ATM Cards in Australia

ATM Cards in Australia

HEADLINES

ATM card transactions value remains flat in 2010 while volume declines by 2%

Direct charging leads consumers to restrict ATM use to machines operated only by their card issuers

The number of ATMs in Australia increases to 28,000 in 2010

Non-bank ATMs lead in 2009, accounting for 45% of the ATMs currently in operation in Australia

Due to the growth in card-based payments, ATM transactions is expected to increase in constant value by just 1% CAGR over the forecast period

TRENDS

The Reserve Bank of Australia’s (RBA) direct charging reforms came into effect during March 2009. The reforms promote transparency in the charges which are levied on the use of ATMs provided by a bank or other organisation other than the issuer of the card being used to withdraw funds. Under the reforms, consumers were informed of the cost of withdrawing cash at these non-issuer ATMs, known as ‘foreign ATMs’, before processing the transaction. Since the implementation of the reforms there has been a significant change in trends away from consumers accepting the charges to use foreign ATMs towards consumers restricting their use of ATMs to those of their card issuers. The total number of transactions at all ATMs in Australia declined by 2% in 2010 in the wake of the direct charging reform, whilst the proportion of ATM transactions value stemming from transactions through foreign ATMs fell from 40% before the reforms to 35% during 2010. Consumers who found themselves with no option but to use a foreign ATM preferred instead to withdraw large amounts of money or chose to pay for goods at the point of sale using a debit card.

Despite the trend away from cash based payments in Australia, cash is still the most commonly used method of payment for low value transactions. According to the June 2009 report of RBA, cash still accounts for 70% of all payments made in Australia. Furthermore, cash accounts for 94% of all transactions under A$10 and 74% of all transactions between A$11 and A$25. Withdrawing cash from an ATM, making a withdrawal over-the-counter in a bank branch and taking cash-outs when paying with a debit card at points of sale remained the main sources of accessing cash in Australia during 2010. The value of cash-outs at points of sales increased by 6% during 2009/10, which was largely due to Australian consumers planning ahead in order to avoid the fees incurred through the use of foreign ATMs, which also explains the stagnation of ATM withdrawals in value terms.

Prior to the introduction of RBA’s ATM reforms, transactions through foreign ATMs stood at 47% of total ATM transactions volume, while the equivalent value measure was 40%. The direct charging reform has led to consumers sticking to the ATMs of their own card issuing bank, hence the share of foreign transaction now stands at 40% in 2009, down from 47% in 2008, falling further to 35% in 2010.

The cost of using foreign ATMs remains unchanged in the wake of the implementation of RBA’s reforms. Prior to the ATM reform, users of foreign ATMs were subject to a varying fee in the region of A$2, most of which went to their own bank, although the operator of the foreign ATM received around 40% of this fee. With the introduction of the reform, the order of distribution reversed. Instead of the issuing bank charging the customer, now it is the foreign ATM owners who charge the customer. The interchange fee was abolished and foreign ATM owners now keep 90-100% of the fee. Following the implementation of the reform, the majority of financial institutions in Australia stopped charging foreign fees. Customers now pay the direct charge levied by the ATM operator. ATM owners now have more flexibility to charge customers. In some cases, such as in the sprawling suburban areas of Australia’s large cities, the charge is now lower than A$2, while at many others such as pubs, clubs and airports, the direct charge has risen well above A$2.

Another objective of the reform was to increase the supply of ATMs, as it was hoped that more players would enter ATMs and drive down the level of the fees. According to RBA, there were 27,100 ATMs in use in Australia as of June 2009. The number of ATMs declined to 26,600 in September 2009 before recovering to 27,100 in December, according to Australian Payment Clearing Association. There was an expansion in the number of ATMs owned and operated by non-bank ATM owners in 2010 as the number of ATMs reached 28,000. Greater flexibility in pricing has encouraged independent ATM operators to deploy ATMs in locations which were previously considered not to be viable, such as Australia’s vast and sparsely populated rural areas.

Financial institutions and banks have also been entertaining the idea of expanding their networks of fee-free ATMs as it is seen as critical to be seen to be competing in ATMs which do not charge users. Many of these financial institutions are either joining existing sub-networks or entering into one-way agreements with other networks. In June 2009, National Australia Bank entered into an agreement to join Cuscal’s Redi ATM sub-network. In addition to joining a sub-network or a one-way agreement, some larger issuers expanded their own networks of ATMs in 2010.

Independent ATM operators such as Customers Ltd are looking towards alternative revenue streams by investigating the potential of providing EFTPOS services as well as offering mobile phone pre-paid card top-up facilities through their ATMs and offering advertising space on the ATMs themselves. Customers Ltd commenced mobile phone pre-paid card top-up facilities through up to 500 of its ATMs in September 2010.

COMPETITIVE LANDSCAPE

Independent ATM operators account for 50% of the ATM network currently in operation in Australia. Customers Ltd is by far the largest independent operator, with 5,500 ATMs in operation across Australia. Customers Ltd is looking at providing outsourcing for its existing fleet of ATMs owned by the banks. Customer Ltd has a five-year branding agreement with Bendigo and Adelaide Bank. Cashcard also operates a similar number of ATMs, and these two independent operators combined controlled 42% of ATMs in operation in Australia during 2009.

Due to the abolition of interchange fees under the RBA direct charging reforms, there has been some changes in terms of participation from new players. My ATM, for example, is offering individuals the opportunity to own a portfolio of ATMs as an investment vehicle. My ATM has reserved 3,000 ATMs and negotiated agreements with the operators of these ATMs in order to make it easier for investors to enter into ATM ownership. It is believed that this opportunity has attracted significant numbers of passive investors as it provides a minimum guaranteed income of A$0.20 per transaction. However, some investors have experienced no capital gain due to depreciation of ATMs.

Financial institutions and banks control the remaining 50% of the ATM network in Australia. Commonwealth Bank of Australia was the largest single operator in 2009, with 4,000 ATMs, including BankWest ATMs, in operation. Westpac Banking Corp was ranked second among banks, with 2,800 ATMs while ANZ Banking Group Ltd operated 2,600 ATMs, placing it in third position in 2009. Having access to a wider network of ATMs has become critical for Australian banks in order to compete for deposits. This is largely because Australian consumers tend to look for ATMs operated by their own bank in order to avoid foreign ATM transaction fees.

Although the interchange fee was abolished under the RBA direct charging reforms, it is still allowed to be levied where it promotes competition. Institutions pay a one-way interchange fee to make use of the machines of other ATM networks, which is seen to promote access to a wider ATM network. By allowing interchange fees, smaller institutions will have access to a wider network of ATMs than they would if they were to set up their own network, which would involve a disproportionately high level of capital investment, as well as increasing their ability to compete with larger organisations.

PROSPECTS

RBA is closely monitoring the impact of its direct charging reforms, which have now been in effect for one year. It has been acknowledged that the cost of using foreign ATM has not gone down, especially in remote rural areas and certain locations such as pubs and clubs. There have been calls for more regulation in order to bring down the cost to cardholders of using foreign ATMs. It is highly unlikely that the supply of ATMs in remote locations and pubs and clubs by independent ATM operators will increase over the forecast period, even though RBA intends to maintain transaction fees at A$2. The increased supply of ATMs will serve to more evenly distribute transactions between ATM operators. Furthermore, the cost of servicing ATMs will exceed the revenue earned, hence making the operation of ATMs unprofitable for many smaller operators.

The value of ATM withdrawals at gaming venues is expected to decline significantly over the forecast period on the basis of recommendations by the Productivity Commission to reduce the limit of cash withdrawn at gaming venues from A$2,000 to A$200 in order to tackle the thorny issue of Australia’s spiralling level of problem gambling. The final report by the Productivity Commission was handed to the Federal Government on 26 February 2010. The discussion on the recommendation was issued in June 2010. It is anticipated that the recommendation will be taken up as gambling is seen as an increasingly serious problem in Australia and one which urgently needs to be addressed.

The anticipated growth in the card-based payments system in Australia will also impact the value of ATM withdrawals over the forecast period. In addition to card-based payments, the increasing popularity of cash-outs at points of sale will also have a significant impact on the value of ATM withdrawals. Australian consumers have increasingly been using points of sale to access cash in the wake of the direct charging reform; cash-outs increased in value from A$11.6 billion in 2008 to A$12.9 billion in 2009, and this trend is likely to intensify over the forecast period.

Greens Party Leader Senator Bob Brown has proposed a bill to the Federal Parliament which would outlaw the A$2 fees charged by the major banks to non-customers using their ATMs, while building societies, credit unions and independent operators would be excluded and still allowed to charge the fees. If the bill were to be passed, it would provide another yet opportunity for independent operators, following on from the direct charging reform, since major banks would lose out on the revenue which they currently obtain from operating ATMs and it would be more cost effective for banks to outsource their ATMs to independent operators.

Since there are incentives for independent ATM operators to expand their fleets of ATMs due to the freedom they enjoy in terms of pricing, the number of foreign ATMs is expected to rise during the forecast period. However, transaction volume through foreign ATMs will decline, although the average value withdrawn per transaction will be higher.