Usury and ATM Fees

I should clarify my previous post re: usury to state my implicit assumption. That is, the maximum nominal rate of interest should be 15-20% provided that the rate of inflation stays around 2.5%-3.5%. If inflation goes higher, so should the maximum nominal interest rate. Also, I envision the interest rate cap as applying only to personal borrowing, not business borrowing. Financial institutions should be able to charge businesses as much interest as they want.

In any event, many would be surprised to learn that most states still have usury laws on the books. However, their effect has been practically eliminated by the fact that a bank's home state's (i.e., state of incorporation) usury law is the one that applies, regardless of where the borrower is (this is from a 1979 Supreme Ct. decision - I'll look it up later). So a bank can incorporate in a high cap state and charge that rate of interest anywhere it does business. And apparently banks get some kind of exemption from the normally applicable usury rules as well.

Here is my point. ATM charges have now reached $3.00 for foreign bank withdrawals in the campus area at the University of Illinois. If you think about it, a foreign bank withdrawal from an ATM is really a loan: the bank extends you the money, and you pay that bank back automatically from your home bank account. So the charge is a kind of interest charge. It can't be a "processing fee" because the costs of processing are almost certainly negligible with current technology. Besides, to the extent that they exist at all, usury laws often collapse all "fees" associated with a loan into the interest rate so companies can't just get around the maximum rate by charging low nominal interest but high fees.

The upshot of this is that the ATM machine bank charges the customer making a foreign withdrawal an interest rate on a loan (which is redeemed almost immediately) equal to $3 divided by the withdrawal amount, before annualization. Let's be overly generous and say the ATM bank doesn't get its money for 2 business days (the amount of time it usually takes to transfer funds from one bank account to another). And let's say your withdrawal amount is the "fast cash" option, usually $60 (again, very generous - usually people withdrawal less). That means that the annualized rate of interest is equal to ($3/$60) * (365/2), or 912%. And remember, this is almost certainly a substantial understatement. Under more realistic assumptions ($40 withdrawal, 1 day for ATM bank to get its money) the annualized interest rate is 2,737.5%. If it only takes a matter of minutes for the ATM bank to get its money, the annualized interest rate would be absolutely astronomical.

As with most personal finance charges, this charge is highly "regressive" in that it will end up charging people making smaller withdrawals (i.e., people who are concerned about their account balance and can't make larger withdrawals) a higher effective rate of interest.

A good usury law should forbid this kind of nonsense.