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A Lesson From the UK: ATM Costs Could Break the U.S. Prepaid Model

September 18, 2012
Prepaid|International|Banking_Channels
Tim Sloane
Mercator Advisory Group
If you expect ATM access to be free for low balance bank accounts and prepaid cards, please pay attention to the recent news out of the United Kingdom.

The story in ATM Marketplace, “Will UK banks break the ATM LINK?,” describes how some banks now have eliminated surcharge-free ATM access for low-balance checking accounts. In the UK, every bank customer was able to access any ATM for free using LINK, which is a simple cooperative agreement between banks. That cooperation just came to an end and it’s all about operational costs associated with providing ATM access.

As of 2010 there were nearly 8.5 million basic bank accounts under management by 16 banks across Britain, all of them allowing free access to any ATM by any cardholding customer. But that changed in 2011.

Late in that year, the Royal Bank of Scotland and Lloyds TSB told basic accountholders (with the exception of certain "grandfathered" customers) that they would no longer be allowed to use ATMs operated by an independent bank or third party.
Why would the banks be so callous? Well, it’s about the cost associated with enabling that free ATM access!

The banks have said that restricting ATM access and reducing interchange fees has been necessary in order to prevent cross-subsidization of basic accounts, which they said cost them £10–£12 ($16–$19).
This withdrawal from LINK by major banks may be sufficient to destroy the economics that makes LINK possible, since now fewer banks end up covering all the costs, which would end free nationwide ATM access in the UK.

It is obvious that convenient ATM access is a critical need for the unbanked and underserved, but such access can’t be legislated if that legislation fails to address the very real costs associated with ATMs. At some level, a low-balance account becomes unprofitable. To provide financial services further down market demands the costs of providing the service be reduced and today ATMs are by far the most expensive component of providing Prepaid Financial Services. While surcharge-free ATM networks have the largest footprints in low and moderate income neighborhoods, they are by far the most expensive to operate.

So legislation that requires free ATM access will almost assuredly force prepaid providers to do exactly what banks have done – identify minimum requirements for prepaid card holders to assure ATM costs can be recovered. If so, then ATM legislation will once again eliminate financial services to those that need it most: consumers with low and moderate income.

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