very helpful. Regarding the Banking Code Standards Board and law enforcement, I have described it as ad hoc. Is there a way you could discuss that with the Banking Code Standards Board to produce a more systematic approach to that?

Mr Aiken: We already have done.

Q249 Chairman: My friend on the M40 in Warwick does not think that because he bought that to my personal attention. So we are looking for a systematic approach, not an ad hoc approach.

Mr Aiken: That is right and we are going to do these mystery shopper exercises.

Q250 Chairman: It is not just mystery shoppers because the mystery shopper takes place the week before Christmas and then everybody forgets that in the new year. It is the systematic approach that we are looking at.

Mr Aiken: If we are talking about signage on individual machines you have to visit the individual machine.

Q251 Chairman: I will give you that challenge as to how systematic you can be and you can come back to us on that particular issue. Regarding the selling off, the point was made that banks are selling off. Is there what we term a "double" incentive to sell off for banks because if they have their free cash machines in their bank branches or at Victoria Station then customers come along and the banks pays LINK the 31 pence or whatever ---

Mr Aiken: No, it does not pay LINK. The bank that issued the card will pay LINK on average .8 of a penny. The interchange fee goes to the ATM owner.

Q252 Chairman: They are paying some amount of money.

Mr Hardy: To the ATM owner.

Q253 Chairman: But if the bank or the company sells to an IAD, then if any customer comes to that machine later on there is no charge at all for the bank?

Mr Hardy: As long as there are no surcharges because some independents do have machines which are free.

Q254 Chairman: But it does not cost the bank for every transaction because it is then the responsibility of the IAD. Is that correct?

Mr Hardy: It does not pay any interchange fee.

Chairman: That is an issue that we would like to look at. Do my colleagues have anything else? Can I thank you for your time this morning. It has been very helpful indeed and we look forward to the submissions that you are going to make.