"Rip-off" ATM surcharges

We develop a spatial model in which we endogenize both the pricing of ATM services by banks and the choice of home bank and ATM use by consumers. The equilibrium delivers the empirical regularities: Banks set high bank account fees for their own customers but do not charge them for ATM usage; in contrast, banks charge high ATM fees for nonmember users, fees that exceed those levels that would maximize ATM revenues from nonmembers; and larger banks set higher account fees and demand higher surcharges for ATM use than smaller banks. Paradoxically, (i) a bank's ATM revenues may fall short of its costs of ATM provision, and (ii) prohibiting banks from surcharging nonmembers, by forcing banks to charge members and nonmembers the same ATM price, leads to higher ATM prices, greater bank profits, and possibly reduced consumer welfare.