How ATMs make money

How do ATMs make money? Jane Baker finds out.

In towns and cities up and down the country, you won’t have to venture far to find a cash machine. They’re just about everywhere and very convenient they are too. Imagine what a nightmare it would be if you had no choice but to visit a bank branch and queue every time you needed some ready money.   

Cash machines certainly play a very useful role in modern life, but the trouble is they’re not always free, especially if you’re somewhere slightly off the beaten track. Automated Teller Machines (ATMs) in out of the way locations, or at small shops, will likely charge you a fee for withdrawing cash, and this fee can run as high as £3. 

This probably seems extortionate, especially if you’re only taking out a relatively small quantity of cash. But then again, I bet you've never stopped to think about the service that machine is providing you with - and how much it might be costing your bank.

Why do some cash machines charge?

Where cash machines are free to use, the card issuer will be charged a fee by the ATM operator to cover the running costs.

Smaller banks and building societies can take part by joining the LINK scheme which allows their customers to draw cash from larger banks’ cash machines. Again the costs are covered by charges banks have to pay to each other known as an intercharge fee.

But that still doesn’t explain why some machines charge us to withdraw money, while others don’t.

It’s all do with location, location, location, or, more specifically, how busy a particular location is. If an ATM is installed in an area where the amount of withdrawal transactions carried out is generally pretty low - such as in a rural village - the running costs can’t be met by the charges paid by the card issuers alone.

According to research by Associated Newspapers, running cash machines is actually a lot more expensive than you might imagine. There are significant expenses to be met - namely, the installation of the machine, and ensuring it’s securely topped up with notes on a regular basis.

If there isn't enough business to meet the cost with fees paid by the card provider, cardholders will be charged too.

Avoiding cash machines fees

Don’t forget, no matter where you’re using a cash machine in the UK, you’ll always get an upfront warning if a fee is going to be applied to your withdrawal, giving you an opportunity to cancel the transaction and get cash for free elsewhere.

You can avoid ATM charges completely by using your debit card to pay for items instead. You could even use your credit card and earn a little cashback on your purchases as long as you pay off your bill in full every month. Alternatively, why not get cashback from the supermarket when you’re doing your weekly food shop which will give you ready money without applying a charge? Or, make a point of planning in advance and only ever using ATMs at a bank branch which never charge users fees either.

Credit cards and cash machines

It’s absolutely fine to use your debit card in a cash machine as long as you always avoid paying a fee. But, take it from me, most credit cards and cash machines are like oil and water - they don’t mix. Otherwise, you can expect to find whacking great extra interest charges for the withdrawal on your next credit card bill.

The popular Virgin Credit Card, for example, charges an interest rate of 27.9% APR on cash advances. Worse still, each time you take cash out of a cash machine using your card, you’ll also get charged a 3% handling fee, with a minimum charge of £3.

These charges are fairly typical and are applied by most card issuers. So you can see it’s always best to steer clear of withdrawing cash from an ATM using your credit card, or the transaction will cost you far more than you might realise.

Using cash machines abroad

If you normally take a credit card with you when you travel abroad, it may be a little more difficult to avoid ATM charges as this is a convenient way to obtain local currency in many overseas destinations. But again these types of transactions often come with a whole host of hidden charges. There’s no question that most debit and credit cards are expensive to use overseas but some are more cost effective than others.

The Sainsbury’s Gold Credit Card, for example, doesn’t charge a fee for ATM withdrawals whether you’re at home or abroad. You won’t even be charged interest on the amount you take out as long as you clear your balance in full before the end of the month. That said, the card offers a range of extra benefits for travellers but all this comes with a £5 a month price tag. To find out more, take a look at A new credit card to use abroad.

Alternatively, if the monthly fee puts you off, the Halifax Clarity Credit Card is a good choice which doesn’t charge you fees anywhere in the world for cash withdrawals. Meanwhile, the Santander Zero Credit Card is another option which doesn’t slap on painful ATM charges. Check out The best and worst ways to get foreign cash to learn more.

More: Don’t let this happen to your credit card | Five ways to make money from credit cards