The role of interchange fees in ATM networks
We develop a model to study the deployment of shared automated teller machines (ATMs) by banks when an interchange system compensates them for processing foreign withdrawals. The interchange fee is chosen collectively by banks and it is paid by the withdrawer's bank to the ATM-owning bank. We show that a high level of interchange fee softens competition on the market for deposits but increases competition on the market for withdrawals. As the former effect dominates the latter, profits are increasing in the interchange fee. This confirms the presumption that the interchange system can be used as a collusive device by banks. The model predicts an over-provision of ATMs when the number of banks is large. The predictions of the model are shown to be valid under a wide range of assumptions including different cost structures and different pricing schemes of ATM transactions. They are also consistent with the empirical evidence concerning interchange fees and foreign fees.
|Date of creation:||26 Nov 2003|
|Note:||Type of Document - pdf; prepared on WinXP; pages: 30; figures: Yes|
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