Brother Can You Spare A Dime
I’ve noticed that ATM’s are increasing their prices again.
In the last few weeks I’ve encountered several ATMs that were charging $2.99 for a withdrawal. That’s an absurdly high fee. Or is it? If others think like me (a dubious proposition) it might be a loser for the banks. Here’s why.
When the fee at an ATM is $.99 I generally don’t think about the value of what I’m withdrawing. I’ll withdraw $20 or I’ll withdraw $100. I’m price insensitive at $.99 per transaction. I don’t think about the percentage of the withdrawal either and am happy to pay a 5% fee.
When the fee at an ATM is $1.99 I do think about how much I’ll take out. I generally will withdraw $100 or $120 if I have that in the bank. I will avoid withdrawing $20 as I feel like 10% is too high a fee. I’m price aware at $1.99 and prefer to pay a 2% fee.
When I see a fee of $2.99 I think a lot about what I’m doing. I wouldn’t take out $20 (for the same reason as if the fee were $1.99). I also wouldn’t take out $100 as I feel the fee is too high. In fact, I walked away from two of the three ATMs that asked for $2.99. This means I’m very price sensitive at $2.99 and unwilling to pay a 3% fee. But why did I use the 3rd ATM that charged $2.99? Because it let me take out $200 and I paid only 1.5%.
There’s one other thing to consider. It’s the time-value of money. Time-value is what money is worth to the person who has it right now. If I have $10 today to buy a house and invest, it is probably worth more than a contract that gives me $20 but pays it to me in 10 annual installments of $2. This is why you should always take the lump sum in a lottery payout if you win. The value of a significant sum now is greater than the value of a greater sum but doled out over a long period of time. Banks know this. They want to hang onto your money, even if only for a few hours, so they can earn interest and put that money to work. Earning interest on $1 for 24 hours doesn’t make much money, but earn interest on 20,000,000 customers’ $1 does.
Given this, perhaps banks would make more money by charging a smaller fee at the ATM.
1) They get the time value of keeping more since we withdraw less at each point.
2) They get a higher effective commission on the transaction since I’m willing to give up 3% when paying $.99 but only 1.5% when paying $2.99.
Or maybe I’m the only one who would think this hard about ATM fees.