Shumer on ATM Fees: Another Chink in Capitalism's Armor?

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Senator Charles "Deerslayer" Schumer is at it again, this time taking aim not at Bambi but at banks charging ATM fees that the Democrat from New York judges to be "onerous." Said the senator, in demanding that the chairman of the Federal Reserve review the issue:

ATM fees are getting so onerous that the costs of accessing your money easily outweighs the convenience factor. These mounting fees demand a response from federal regulators. Consumers are bearing an unfair burden in maintaining the health of banks' balance sheets.

A few comments are in order. First, the fees Mr. Schumer is complaining about are fees that banks are charging to provide a service to people who aren't their acount-holders. Banks already provide free checking accounts, along with ATM access, to many of their own customers. Some even offer free, interest-bearing checking accounts. There aren't many businesses in capitalism that can survive by offering their core service for free (another good reason to consider buying a subscription to in time to receive our first quarterly report to subscribers). The banks have to make money somehow.

Federal regulators are after them to take fewer risks, to modify mortgage loans they have made in ways that provide "foreclosure relief," and to lend more to help the economy, all at the same time. Given that, it's no wonder that ATM fees are increasing. If a customer thinks an ATM fee is too high, he doesn't have to take money out of that ATM. He could go to his own bank's ATM and get the money out free of charge. Or he could open an account at the bank with the ATM that's more convenient but that is charging him a high fee as a non-customer.

More broadly, in a competitive market, banks may choose to compete by offering more of their own fee-free ATMs to their customers. Some banks even offer to refund the ATM fees that their own customers incur using other banks' ATMs. That development is a factor which may be contributing to the ATM fee increases in much the same way that financial aid discounts increase the sticker prices of college tuitions and that health insurance increases health care costs.

With reimbursement, the ATM fee is borne by a third party (the customer's home bank) rather than by the consumer. You can argue that the fee is eventually passed along in the form of lower interest on the checking account, but still, it's less visible and therefore less likely to discourage the use of the high-fee ATM. Meanwhile, it's hard to see the need for action by federal regulators when the fees affect only consumers who don't shop around for lower prices.

Here's a suggestion: Chuck Schumer should talk to Chuck Schwab, whose Charles Schwab Bank High Yield Investor Checking Account offers unlimited ATM fee reimbursement. Or to First Arkansas Bank and Trust Online, which also offers "worldwide ATM refunds." Or to Farmers & Merchants Bank in Virginia, which also offers "unlimited refunds of ATM fees, anywhere in the country!" Certain banks, in other words, realize this is a concern for some consumers and are marketing products to address it. The market has a way of self-correcting.

One way a consumer can know about these offers is because of (NYSE:RATE), which, contrary to what the headline of the Schumer press release says, is not a "consumer group" but a company.

Incidentally, the Schumer press release is misleading in another way, too. It cites a study on the fact that

the average fee that banks charge non-customers rose 12.6 percent in the last year to $2.22.

But it doesn't mention the same study's finding that the average fee your own bank charges you for taking money out at another bank's ATM dropped, to $1.32 from $1.46 the year before. That's a 9.6% decline, and since that fee by definition doesn't get reimbursed (who would reimburse you for a fee your own bank charges you?), it reinforces the idea that third-party reimbursement is a factor in the rise of one kind of fee while another fee is declining.

The Schumer approach is to call in federal regulators to protect delicate, vulnerable consumers from rapacious, greedy bankers, all the while sucking in campaign contributions from the same financial industry he is grandstanding against. A more market-oriented approach would let technology (online banking, Web sites that create more price transparency for customers) and competition drive down prices for consumers without regulatory action. For a senator who represents New York, which is supposedly a capital of capitalism, Mr. Schumer sure seems to prefer the regulatory approach to the market-oriented one.