The 401st Blow :: Thoughts On Media

Brother Can You Spare A Dime

Posted in Data Analysis, Economy, Theory by Noah Harlan on March 25, 2010

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.

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One Response

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  1. Rolando said, on March 25, 2010 at 11:27 am

    I’m with you on this. I tend to find a branch of my own bank and withdraw large sums of cash at one time, then pay wherever I can with my debit card. This way I usually have cash and avoid a lot of ATM fee situations.

    But really I wish we could just use debit cards everywhere already. Or maybe our thumbs, like in Back to the Future Part II


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