The skirmish over automated teller machine fees is just plain silly. The irony of the debate should be lost on no one - juxtaposed as it is against the backdrop of the recently enacted, historic financial modernization bill. Those who now sound the call against ATM surcharges appear as bit players on a long-deserted dark stage playing the part of self-selected fools.

Let the lawyers argue the obvious that preemption and supremacy of the National Banking Act offers cover to national banks. The rest of us should, at the very least, expect members of Congress - even a "staunch liberal" [American Banker, Nov. 19] representative like Maxine Waters of California - to understand basic tenets of economics. After all, the frequently liberal editorial page of The New York Times [Nov. 21] wasn't duped by this latest guise of socialism.

For a House Banking Committee member to fail to grasp economic fundamentals as they apply to our banking system is, of course, profoundly disturbing. How does she serve in good conscience on an otherwise prestigious committee of Congress charged with important oversight responsibilities of our commercial banks?

For Ms. Waters and others of like mind (Rep. Bernard Sanders of Vermont comes to mind), a primer on how our free economy works may be in order.

In the private sector, businesses try to make money. Typically, they try to do so for their owners, the shareholders. Along the way, a business pays the folks who work for it, incurs other expenses, and pays taxes. Anything left over is called profits or earnings. Some profits are paid to the owners. These are called dividends. Some are kept as retained earnings. They are used to build new facilities, improve operations, or hire more people.

One prays it comes as no epiphany to a member of House Banking that banking is a business. It is a special business, to be sure, with special responsibilities to pay careful attention to the trust placed in it by its depositors and customers. Bank regulatory agencies like to remind us that a bank charter is not an entitlement of right, but rather a grant of privilege.


But make no mistake. Banking is a business, and like any other it is there to make money. Those who supervise banks make this abundantly clear in their examinations and assessments of a bank's performance. In the Camels rating system, the "e" stands for "earnings."All businesses try to make something, or sell something, or provide something that consumers want. That's the supply side of the supply-and-demand equation. If, say, no one wants widgets, there is no real point to being in the business of manufacturing widgets. That's a function of consumer choice. (Supply reacts to the absence of demand.)

On the other hand, if widgets could be jazzed up to run, say, a "dot-com" business or an Internet site, consumers might buy them in droves. That is the demand side of the equation. Somebody might decide to make a bunch of high-technology widgets to meet that demand. That, too, is a function of choice. (Somebody supplies the jazzed-up widgets to meet demand.)

Other essential factors determine the success of any business besides simplistic assessments of supply and demand. Consumers expect a certain quality in the goods and services they buy. And they expect to pay only what they believe is a fair price. That is why terrific slogans - like "Have it your way" - resonate with consumers. Again, consumer choice.

Quality and price, however, aren't isolated factors in our equation. They are linked. Something of higher quality (either real or perceived because of brand promotion) usually commands a higher price in the marketplace. The price of a finely made Swiss wristwatch is higher than that of the plastic kind that some of us wear sailing, for example. We consumers get to choose.

Price also is affected by scarcity. (This, too, is a function of supply, but a supply that cannot be artificially created or manufactured.) If something is genuinely hard to get but enough people want it, as a rule, the price goes up.

But that's not all. Another factor driving price is convenience. Abstract notions of supply and demand have little relevance if goods or services are difficult to get our hands on. That explains why there are "convenience stores" where prices are, on average, higher than on the same stuff sold elsewhere. That is why FedEx successfully promotes "When it absolutely, positively has to be there." Both know consumers pay for convenience.


Here is where ATMs come in. Banks do a lot of different things. They are engaged in a lot of different businesses.They sell products such as CDs (no, not that kind), insurance, and securities. They offer services like loans, safe-deposit boxes, and brokerage. They hold customers' funds on deposit and pay for this right in interest, which shows up on the monthly bank statement. They also lend out money to others at a cost, also in the form of interest.

A bank tries to receive more interest on the money it loans out than the interest it pays to its depositors. This is called the interest spread.

If taking deposits and making loans were the only thing banks did, it would be easier to understand the economics of banking. But customers and consumers want more products and services from their banks. They want to "have it their way." They want branches more convenient to them. Increasingly, they want to get access their accounts, check their balances, buy and sell securities, and pay bills - right from their personal computers.

In short, they "absolutely, positively" want to do their banking where they want, when they want, 24 hours a day. Consumer choice speaks again.


All this costs money. All this makes the banking business more complicated and more expensive than living off the interest spread.So banks try to find other ways to pay for all this extra stuff by charging sufficient fees to avoid erosion of the spread. If they didn't, they would either have to pay less on our deposits or charge more for loans.

But if a bank pays less on deposits and we go elsewhere for our banking, they would have less money (the supply side) to lend. They'd have to charge more for loans to maintain the spread. But then, of course, borrowers (the demand side) also may go elsewhere. And the bank would make fewer loans, earn less, and have still less to pay for our deposits. A vicious circle.

Whether Congresswoman Waters and others of like mind like it or not, ATMs are part of the banking business. And they are a fee-driven part of the business. Many of us believe that a little cash is useful to have around. We demand that our banks supply us with ready access to cash. We expect our demand to be met at an acceptable price.

If it is our money in our bank and we need a few bucks to settle up with the paperboy, we don't assign any particular value for scarcity or quality. We expect our cash to be supplied for free at our bank's ATMs.

On the other hand, suppose you've just landed in an out-of-town airport and don't have enough cash for a taxi. We can usually choose to get cash from an airport ATM. That ATM may be operated by another bank - a bank where we have nothing on deposit and from which we have never borrowed any money. Most of us think it's O.K. for that bank to charge a reasonable fee for the convenience of getting the cash we need on the spot to pay the taxi.

Choice is at work. The traveler can always choose to carry cash. Mr. Byrne, a former Federal Deposit Insurance Corp. general counsel, is with the LeClair Ryan law firm in Richmond, Va.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.