Naive consumers, banking competition, and ATM pricing

This paper studies the performance of a direct charging regime in the ATM market in the presence of uninformed consumers who fail to recognize all relevant fees when selecting a bank. We show that the success of a direct charging regime critically depends on consumer information: the equilibrium surcharge fee is increasing in the number of uninformed consumers. If consumers are poorly informed, banking competition is weakened and prices for banking services are high. We discuss various regulatory interventions to improve market performance. We show that regulating the surcharge fee is an effective policy while intensifying competition (entry of additional banks or of independent service operators) fails to improve the outcome.