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Determinants of ATM Pricing
Mark Wasiljew
Emerging Payments Department
Federal Reserve Bank of Chicago
May 2002
1
Determinants of ATM Pricing
Mark Wasiljew*
May 2002
Abstract
Automated Teller Machines (ATMs) and ATM transactions have become a dominant
feature of the financial landscape, sparking debate over the validity of various ATM fees. In
light of the current debate, this paper will study the level of bank surcharges, controlling for
factors of pricing, bank size, and demand. This will test the hypothesis that banks choose
whether or not to levee a surcharge based on their size and demand levels, while the level of the
fee is affected by the pricing of other bank services. This is an attempt to further understand how
banks determine the price of surcharges, which serves as a contribution to the developing model
of the banking firm. The paper will also look to confirm previous studies on the effect of bank
size on ATM fees by using a more current and comprehensive data set. Results show that higher
surcharge rates are equated with more ATMs and more convenience, so it appears less likely that
banks are simply using these charges as a means of leveraging market power.
* Emerging Payments Department, Federal Reserve Bank of Chicago. The views expressed
herein are those of the author and do not represent the views of the Federal Reserve Bank of
Chicago or the Federal Reserve System.
2
I. Introduction
Automated Teller Machines (ATMs) and ATM transactions have become a dominant
feature of the financial landscape. The bank with the largest number of ATMs climbed from
5500 to 12000 in the last seven years of this studys data set, while the average number of ATMs
per bank rose 158 to 394 over that same span. This data is shown in Chart A. In turn, the
number of transactions performed annually has grown at the same pace. However, the number
of transactions performed per ATM climbed steadily until 1999, with significant drop-offs in the
subsequent years. Newer machines are bringing down this average by being deployed in low
traffic, high cost locations. This indicates market saturation, where banks must now compete in
pricing the services, rather than simply providing more convenience via more available
machines
1
.
The growth coincides with a debate on the validity of surcharges. Some banks are
banding together to eliminate some of these charges, while some state legislatures and city
municipalities are attempting to restrict their use. Still others are looking to ban them altogether.
The federal courts have stepped in to temporarily bar municipalities from making such rulings.
Consumer groups are challenging the various fees as exploitative, while small banks criticize the
larger banks for using these fees as strategic tools. Customers, accustomed to having free access
to bank tellers, are protesting having to pay for access to their accounts. Some academics
suggest the fees are simply a charge for a service: the convenience of having access to money
anytime and anywhere.
In light of the current debate on the validity of ATM surcharging, this paper will study
the level of bank surcharges, controlling for factors of pricing, bank size, and demand. This will

1
While this may simply be an indication of high prices, this paper did not use cost-side data in its analysis.
3
test the hypothesis that banks choose whether or not to levee a surcharge based on their size and
demand levels, while the level of the fee is affected by the pricing of other bank services. This is
an attempt to further understand how banks determine the price of surcharges, which serves as a
contribution to the developing model of the banking firm. The paper will also look to confirm
previous studies on the effect of bank size on ATM fees using a more current and comprehensive
data set. These issues will be addressed through analysis of a unique data set, which will be fully
described below.
There are a number of interesting results drawn from the data set. The number of ATMs
has a significant positive influence over surcharges, confirming previous studies. However, in
contrast to previous work, the impact of assets was shown to be significantly negative over
surcharging. There is also a noted negative effect on surcharges by the number of transactions
per ATM. Of further importance, the pricing factors were deemed insignificant, but
inconclusive. These results combine to discount the idea that banks are using ATM surcharges
simply to exploit market power.
The rest of the paper is organized as follows: The following section gives important
background information on how an ATM transaction is set up. Section III provides the recent
history of surcharges and includes both sides of the debate over whether they are necessary.
Section IV will review relevant previous research on the topic. The next section will discuss the
formation of the data set, followed by a discussion of the methodology for the rest of the study.
Section VII gives results, followed by conclusions that have been drawn. The final section gives
suggestions for areas that need further research.
II. Background
4
It is important, first, to distinguish between the different types of ATM transactions. An
on-us transaction, as defined by the cardholders bank, is a transaction that occurs at the same
bank as the account it is drawn on. There may be a monthly charge for this service, but it is
almost always free on a per-transaction basis. The lack of a fee can be combined with
convenience as an incentive to switch banks, if there are enough ATMs available. It has been
shown that there are cost savings for using an ATM over a teller, to the degree that some banks
now charge account holders per teller transaction performed. A second type is called a foreign
transaction. In this case, the machine used does not belong to the same bank as the account
being drawn on. Occasionally a bank will grant a number of free foreign transactions per month,
in association with a minimum balance requirement on the account.
There is the potential for a number of charges to be levied in a foreign ATM transaction,
where a number of parties are responsible for paying and collecting the different fees. There can
be up to four parties involved in an ATM transaction: the cardholder, the ATM owner, the ATM
network, and the cardholders financial institution. The network is generally run as a joint
venture owned by a group of bank members. Typically, the cardholder will pay a surcharge fee
to the owner of the ATM. This fee is imposed on ATM users who are deposit account holders at
another bank, and the fee is generally waived when the cardholders bank is the ATM owner.
The cardholder may also have to pay a foreign fee to his/her bank, a fee imposed on ATM users
for using the machine of another financial institution. This fee is not applied when using your
institutions machine. The sum of these two fees may be enough to discourage consumers from
using a particular ATM, and for them to go out of their way to find a machine from their own
institution.
5
In addition, the cardholders bank must pay an interchange fee to the ATM owner and a
switching fee for transaction routing costs to the owner of the ATM network, over which all
foreign transactions must be routed. The interchange fee, ranging from $0.30 to $0.60, is set
constant for all member banks by the network, regardless of size or market power, to be paid
whenever a customer uses another institutions ATM. The switching fee is typically in the range
of $0.02-$0.15 per transaction.
2
An example of this transaction is pictured in Chart B. There are
also fixed and variable costs associated with installation and upkeep of the machine. Surcharges
have typically been thought to cover these deployment and maintenance costs, which are not
fully covered by the interchange fees. While the level of these costs is currently being debated,
the arguments are outside the scope of this study.
III. Surcharge History
The two major national ATM networks
3
had banned surcharging prior to 1996. For the
first time, banks were allowed to charge customers from other banks for using their ATMs.
Once the bans were lifted, surcharging grew to be an accepted practice among banks, as about
half of them currently levy surcharge fees. ATM owners were given greater incentives to install
machines in more convenient, but higher cost, locations. The change in the law prompted new
approaches to the pricing of bank services and other ATM-related prices.
In response, many states and municipalities have instituted or are considering imposing
their own bans on surcharges, and advocates are strong on both sides of the debate. Critics of
ATM fees charge that large banks are simply being greedy, and finding ways to double-charge

2
See McAndrews (1998) for more detail on this point.
3
The CIRRUS Network and The PLUS Network
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consumers, with the combination of a surcharge and a foreign fee. Customers had grown
accustomed to having account maintenance and activities fees being waived with minimum
balance requirements, fostering the belief that these services are inexpensive to provide. Besides
harming consumers directly, critics argue that surcharging improves the competitive position of
large banks, due to their advantage in creating larger ATM networks.
Supporters of the fees base their argument on the right of private businesses to recover
the costs of their services. Banks are now able to place ATMs in high traffic areas, where
surcharges allow the banks to recoup the high cost of machine placement, such as in casinos,
convenience stores, etc.
4
This also holds for low traffic areas, where it is difficult to cover the
fixed costs of implementation without levying a surcharge. Consumers must therefore pay for
the convenience of being able to access their money anywhere and anytime, and even from other
institutions whenever necessary. This is viewed as similar to other sectors of the economy, such
as more expensive soda in vending machines or more expensive overnight shipping, where
convenience is priced into the transaction. It provides a better match between consumer demand
for access to cash in remote places and the banks supply of ATM locations. Additionally, large
banks argue that without surcharges, their own customers are subsidizing the use of ATMs by
non-customers.
5
The short-term effects of imposing surcharges have been well documented, while long-
term effects remain to be seen.
IV. Previous Research

4
High traffic areas (away from bank branches) are associated with higher rent payments.
7
The existing literature on ATM fees is relatively limited. McAndrews (1998) published
the first important ATM analysis, providing a simple overview of the market, and describing the
different types of fees present in a transaction. He proposed that surcharges have changed the
nature of competition, reducing customers sensitivity to deposit interest rates in favor of ATM
fees and locations. The papers primary focus was outlining the pros and cons of surcharge fees.
Litan (1999) followed this up by reviewing the latest arguments in the surcharge banning debate.
The paper concluded that banning surcharges interferes with the market of providing
convenience to individuals who are customers of other banks, leading to less convenience and/or
higher fees in the long run. These would be generally undesirable, albeit unintended,
consequences.
Theoretical models have been developed to account for the supply and demand for ATM
services, leading to theories on how surcharge fees are set. Bernhardt and Massoud (2000)
developed a model to endogenize customer choice of bank and ATM usage and the pricing of
services by banks themselves. The model concludes that banks will set low foreign ATM fees,
recouping revenues through higher account fees. Their study also supports the claim that larger
banks will have higher account and ATM fees than those of their smaller counterparts.
McAndrews (2001) followed with his own model, which focused on direct and indirect
demand. Direct demand is determined by the number of depositors who do not yet own accounts
with a bank, the fees that the bank charges, and the distance required to travel to avoid those
fees. Indirect demand consists of newcomers to the market, who make their decisions based on
the expected cost of accessing deposits through ATMs. His model also supports the idea of
smaller banks charging lower fees, theorizing that banks with fewer ATMs are likely to charge

5
This will be true if the interchange fee does not completely cover ATM costs. Please see Litan (1999) for further
detail on these points.
8
smaller foreign fees to provide depositors with lower expected access costs, for the purpose of
remaining competitive with larger banks. He also contends that surcharges are increasing in a
banks ATM market share, the number of depositors, travel costs, and greater immigration, and
declining in machine density.
On the empirical side, Stavins (2000) analyzed the differences in ATM fees between
banks of different sizes. She established cost and demand functions for ATMs, surmising that
owners will set surcharge and foreign fees based on these. She ran regressions with the surcharge
and foreign fees as the dependent variables and different combinations of assets, ATMs, ATMs
per branch, and labor wages as the independent variables. Banks with larger ATM networks face
higher demand than small banks, allowing them to charge higher fees while maintaining revenue
streams. A higher number of machines equates with more transactions, but higher costs, and this
is what the bank must keep balanced. After controlling for factors relating to convenience and
service, Stavins confirmed that larger banks still charged higher fees than their smaller
competitors. Stavins results were found with 1997 data. This study will attempt to replicate
Stavins results with newer and more comprehensive data.
Hannan (2001) studied the presence and level of fees applied to checking and savings
accounts over time. The study looked at how different fees within the same account related to
each other, particularly with minimum balance requirements, viewing each account as a package
of fee options. He noted that a higher proportion of banks began surcharging over time, while
confirming that large banks charged higher fees and multi-state banks charged higher fees than
their single-state counterparts. In a follow-up study, Hannan, Kiser, Prager, and McAndrews
(2001) looked at how different factors combine to determine the likelihood of surcharging. The
institutional, market, and political characteristics they accounted for included: ATM market
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share, time (since 1996), and local ATM density. Local demographic factors were also included.
This study focused on whether or not a charge would be levied, without addressing the level of
the surcharge fee.
This study will contribute to the existing literature in a number of ways. Firstly, it will
attempt to account both for factors leading to a choice of surcharging or not, as well as what
level the fee should be set at. Previous papers have not accounted for each step. I will be
employing the Heckman two-step sample selection model to account for both decisions. This
serves as a preferred statistical technique with less vulnerability to bias. If the same factors
account for each step of the decision, this method will be able to distinguish between the two.
The data set will also be more comprehensive than others previously used, including more recent
years, and some variables that have yet to be included in previous work. This should all lead to
stronger conclusions that may confirm or discount previous theories.
V. Data Set
The data used in this study was taken from two sources: the Faulkner & Gray Card
Industry Directory and the Federal Financial Institutions Examination Councils (FFIEC)
Reports of Condition and Income (Call Report). It encompasses data for banks and other ATM
card issuers from 1994 through 2001. The Card Industry Directory provides annual information
on fee levels, monthly transactions, cards issued, and number of ATMs for the 300 largest card
issuers.
6

6
The Card Industry Directory includes data for thrift banks and credit unions, which have been excluded from this
analysis.
10
The FFIEC is empowered to prescribe uniform principles, standards and report forms for
the federal examination of financial institutions. Similar to the SEC filings, it provides detailed
public regulatory financial information for all FDIC-insured institutions. Each bank is required
to file a Call Report. It provides data on assets, fee income, and deposits, and total number of
accounts. The two data sets were merged to give concise data for the set of banks in the sample.
A number of variables used in this study were derived from the existing data. The
imputed savings interest rate was found through dividing the savings interest paid by the amount
of savings deposits. This is the average interest rate for all savings accounts in the bank. The
same holds true for the money market interest rate. Total transactions per card was derived from
the total transactions variable and the number of cards issued variable, while the same holds true
for transactions per ATM. Finally, fee income per dollar of deposit was calculated by dividing
the amount of fee income by the value of the banks demand deposits. Due to the nature of the
data, it was impossible to determine fee income solely from ATM fees. Banks were then divided
by assets into three roughly even size categories. Small banks were classified as less than $2.5
billion in assets, medium size banks ranged from $2.5 to $10 billion in assets, and large banks
were all greater than $10 billion. The variables used in the study are defined in table C. The
data comprises 1300 observations of banks over the last seven years.
There were very few surprises in a preliminary overview of the data. Large banks were
more likely to impose a surcharge than small banks, and those surcharges were set higher.
Thirty-seven percent of small banks imposed surcharges, with an average rate of $1.16, with
sixty-three percent of large banks charging at an average rate of $1.35. The surcharge fees
ranged from $0.25 to $3.25, with an average of $1.26.
7
See Chart D for a distribution of these
values. Similar results occur with the foreign fee. This is consistent with theory, as smaller
11
banks are expected to have lower foreign fees to compensate depositors for surcharges paid in
using another banks machines. This serves to equalize their expected cost of access to their
deposits. Foreign fees average $1.23, while ranging from $0.30 to $3.00. Seventy-nine percent
of the banks surveyed charged foreign fees, while the number of banks levying surcharges was
fifty percent. The number of banks with surcharges jumped from 1997 to 1999, before leveling
off at its current rate. These results are all consistent with previous research. As noted earlier,
each of the noted statistics have all been increasing since 1997.
A large disparity exists between banks of different sizes for the number of ATMs, as
well. Small banks average 58 machines, and medium size banks average 118, but big banks on
average deploy 855 ATMs. The number of ATMs also rose consistently in each year of the
sample, from an average of 157 in 1994 to 393 in 2001. In what could be a testament to their
market power or superior quality, larger banks also have lower savings rates than their smaller
counterparts, and earn more money per deposit. These statistics confirm previous studies.
However, the most interesting result is that transactions per ATM remained constant for each
bank size. Both large and small banks each averaged just over five thousand transactions per
month per machine. More ATMs do not lead to more transactions per machine, or to fewer.
This seems to be a result of constant demand, and perhaps there are just enough machines in the
market to satisfy that demand.
8
This could also be an effect of the amount of business required
per machine to cover the associated costs. These results are summarized in Table E.
VI. Model Estimation

7
The distribution of surcharge fees is fairly discrete, where the most common fees are $1 and $1.50.
12
This study will begin with the Stavins model as a baseline, and continue to expand from
that point. The dependent variable will continue to be the surcharge level. Assets will start as
the only independent variable regressed upon, to determine the strength of a banks size in
determining the surcharge rate. Next, ATMs will be added to the equation to see if it is a better
representation of bank size. The asset and ATM distribution in the data set was quite skewed; so
natural logs will be employed and added into the regressions in different combinations for
robustness. The regression will then be run distinguishing by the three bank size categories
delineated above to see if results hold true for each size, or if they are particular to one category
of bank. In the next step, the regression will be shown distinguished by year, to see if the 1997
results were an anomaly, or if they hold true throughout the last seven years.
Further variables will be added to determine their impact on surcharge fees, as well as to
test the continued significance of assets as a factor. While assets and ATMs measure the size of
the bank and its network, this study will incorporate demand effects and pricing effects into the
model. The number of transactions per ATM and the number of transactions per card are
expected to impact the surcharge level. If cards or machines are being used more often, there
may be scale effects that reduce the cost per transaction, and therefore banks will not have to
charge as much to cover the costs of providing the service. On the other hand, high demand
coupled with a limited amount of machines may also induce the bank to raise its rates.
On the pricing section of the equation, the imputed savings rate and imputed money
market rate will be added to the regression. If banks were balancing out the pricing of their
services to keep profits steady, we would expect higher surcharges to be associated with a higher
return on investment to consumers. Likewise, a lower return on investment would lead to lower

8
While customers are able to receive cash back in stores through the use of debit cards and to pay a fee for using a
bank teller, ATMs appear to be the primary source of accessing cash in the marketplace.
13
surcharges in order to attract customers. However, if larger banks have enough market power,
we would expect to see the inverse relationship. A bank with better service quality, or with a
large enough network compared to its competitors, would be able to couple a lower return on
investments with higher ATM fees. The amount of money earned in fee income per dollar of
deposit will also be added to the study. This statistic is important to the regression because it can
give a measure of how important surcharges are to the amount of fee income a bank earns. A
high, positive correlation implies that the bank earns a significant amount of its fee income from
ATM fees versus other bank fees. The end-result regression equation will look like this:
i i i i
i i i i
TransCard TransATM FeeInc MM
Save ATM assets e surch
7 6 5 4
3 2 1 0
arg
b b b b
b b b b
+ + + +
+ + + =
Finally, the two-step Heckman sample selection model will be employed to add more in-
depth analysis to the model. Previous models may suffer from selectivity bias, wherein the
factors that determine whether an effect is happening will also be affecting the degree to which it
is happening. More formally, Selectivity concerns the presence of some characteristic of the
treatment group that is both associated with receipt of the treatment and associated with the
outcome so as to lead to a false attribution of causality regarding treatment and outcomes.
9
In
this case, the treatment is the surcharging decision, and the outcome is the level charged. Boiled
down, the model first runs a probit of the decision to implement a surcharge, followed by an
ordinary least squares regression using the results from the probit. The model attempts to
account for correlation between the error terms from the probit model and from the OLS

9
B. Barnow, G. Cain, and A. Goldberger, Issues in the Analysis of Selectivity Bias, Evaluation Studies Review
Annual, 5, 1976, 43-59.
14
regression by incorporating the error from the probit model into the second step. The equations
look as follows:
l e b
e g
+ + =
> + Z =
2 1 2
1 1 1
*
* *
X y
y y
The lambda term works to counteract the effects of the error term from the first
regression. This study theorizes that banks employ different criteria when deciding whether or
not to have a surcharge versus when they set the level of the rate. The demand and size factors
are considered to be most important in the surcharging decision (the Z term), while the level of
surcharge is expected to vary with all three factors (the X term). We expect the pricing of other
services to become a factor only after the decision to surcharge has been made. For instance, the
savings rate is unlikely to affect the surcharging decision, but it is likely to impact the level of
the fee when banks put together packages of pricing options on different accounts. Also,
demand should be a better indicator to the banks of whether a surcharge is a viable option, rather
than impacting the size of the fee. The Heckman model gives a reliable method for measuring
both aspects of the decision within the same regression.
VII. Results
Table F shows the results from the first set of regressions related to Stavins model.
Beginning with a test of assets as the lone independent variable, we see that it has a positive
impact on the surcharge rate, and is significant at the one-percent level. With no other variables
included, a 10 billion dollar change in assets is associated with a $0.052 change in the surcharge
15
level. Adding ATMs to the regression significantly changes the effect of assets. While ATMs
prove significant at the one percent level, assets drop beyond the ten percent significance barrier.
The coefficient is also about one-fourth of its original size. An increase of 100 ATMs to a
banks network results in a $0.20 increase in the surcharge. Different combinations of the log of
assets and ATMs were then replaced in the combination to strengthen the results.
The strongest fit appeared when both the logs of assets and ATMs were used as the
independent variables. This is due to the skewed nature of the distribution for each of these data
sets. The effect of ATMs is still significant at the one-percent level. Doubling the number of
ATMs results in a $0.25 change in the surcharge level. Assets continue to be insignificant, even
at the ten-percent level. Interestingly, the coefficient is negative in this case, showing that
doubling of assets results in the surcharge decreasing by $0.04. However, since this result is not
significant, it is of little concern. The fact that assets are not significant in these results does not
mean that they are insignificant to the banks decision making process. Further study will look
to find in which area the size of the bank becomes vital. Because the regression using natural
logs of assets and ATMs proved the strongest, those are the statistics that will be used through
the rest of the study.
The next step is to see if Stavins 1997 results were an anomaly, or if they tend to hold
over the last few years. The regression results were separated out by year, as is shown in Table
G. Assets maintained their significance in 1997, 1998, and 2000, but were insignificant in 1999
and 2001. However, while assets continued to be significant in 1997 at the one-percent level, the
sign on the coefficient is negative, as opposed to previous positive results. Doubling assets is
now associated with a $0.14 decrease in the surcharge. This negative coefficient also holds for
1998, but becomes positive at a less significant level in 2000. In contrast, the coefficient on
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ATMs is significant at the one-percent level in four of the five years, and is positive throughout.
The coefficients for each year average the same as the coefficient in the original regression, a
$0.25 increase resulting from a doubling of the number of machines.
Another method to test for asset significance is whether these effects vary by bank size
category. Having divided our data set into small, medium, and large banks, the regressions were
re-run by size. Again, the emerging pattern seems to be holding. ATMs are a significant factor
at the one-percent level for each bank size, with the magnitude slightly larger for medium-sized
banks. As for assets, they are only significant for medium-sized banks at the five-percent level.
Again, the coefficient on this is negative, continuing the trend from the previous regressions.
Doubling asset size results in a $0.26 decrease in surcharge level. Results are shown in Table H.
Other variables were added to the regression to account for more of the difference in
surcharges among banks. While assets and ATMs were a measure of bank size, pricing and
demand factors were added for robustness. Table I displays results. The first column is for all
banks in the data, while the final three columns represent the same regression broken down by
bank size category. ATMs continue to be a significant contributor at the one-percent level to the
surcharge rate. In the first case, the surcharge increases $0.25 with a doubling of the number of
machines. This is of greater magnitude for smaller banks, while slightly smaller for the medium
and large-sized banks. Assets were only significant at the one-percent level for the small-sized
banks, again with a negative coefficient, but at a smaller magnitude. Doubling assets only
resulted in a $0.005 decrease to the surcharge.
Of the other data added to the regression, the fee income per dollar of deposit and the
transactions per ATM were most notable. For all banks, fee income per dollar of deposit was
significant at the one-percent level, as was transactions per ATM. One thousand more
17
transactions per machine equated to a drop of $0.02 in the surcharge. An extra ten cents in fee
income per dollar deposited resulted in an increase of $0.37 in the surcharge. This value was
nearly three times larger for the large-sized banks. As for transactions per ATM, they remained
significant at the one-percent level for small- and large-sized banks, with a magnitude twice as
large for smaller banks, and three and a half times as large for medium-sized banks.
These results all point to assets being a rather insignificant factor in determining surcharges,
refuting Stavins previous conclusions. However, there are two issues being confused here.
Banks have two choices to make: whether to impose an ATM surcharge, and if so, at what level
to set it at. Running the data as above combines the choices into one. The following Heckman
regression is an attempt to separate those decisions to see which factors are important in which
decision, if at all.
The first step of the Heckman model is to run a probit on whether or not the bank decides
to levee a surcharge, using the size and demand factors as the independent variables. The
number of transactions per ATM, Assets, and the number of ATMs all proved significant at the
one-percent level. The number of transactions per card was not a significant factor. The
marginal effects were calculated for ease of interpretation. A change of 1000 transactions per
machine is associated with a 2% less likelihood of imposing a surcharge. However, increasing
the number of ATMs in a network by one increases the likelihood of surcharging by 15%.
Surprisingly, an increase in assets is also associated with a decreasing likelihood of imposing a
surcharge. Doubling assets leads to a 5% decreased likelihood of surcharging.
10
Once the data set has been reduced to the banks that do have a surcharge, an ordinary
least squares regression is run using the size, demand, and pricing factors as independent
variables to determine the level of the surcharge. Results are displayed in Table J. The pricing
18
factors of the savings and money market rates both come out insignificant, while the amount of
fee income earned per dollar deposited proved significant at the one-percent level. Both size
variables proved significant: ATMs at the one-percent level and assets at the ten-percent level.
Finally, transactions per ATM proved significant at the five-percent level, while transactions per
card was significant at the ten-percent level. Increasing the amount of fee income per dollar of
deposit by ten cents was associated with an $0.18 increase in the surcharge level. Doubling the
number of ATMs increased the surcharge by $0.26, and an increase of one transaction per card
increased the surcharge by $0.02. On the negative side, a doubling of assets led to a $0.05
decrease in the surcharge, and one thousand more transactions per terminal decreases the
surcharge by $0.02.
VIII. Conclusion
There are a number of interesting results to be drawn from this data. Least surprising is
the effect of ATMs on surcharging. The number of terminals owned by a bank maintains a
significant positive influence over the presence and level of the surcharge through the study. As
bank networks grow larger, and therefore the convenience to consumers is increased, banks are
more likely to charge a higher surcharge. This may be an effort to induce customers to join the
bank by exercising market power, a charge for quality improvements in bank service, or an
attempt to recover costs from putting more machines in more remote, high-cost locations. While
it is most likely that it is a combination of all three, the results discussed below tend to discount
the market power factor.

10
This could be due to lower costs incurred by larger banks.
19
The impact of assets is less easy to deduce. While it has had a positive effect on the
surcharge level in previous studies and the summary statistics point to the fact that bigger banks
are more likely to charge a higher fee, the results of this study point to a significant negative
effect. There are a number of reasons that this may hold true. Bigger banks could be providing
free ATMs as a service, where the costs are recovered through less lenient accounts, with larger
minimum balances and other fees unaccounted for in this study. Having no surcharge could also
be seen as a means of drawing customers from other banks. These customers see free ATMs,
and may expect similar deals on the rest of the banks services. Another idea is that smaller
banks cannot afford to subsidize the costs of ATM deployment, as they may not have the assets
to fully support the terminals. This contrasts with larger banks that have the assets to cover the
implementation and upkeep costs of the machines. Finally, a drop in assets can lead to increased
surcharging as an effective means of maintaining revenue.
The demand variables also provide conflicting evidence. Transactions per ATM proved
more significant than transactions per card, which is expected, as the actual use of machines by
all customers should have more of an effect than how often a banks own customer uses his or
her card. The negative coefficient on transactions per ATM helps to discount the market power
argument. More transactions per machine are associated with a lower fee, implying that the fee is
set to cover the costs and then adjusted according to demand.
11
Conversely, machines that are
used less often require a higher fee to maintain cost effectiveness.
The number of transactions per card proves more troublesome. A higher fee is associated
with an increase in the number of transactions per card. However, this has no effect on the
likelihood of imposing a surcharge. This could be an effect of regional differences, where high
card-use is typical of an area with high demand for ATM services, and therefore a higher
20
surcharge. The bank may be assuming that higher card use by its own customers coincides with
higher card use by non-customers, leading to an attempt to profit from higher surcharges.
Conversely, if a bank is seeing fewer transactions per card, there may not be enough use of the
ATMs to justify charging a lot for the service. A higher surcharge may dissuade customers with
lower demand from using the machines at all.
Of further importance is the insignificance of two of the pricing factors. Neither the
money market nor the savings rates were significant factors on the level of the surcharge. This
implies that banks are not using one set of prices to subsidize the discounted pricing of another
product. It also discounts the market power theory, as high surcharge fees would be associated
with lower return on investment in that case. However, there may also be problems in the data,
which give us these unexpected results. Because the rates were imputed from the data, we only
have the average savings account rate per bank. As each bank offers a variety of accounts, their
pricing and different fees may become more of a factor. Further work needs to be done to
determine how the pricing is correlated between different packages of fees in various accounts
offered by banks. If pricing on accounts is a significant factor, it should show up in further
analysis.
Finally, the fee income per dollar deposited variable proved a significant factor in
determining the surcharge level. Higher fee income per dollar deposited is associated with a
higher surcharge. This is the only other result that supports the theory that large banks use high
surcharges to exploit market power. The high, positive correlation implies that banks earn a
significant proportion of their fee income from the surcharge fee. The use of the fee as a
moneymaking tool disputes accounts that the ATM surcharge is a means to cover the costs of
installation and operation. There may also be a connection between the higher surcharge and

11
Higher fees may also lead to fewer transactions.
21
higher fees for other bank services. However, because there is no breakdown of fee income by
various fees charged, this is all conjecture.
This study has served as the next step in contributing to the developing model of a
banking firm. Higher surcharge rates have been equated with more ATMs and more
convenience, and it appears less likely that banks are simply using these charges as a means of
exercising market power. The costs of running banks have always been incorporated into the
rates consumers receive on their deposits, or through other fees. The use of surcharges simply
puts another tool at the banks disposal.
VIII. Further Study
There are a number of issues to be explored beyond this study. Firstly, more must be
done to understand whether ATM surcharges are used to cover costs or as a revenue tool. One
way to do this would be with a stronger data set, where fee income is broken down by its
sources. Banks have shied away from disclosing this data in light of accusations that they are
overcharging consumers for access to their funds. A stronger data set would also include all the
factors from previous studies combined into one. Measuring the amount of competition in
metropolitan areas, and its effect on pricing would be another benefit to a strong data set. The
data should also be controlled for the effect of new no-surcharge alliances that have been
forming among some community banks. Another factor that has not been accounted for is the
effect of minimum balance requirements on the fees that bank set. There must also be some
research on the long-term effects of ATM surcharges on consumers and bank competition. All
of this will be vital to the continuing development of an integrated theory of retail banking.
22
23
References
Bernhardt, Dan and Nadia Massoud. Rip-off ATM Surcharges. University of Illinois,
November 7, 2000.
Board of Governors of the Federal Reserve System. Annual Report to the Congress on Retail
Fees and Services of Depository Institutions, July 2001.
Card Industry Directory. Faulkner & Gray, various years.
Hannan, Timothy H. Retail Fees of Depository Institutions, 1994-1999. Federal Reserve
Bulletin, January 2001.
Hannan, Timothy H., Elizabeth K. Kiser, Robin A. Prager, and James J. McAndrews. To
Surcharge or Not to Surcharge: An Empirical Investigation of ATM Pricing. Federal
Reserve Bank of New York, May 24, 2001
Johnston, Jack, John Dinardo, and John Johnston. Econometric Methods. McGraw Hill College
Division, October 1996.
Litan, Robert E. ATM Fees: An Economic Analysis. Brookings Institution, November 1999.
McAndrews, James J. A Model of ATM Pricing: Foreign Fees and Surcharges. Federal Reserve
Bank of New York, June 2001.
McAndrews, James J. ATM Surcharges. Current Issues in Economics and Finance. April
1998.
Prager, Robin A. The Effects of ATM Surcharges on Small Banking Organizations. Review
of Industrial Organization, 2001
Saloner, Garth, and Andrea Shepard. Adoption of Technologies with Network Effects: An
Empirical Examination of the Adoption of Automated Teller Machines. The RAND
Journal of Economics, Autumn 1995
Stavins, Joanna. ATM Fees: Does Bank Size Matter? New England Economic Review,
January/February 2000.
http://www.ffiec.gov
24
Appendices
Chart A - ATMs per Bank
0
50
100
150
200
250
300
350
400
450
1994 1995 1996 1997 1998 1999 2000 2001
Year
A
v
e
r
a
g
e
0
2000
4000
6000
8000
10000
12000
14000
16000
M
a
x
i
m
u
m
Average ATMs per Bank Maximum ATMs per Bank
25
Figure B
Pricing a Foreign ATM Transaction: Post-1996
ATM Cardholder
ATM Owner Cardholders Bank
ATM Network
Interchange fee ($0.50)
S
w
i
t
c
h

f
e
e

(
$
0
.
1
0
)
F
o
r
e
i
g
n

f
e
e

(
$
1
.
0
0
)
S
u
r
c
h
a
r
g
e

(
$
1
.
0
0
)
26
Chart C - Variable Definitions
Surcharge Surcharge Level
Assets Bank's Assets
ATM Number of ATMs in the Bank's Network
Save Average Savings Account Rate per Bank
MM Average Money Market Rate per Bank
FeeInc Fee Income per Dollar Deposited
TransATM Transactions per ATM
TransCard Transactions per Card
Foreign Foreign Fee Level
SurchargeDum Dummy Variable Equal to 1 if Bank Charges
Surcharge
ForeignDum Dummy Variable Equal to 1 if Bank Charges
Foreign Fee
logAssets Natural Log of Bank's Assets
logATM Natural Log of Bank's ATM Network
27
Chart D - Surcharge Frequency
0
50
100
150
200
250
300
0.15 0.25 0.35 0.5 0.75 0.85 1 1.25 1.35 1.48 1.5 1.75 2 2.2 2.5 2.75 3
Surcharges
Frequency
28
Table E - Summary
Statistics
Variable Mean Std. Dev. Minimum Maximum
Surcharge 0.55 0.73 0 5
Foreign Fee 0.87 0.62 0 3.75
Assets (000's) 16900000 35000000 3037 371000000
ATMs 250 838 0 14000
Savings Rate 0.02 0.001 0 0.19
Money Market Rate 0.03 0.001 0 0.07
Fee Income per Dollar of
Deposit
0.03 0.02 0 0.33
Transactions per ATM 7731 10905 0 256137
Transactions per Card 3.19 2.45 0 59
Percent with a Surcharge 0.41 0.49 0 1
Percent with a Foreign Fee 0.76 0.43 0 1
29
Table F - OLS Results
Regression
Variable (1) (2) (3) (4) (5)
Assets (000's) 5.24E-9*** 1.44E-09 -1.95E-10
(7.58) (1.28) (-0.024)
ATMs 0.000205*** 0.0001621***
(4.22) (4.47)
logAssets 0.0968*** -0.0428
(4.27) (-1.64)
logATMs 0.2292*** 0.2568***
(10.85) (10.24)
R^2 0.0717 0.0916 0.1141 0.2007 0.2036
F 57.53 37.94 47.06 91.66 93.3
N 747 734 734 733 733
t-statistics in parentheses
* statistically significant at the 10 percent
level
** statistically significant at the 5 percent
level
*** statistically significant a the 1 percent
level
30
Table G - Results by Year
Year
Variable 1997 1998 1999 2000 2001
logAssets -0.1468*** -0.112** -0.0506 0.1082* 0.0025
(-3.14) (-2.40) (-0.89) (1.83) (0.03)
logATMs 0.2761*** 0.2947*** 0.3472*** 0.1262** 0.2376***
(6.21) (6.53) (6.13) (2.17) (3.36)
R^2 0.212 0.2474 0.3311 0.1835 0.2011
F 21.93 26.63 32.92 16.07 14.72
N 166 165 136 146 120
t-statistics in parentheses
* statistically significant at the 10 percent
level
** statistically significant at the 5 percent
level
*** statistically significant a the 1 percent
level
31
Table H - Results by Bank
Size
Bank Size
Variable Small Medium Large
logAssets 0.0571 -0.2611** 0.00138
(0.98) (-2.16) (0.02)
logATMs 0.2611*** 0.3083*** 0.2628***
(5.64) (5.79) (5.99)
R^2 0.128 0.1168 0.1843
F 15.94 16.92 28.35
N 220 259 254
t-statistics in parentheses
* statistically significant at the 10 percent
level
** statistically significant at the 5 percent
level
*** statistically significant a the 1 percent
level
32
Table I - Additional
Variables
Bank Size
Variable All Small Medium Large
logAssets -0.0608* -0.0051*** -0.2046 0.0286
(-1.94) (-0.06) (-1.45) (0.33)
logATM 0.2574*** 0.3395*** 0.2231*** 0.2093***
(8.40) (5.82) (3.40) (3.81)
Save -6.21 -8.54 -8.535 0.1294
(-1.50) (-1.19) (-1.28) (0.02)
MM -8.46** -4.94 -5.785 -13.67
(-2.14) (-0.82) (-0.92) (-1.61)
FeeInc 3.78*** -1.66 3.064* 9.319***
(3.04) (-0.49) (1.95) (3.15)
TransCard 0.0216* 0.0888** 0.0656 0.0159
(1.84) (2.35) (1.48) (0.98)
TransATM -0.00002*** -0.00004*** -0.00007*** -0.00002
(-2.73) (-2.66) (-2.60) (-0.80)
R^2 0.2876 0.2961 0.1551 0.2768
F 29.35 7.69 4.59 10.39
N 517 136 183 198
t-statistics in parentheses
* statistically significant at the 10 percent
level
** statistically significant at the 5 percent
level
*** statistically significant a the 1 percent
level
33
Table J - Heckman Method
Results
Variables Probit OLS Marginal
Effects
logAssets -0.209*** -0.3051* -0.057**
(-3.48) (-1.72) (-2.37)
logATM 0.476*** 0.261*** 0.151***
(8.09) (8.93) -6.6
TransCard 0.030 0.019* 0.031*
(1.35) (1.90) -1.68
TransATM -0.00002*** -0.000022** -0.00002***
(-2.86) (-2.44) (-2.88)
Save -1.313
(-0.50)
MM -1.654
(-0.67)
FeeInc 1.822***
(3.08)
N 517 351
Log Likelihood -447.849
Chi2 190.54
z-statistics in parentheses
* statistically significant at the 10 percent
level
** statistically significant at the 5 percent
level
*** statistically significant a the 1 percent
level