Automated Teller Machines
Automated Teller Machines are an established part of the banking industry, but they do not represent a method of payment - merely an electronic means of dispensing cash, taking deposits, and moving funds between accounts.
While originally a terminal located at a branch office that connected to the local network, they have expanded via telecommunications networking to enable ATMs to be located in virtually any location, and for customers to access funds in their bank from the ATM operated by another bank or a third party.
Growth and Usage
In terms of volume, it is estimated that 14 billion ATM transactions were conducted in 2002, a sharp upward trend over the past two decades, though the majority of growth in the number of machines and transactions was most significant in the late 1990s, and began to decrease in the middle of that same decade, as the use of debit cards reduced the need to obtain cash for routine purchases.
The number of terminals has also risen steadily over the same period of time, and it is estimated that by 2002, there were over 350,000 ATMs in the United States, roughly five times the number of bank offices, with growth in off-premise locations (convenience stores, gas stations, and shopping malls) significantly increasing after 1994.
In the present day, ATMs continue to be used primarily for cash withdrawals, though they is still significant use for traditional transactions such as deposits and funds transfers. More recently, some ATMs have offered additional options, such as purchasing postage stamps, printing bank statements, and managing the payment of bills.
Industry structure
The number of shared ATM networks peaked at over 140 in the mid-eighties (corresponding to the Supreme Court ruling that enabled networking across state lines), and has fallen to less than forty in 2002, though the networks have grown considerably in size (as a consequence of deregulation and consolidation in the industry).
The three largest players are Star, NYCE, and Pulse, with a sharp decline afterward (the fourth largest, Jeanie, has less than 10% of the transaction volume of the third largest).
From the customer perspective, the network structure is of no concern. By 1998, 99% of ATMs were shared on a nationwide basis, so they can use their card on any ATM. (A decade earlier, less than two-thirds were connected, such that a customer would have to pay attention to the logo on an ATM to determine whether his card would be accepted there.)
From a bank's perspective, the transaction volume is significant, as the interchange fees paid to ATM owners are based on transaction volume, and part of this revenue is claimed by the network operator - such that the three largest networks claim nearly 70% of the data, the next seven another 25%, and all outside the top ten fewer than 5%.
It's noted that the national networks, Cirrus and Pulse (managed by MasterCard and Visa, respectively) operate as nonprofit organizations, a partnership arrangement in which companies that use the network pay their share of the cost of its operation, and the network itself makes no profit.
The ownership of the ATMs themselves has fluctuated over time, but by 2002, it was roughly split into thirds, between single-bank ATMs, joint-venture ATMs, and non-bank ATMs, though growth in the latter category has been most dramatic.
Industry pricing
At the time the book was written, there was considerable uproar over bank surcharges for the use of ATMs. When withdrawing cash, it was common for the cardholder to pay a fee to both his own bank and the ATM owner, and some banks added annual fees or issuing fees for the use of a payment card.
The author presents data on the percentage of banks charging such fees and the average amount of fees charged:
- Annual fee - $10.35 (10.7% of banks)
- Card fee - $4.51 (3.5%)
- On-us fee (for using a bank-operated ATM) - $0.81 (3.6%)
- Foreign fee (for using a non-bank ATM) - $1.17 (78.5%)
- Transaction surcharge - $1.32 (88.5%)
Where surcharges are levied, the behavior among consumers is to avoid the fees by using only their own bank's ATMs and making fewer, but larger, withdrawals. Where they are not, customers seem to gravitate toward more frequent and smaller transactions at any ATM that is conveniently located.
Equally important, but less visible, are the wholesale fees charged by networks to both participating banks and ATM operators - which were also assessed upon initial membership, monthly/annually, and on a per-transaction basis. Such fees were passed along to the customers in the retail fees, or resulted in banks seeking to recoup the expense through other means (reducing interest paid or increasing interest collected on other bank products).
Data on wholesale fees is less publicized and varies more greatly. Some networks (Star) charge no membership fee and an annual fee up to $4,000 (depending on transaction volume), other networks such as Cirrus and Pulse can charge a membership fee as much as $25,000 but lower monthly fees ($50 to $500).
The per-transaction "switch" fee when a transaction is handed from one network to another is more complicated, based on the transaction and the distance involved, but can range between 2 and 12 cents per transaction. This is in addition to an interchange fee paid by a bank to the operator of an ATM that can vary - one example is a fee of 50 cents for a withdrawal and 25 cents for a balance inquiry or transfer of funds.
Authorization, fee, and settlement routing arrangements
In terms of the methods by which transactions are routed, there is a great deal of complexity: there are many combinations of parties that may be involved in each transaction, depending on which ATM the cardholder uses and the networks over which the data is routed.
For simplicity's sake, the author considers four basic kinds of ATM transactions:
- A native transaction is not routed through any network - such as a cardholder using an ATM that is operated by his own bank, or even an ATM whose owner uses the same payment processor. To save on network fees, these transactions are flagged for local processing without passing the data over network switches.
- A network on-us transaction is routed through one switch, typically where the ATM operator and cardholder bank are on the same regional network.
- A reciprocal transaction occurs when there is a sharing agreement in place between two regional networks, such that the switch can be made from one regional network to another without passing over the national network.
- A national bridge transaction occurs when the data passes from the ATM, to a regional network, to a national network, to another regional network, and finally to the cardholder's bank.
Ultimately, the goal of banks is to route the transactions through as few networks as possible to minimize transaction cost and switching fees, and larger banks may have a complex array of network interconnections to minimize their expense - this occurs when the savings in per-transaction fees exceeds the membership cost of joining an additional network.