Last night during a meeting with my capstone clients, the discussion turned to user fees and how the financial services industry uses them as a means to remain competitive, with competitive being defined as the ability to draw consumers to their company to increase growth and the overall market share. Consumers are charged a variety of user fees from overdrafts to late fees for credit card payments to ATM usage; for particular banks, consumers are charged a user fee for using an ATM that is not affiliated with their bank in addition to the user fee that is associated with using an ATM for the convenience factor. Two key points related to the competitive advantage were focused on during last night’s discussion; the first being if a bank eliminates a user fee, as M & I Bank has done previously for ATMs, they are doing so as a strategy to attract more consumers to bank with them. Such a strategy creates benefits and/or incentives for opting for a particular bank over another. However, the opposite point was also argued last night where smaller banks can still attempt to utilize strategies, such as eliminating user fees, but it is still not enough to compete with the larger banks, such as TCF, US Bancorp, and Wells Fargo. These larger banks have such a significant market share that they can still have limited benefits and/or incentives, such as charging user fees for ATMs, and people will bank with them. Despite increase choices in the financial services industry, a higher percentage of people still opt to bank with the larger banks rather than smaller banks, community banks, and credit unions. The discussion then turned to who actually has the competitive advantage when it comes to user fees as the freedom to choose banks based upon benefits and/or incentives does not appear to be relevant.
Despite the private sector nature of the discussion, my immediate thought turned to Fisher’s definition of user fees, “which are prices governments charge for specific services or privileges to pay for all or part of the cost of providing those services” and whether or not user fees play into the Tiebout Hypothesis. People “shop” around communities by looking at a variety of factors, such as local tax rates, public services, safety, educational institutions, etc. when trying to decide where they want to live. They eventually choose their place of residence based upon the community that offers the “best” package for them. If a local municipality or city is able to attract more residents by reducing or eliminating user fees for certain public services, does that make them more competitive? In this case, competitive is defined as growth due to residents moving into the municipality, which subsequently increases the overall tax base and results in better public services and/or better tax rates. Since the community becomes a more desirable place to live if this occurs, the question then becomes does reducing or eliminating user fees for certain public services act as a competitive advantage?
In my opinion, this is a catch-22 situation as cities reducing or eliminating user fees for certain public services will draw residents into their communities, which is something that cities want to achieve. By increasing their population, they are increasing their tax base and able to provide better and/or more efficient public services. However, they now need to consider the increased costs in providing for more residents, especially since user fees for public services have either been reduced or eliminated and thus that extra money is not available for use. This can also be thought of using the Pareto efficiency model whereas residents moving into the community are drawn to improve their living situation, but the increase of residents into the community decrease the benefits for those already existing.