The Price of Convenience
Chevy Chase Bank blankets the region with ATMs and charges non-customers up to $2.25 to use them. In many places, there is no other choice.

By Terence O'Hara
Washington Post Staff Writer
Monday, September 11, 2006

Train stations, ballparks, amusement parks, mall food courts, grocery stores, Metrorail tunnels, and a few steps from the panda exhibit at the National Zoo.

Capping a costly 10-year campaign of cash-machine shock and awe, Chevy Chase Bank this summer surpassed the 1,000 mark in its bid to saturate the area with automated teller machines. The ATM rollout, a strategy pushed by owner and chief executive B. Francis Saul II, has been a boon for Chevy Chase customers, and imprinted the bank's logo across a region where banking competition is intense.

For the rest of the world it has meant millions of dollars in fees, two bucks or more at a time.

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The fee Chevy Chase charges non-account holders to use its machines -- $2.25 in most cases -- generated about $20 million for the company last year. It also helped Washington earn the distinction of having the highest average ATM fees in the country, according to a twice-yearly survey of the charges by consumer-finance Web site Bankrate.com.

According to the survey, the average ATM surcharge imposed by area banks is $1.83, compared with a national average of $1.60. Chevy Chase's fees are second only to a small Pittsburgh bank, which charges non-customers $2.50 to use its ATMs.

Though nearly all banks charge non-account holders to use their machines, the Chevy Chase ATMs -- ubiquitous by design -- are hard to escape.

"I don't really like them, and I try to avoid them every chance I get," Bill McVay, a businessman traveling through Baltimore's Amtrak station, said as he got socked with a surcharge to withdraw cash from a Chevy Chase ATM. He does a lot of business travel, and Chevy Chase's ATMs are in every area airport and most Amtrak stations under agreements the company negotiated with local transit agencies, including Metro. "There are plenty of times when you simply can't avoid them."

With 1,018 ATMs, Chevy Chase has more than twice as many machines here than even the much larger Bank of America.

From a consumer's standpoint, it is one of the conundrums of modern banking. Technology has let money and information move faster and cheaper, and made banks far more efficient. Yet the fees charged for the convenience of such improvements have for the past decade been the fastest-growing part of banking industry revenue.

Banks lump together all such deposit-related fees, such as bounced-check penalties and online banking charges, so it is almost impossible to determine how much ATMs contribute to the bottom line. Banks won't disclose the exact numbers for competitive reasons.

Analysts and consumer advocates suspect that it is a significant amount. The cost of processing a "foreign" ATM transaction -- in which a customer of one bank uses another bank's machine -- can be as low as 30 cents. Yet customers may pay more than $4 for the privilege -- a surcharge fee from the owner of the ATM and, often, a "foreign bank fee" of up to $2 charged by the consumer's bank.

"Fee income has taken on a much more important role in bank earnings, and that's what's behind it," said Greg McBride, a senior financial analyst at Bankrate and an expert on bank fees.

Washington is one of the most heavily banked cities in the country, with a bank branch for about every 3,300 people, and the number of ATMs reflects that fact. Between national companies like Wachovia and Bank of America, local ones like Chevy Chase, credit unions, small community banks and independent ATM operators, analysts estimate there are at least 5,000 machines in the area, and probably many more.

ATMs first appeared in the early 1970s. Conceived as labor-saving devices, installed outside bank branches to handle routine transactions and take the pressure off of the human tellers inside, they developed quickly into an expected convenience for a bank's depositors. Bank officials say that remains their central purpose.

Costing up to $40,000 apiece and as much as $12,000 a month to maintain, the machines are often money losers, bankers say, and the fees for non-depositors are simply a way to defray the cost.

"Overall, there's a significant expense to our very extensive ATM network," said Thomas H. McCormick, executive vice president at Chevy Chase Bank. "We don't build that network to be a significant profit center. . . . The full cost of deploying and operating the network costs far more than fees from non-customers taken in."

Not all of Chevy Chase's ATMs charge $2.25. At 235 stand-alone ATMs -- such as those Chevy Chase has put in malls, Metro stations and airports -- the company has a $2 surcharge for non-customers -- a concession, McCormick said, for people who may not have many options if they need to get cash.

"Our ATM strategy is to serve our existing customer base and attract new customers to our bank," McCormick said. "The fee we charge to non-customers is really helping to defray our costs of deploying those ATMs. But without getting into the economics, exactly, it costs an enormous amount to have a large ATM network." Seventy percent of the bank's ATM usage is by its depositors, who pay no fees at all, he said.

McCormick said that of Chevy Chase's $136.6 million in deposit service fees booked in its 2005 fiscal year, less than one-sixth is attributable to ATM surcharges. That would amount to about $22 million last year assessed against non-Chevy Chase customers, though McCormick would not disclose the exact number.

Banks, while heavily regulated in almost all aspects of their business, can charge anything they want for ATM fees, and, unlike with a branch, they don't have to go through a regulatory application process to set one up.

According to Arnold G. Danielson, a local bank consultant and investment banker who has tracked banks in the mid-Atlantic region for decades, Chevy Chase became enamored of the market-building possibilities of credit and ATM cards in the 1990s, when it built a large credit card operation. After selling the credit card business in 1999, Saul, according to Danielson, decided that one of Chevy Chase's best chances to increase its market share in the face of competition from much larger rivals was to make the bank so convenient, customers would be "compelled" to sign up.

ATMs were central to the strategy. In 1995, Chevy Chase had 439 ATMs, already far more than any other local institution. In the next 10 years, it added more than 500 more.

Saul, who founded Chevy Chase Bank in one of his family-owed strip shopping centers in 1969, rarely talks to the media, and declined to comment. The 74-year-old banker and real estate investor owns nearly all of the stock of Chevy Chase, which has $14 billion in assets.

Chevy Chase has the fifth-largest deposit market share in the Washington area behind Wachovia, Bank of America, SunTrust and BB&T. But Chevy Chase is largely a consumer bank, and doesn't collect many big-dollar corporate deposits. While no reliable figures exist for consumer deposits, local bankers think Chevy Chase probably has the No. 2 or 3 market share, and dominates its traditional and wealthy stomping ground of Montgomery County.

Those who know Saul say he has made clear the importance of preserving Chevy Chase's market share in the face of competition from out-of-towners -- even if it means outspending his rivals on branches and ATMs, and accepting lower returns than Wall Street would tolerate from a publicly traded company.

"Frank is so much more of a marketing and a market-share person than a typical banker, and he doesn't have a board to answer to," Danielson said. "ATMs may be expensive, but these things build market share."

Later this year, Chevy Chase will begin deploying new ATMs that can accept cash and check deposits using an imaging technology that doesn't require envelopes. While more expensive than standard ATMs, customers like them and competitors, such as Bank of America, have begun installing similar machines here.

Competition on price is growing, too. Other banks have reduced ATM charges, especially for their own customers.

PNC Bank entered the Washington market last year when it bought Riggs Bank. To build its customer base, the company not only eliminated foreign bank fees but also offered to reimburse many of its depositors any surcharges collected when they used another bank's ATM.

"It's a cost that we are very happy to pay to provide convenience to our customers," said Joe Rockey, head of retail sales and service at PNC.

New Jersey-based Commerce Bank, also entering Washington for the first time, reimburses ATM surcharges for any customer with at least $2,500 in his or her checking account.

Chevy Chase's McCormick, however, doesn't seem worried.

"Our business proposition is to be the best bank for customers in this region," he said. "We start out first saying we want knowledgeable, courteous and responsive employees. And we want to be the most convenient bank in this region to deal with. ATMs can do most things any branch can do. So, primarily, our ATM network is to facilitate value for our customers. And we think it works."