A Fee Carrot Instead of a Stick

  Financial institutions and surcharge-free ATM networks are devising new ways to increase the number of signature-based debit cards while chucking onerous fees.
  Fees charged to customers for using personal identification number-based debit cards can help financial institutions glean more revenue in the short term by discouraging the use of PINs at the point of sale and instead encouraging the use of the more profitable, signature-based function. But such fees can backfire, resulting in negative publicity and angry customers.
  Yet what if debit cardholders, rather than being charged a fee to discourage behavior less profitable to the issuer, instead were given tangible benefits, such as unlimited surcharge-free access to thousands of automated teller machines, to encourage more profitable conduct for a small fee? The evolution of for-profit, surcharge-free ATM networks is helping financial institutions to consider such moves.
  "It is a trend we are seeing among our financial institutions," Ben Psillas, president of the Allpoint surcharge-free network, told attendees at Thomson Media's ATM & Debit Forum in Baltimore in October during a discussion about the rise of surcharge-free networks.
  One of Bethesda, Md.-based Allpoint's first clients, the Alexandria, Va.-based Pentagon Federal Credit Union, which has about 500,000 debit cardholders, offers access to Allpoint's 31,000 surcharge-free ATMs only to customers who opt to receive a dual-function debit card instead of one that supports only PIN-based purchases.
  The goal is to leverage Allpoint's surcharge-free access to convert virtually all of its PIN-only cards into dual-purpose cards, says James Schenck, Pentagon Federal senior vice president. "We have had double-digit growth in the number of signature-based debit cards," he says.
  Schenck says Pentagon Federal, which deploys about 80 of its own ATMs in the Washington, D.C., area but has a national cardholder base rooted in transient military families, has more than made up for the cost of joining the Allpoint network. Allpoint does not disclose the charges it imposes to join the network. In addition to that charge, participating financial institutions also pay monthly fees to be in the network based on the size of their card portfolio. No per-transaction fees are charged, however.
  Boosting the number of dual-function cards is increasing the number of signature-based transactions. Thus, Pentagon Federal is receiving more revenue from its debit cards without additional Allpoint charges in its overall card portfolio, Schenck notes. Signature-based debit card purchases generate more acquirer-paid interchange from the point of sale than do PIN-based debit purchases.
  Another Allpoint client, OBA Bank, is considering using Allpoint to promote a new business debit card product, perhaps even charging businesses an annual fee for surcharge-free access to the participating Allpoint ATMs. Germantown, Md.-based OBA already has replaced its reimbursement program for ATM surcharges using Allpoint, says Linda Ludwick, OBA chief operating officer.
  Ludwick says that the bank earlier this year stopped reimbursing customers up to $5 per month in surcharge costs incurred when they used ATMs not owned by OBA. On a cost-per-transaction basis, customers get more surcharge-free transactions using Allpoint than they did under the old reimbursement policy, she says.
  Moreover, OBA no longer has to track reimbursements on individual accounts, Ludwick notes. "It is outsourcing your problems," she says.
  Participating in Allpoint, however, does not make the use of Allpoint-connected ATMs entirely free, Psillas notes. Issuing clients still pay ATM acquirers interchange. Most issuers pass along that cost to their own customers in the form of "foreign" fees for using other companies' ATMs.
  Some of Allpoint's clients have begun charging their debit cardholders a flat, $1 monthly fee instead of foreign fees, says Psillas. The Washington, D.C.-based Genesis Federal Credit Union adopted the flat-fee approach when an internal customer survey found that 78% of customers preferred paying $1 per month for free unlimited access to Allpoint's ATMs instead of a foreign fee each time they used other organizations' ATMs, says Psillas.
  Risks
  Because Allpoint relies on nonbank, off-premise ATMs for surcharge-free access, however, there may be risks in building a debit card product around it. For example, one of Allpoint's main ATM providers, Cardtronics or NetBank, could decide to significantly reduce its ATM portfolio, or merchant ATM owners may go out of business.
  "I guess there is no guarantee in any business," says Psillas. "But if Cardtronics says these things are unprofitable, they are saying these ATMs are not convenient."
  Another network provider, Fort Washington, Pa.-based Genpass Inc., which markets the MoneyPass surcharge-free ATM network, also foresees a future in which financial institutions use surcharge-free networks to give their customers wider, free ATM access for a flat fee.
  "The idea of fixing fees makes a lot of sense," says Bill Raymond, president of Genpass' ATM solutions division.