OFT opens inquiry into inter-bank fees for cash machines

The Office of Fair Trading has launched an investigation into the fees banks charge each other for using their cash machines due to concerns the system is anti-competitive.

The investigation is likely to lead to a reduction of about 25 per cent in the amount banks can charge, prompting fears some institutions will take the view that some of their ATMs are too expensive to run and decide to close them down.

The OFT began its investigation two weeks ago and is likely to take about six months to trawl through the complex way banks set charges known as interchange fees which they levy when other banks' customers use their cash machines.

The Government agency has taken on the task after Donald Cruickshank published a highly critical review of the whole banking industry in March 2000, in which he singled out interchange fees as particularly opaque and anti-competitive.

Banks have strongly rejected the accusation and say the levy for using their ATMs is very close to the actual cost of running them.

The cost a bank must pay for its customer to use a different cash machine away from a branch has already fallen from 40p to 33p while the cost for using an ATM inside a branch has gone from 28p to 20p within the past two years.

The major clearing banks have the most to lose from a further 25 per cent cut in the fee because they control the vast majority of the UK's 44,000 cash machine network. Royal Bank of Scotland has the largest network, controlling 5,400 cash machines through its own and the NatWest brand. Lloyds TSB, Barlcays, HSBC and HBOS also have a very substantial presence in the market.

This means that smaller banks and building societies have to pay them far more in interchange fees than the other way round.

Banking sources said if the OFT does decide to squeeze them further, banks with the largest networks may decide to close cash machines which are used least, because they are the most expensive to operate, or they may try to outsource the running of their networks to other companies.

The move could lead to an increase in machines which charge customers for withdrawing cash run by independent companies which are able to take on machines in remote areas because they levy about £1.50 from each user.

It is likely that the banks will try to strike outsourcing deals where possible. Possible partners include Moneybox, which charges customers £1.50 for using its machines, but has also already agreed deals with lenders including Norwich and Peterborough building society to run their machines at no extra cost to the customer.