ATM Fees, Pricing and Consumer Behaviour: An Analysis of ATM Network Reform in Australia

Automated teller machine (ATM) networks are a key component of payments systems. A number of competing theoretical models have been developed to examine fees associated with ATM transactions. A common feature of these models is that they imply that the elimination of interchange fees will cause a <i>one-for-one</i> increase in direct fees and a <i>one-for-one</i> fall in foreign fees, leaving the price of foreign ATM transactions unchanged in the short run. This prediction is not entirely consistent with recent experience in Australia. Following reform of the Australian ATM network in March 2009 that eliminated interchange fees, the total price of foreign ATM transactions was unchanged but the adjustment in foreign and direct fees was almost twice as large as the eliminated interchange fee. This paper addresses this discrepancy by developing a model of ATM fees that can explain this feature of the Australian experience and also explicitly models various ATM usage costs often ignored in the literature. However, this approach to modelling ATM fees, and the approach taken in the existing literature, cannot explain a striking feature of the Australian experience – the shift in consumer behaviour away from foreign ATM use – and two potential explanations for the observed behaviour are proposed.