What is an ATM, and how does it work?

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Maybe you need some cash. Or check your account balance. Or deposit a check. ATMs are a convenient way for people to quickly access their bank accounts, deposit money, and withdraw cash without visiting a branch. But how do ATMs work, exactly? 

Here’s everything you need to know about ATMs — including how they operate, their features, fees, and more.

What is an ATM? 

An automated teller machine (ATM) is an electronic bank terminal that allows customers to complete basic transactions without the help of a branch representative or teller. Anyone with a credit or debit card can access most ATMs to withdraw cash, check their account balance, or transfer funds between accounts linked to their card. 

ATMs look like robust computerized kiosks, typically located inside or outside banks, malls, convenience stores, restaurants, and other high-traffic areas. 

The first ATM was introduced in 1967 by Barclays in London. Initially, they only dispensed cash. Modern ATMs can accept deposits, transfer funds, and manage various other banking needs. 

There are currently around 450,000 ATMs in the U.S. today. According to National Cash Systems, an ATM service provider, the average ATM is used 300 times per month, and over 10 billion transactions are performed at ATMs in the U.S. annually. 

How do ATMs work? 

An ATM works like an advanced vending machine. It performs this by safely communicating with the bank’s computer network. 

Most ATMs have a card reader that interprets the information on your debit card or credit card’s magnetic strip or chip. This helps the ATM identify you and connect to your bank or credit card accounts. 

ATMs also have a keypad to type your PIN, a display screen, a cash dispenser, and a receipt printer. 

What services do ATMs provide?

The most common transactions available at an ATM include: 

• Cash withdrawals: Enter your PIN and amount to withdraw funds from your linked checking or savings account. There are usually limits on how much can be withdrawn per day. 
• Balance inquiries: Check your real-time account balance. 
• Deposits: Insert cash or checks into the ATM to credit your account. Some ATMs also allow you to make coin deposits. 
• Transfers: Move money between your linked checking and savings accounts at the same bank. 
• View statement: View a summary of your last 5-10 transactions to track account activity. 

How to use an ATM 

Here is an overview of what happens behind the scenes when completing common ATM transactions.

How do ATMs connect to your bank?

ATMs and bank networks communicate using telephone lines or wireless connections — much like a phone. 

The ATM coordinates with your bank’s centralized computer server, or the host processor. All transaction requests are forwarded to the host processor for verification and authorization. 

The two common network setups are: 

• Leased-line: A telephone line connected directly from the ATM to the host processor. 
• Dial-up: The ATM connects to the host processor via a phone number. 

Once connected, the ATM exchanges information on your card (like your name and account information) with the data held by the bank (like your account balance). This exchange is initiated when the account holder enters their PIN. The data is encrypted and can only be deciphered by authorized parties. 

The bank’s host processor verifies your information and checks for sufficient funds to complete the transaction. It then responds to the request, either approving or denying the transaction. Once the ATM receives the bank’s authorization, it completes the requested transaction.

Who owns and operates ATMs?

Banks own a majority of ATMs directly installed at their branches. But you’ll also find machines managed by Independent ATM Deployers. 

IADs are non-financial institutions that install ATMs at high-traffic retail locations like shopping malls and gas stations. They earn revenue from customer transaction fees and share interchange fees with banks.

ATM fees 

Most banks — especially large national brick-and-mortar banks — have a large network of fee-free ATMs. But some banks, like certain online banks, won’t offer any in-network ATMs. 

Banks charge fees to use other ATMs outside their network to generate revenue. As an independent ATM owner, the deployer also imposes an access fee on transactions.

That’s why you may see two fees when withdrawing money from an outside ATM – the ATM fee and an extra fee from your bank. Common fees include: 

• You may be charged a withdrawal fee when using an out-of-network ATM. 
• Some banks charge a balance inquiry fee to check your balance at a non-network ATM. 
• You may have to pay a foreign transaction fee, or currency conversion fee, on international withdrawals. 
• Some banks charge a deposit fee for making ATM deposits at machines they don’t own. 

ATM fees have been rising steadily. Bankrate’s 2023 checking account and ATM fee study found the average out-of-network ATM fee was $4.73.

How can I avoid ATM fees?

While you may not be able to avoid ATM fees altogether, there are ways to keep ATM fees to a minimum. Sometimes, banks will waive all out-of-network ATM fees. Others will reimburse you up to a certain amount each month. 

As an alternative to the ATM, many grocery stores and drugstores allow you to get cash back from your debit card without a fee. So, this could be a good option if you have a purchase with your debit card. 

If you must use an ATM, take out all the necessary cash — and maybe a little extra. This way, you can avoid paying multiple fees for additional transactions. ATM daily withdrawal limits vary by bank and range from a few hundred to a few thousand dollars. 

Banks publish fee schedules, so review your account terms to understand associated costs. Choosing in-network ATMs when possible avoids paying convenience fees. 

How to stay safe while using an ATM 

While ATMs offer convenience, criminals are always looking to steal your money or personal information. 

The most common type of ATM fraud is skimming, where fraudsters attach an external device over the card reader that swipes card data when customers insert their cards. They may also add tiny hidden cameras to record PIN entries. The thief then creates cloned counterfeit cards using the stolen data to withdraw cash. 

Skimming has risen dramatically in recent years — over 700% in the first half of 2022, according to a study by FICO. 

Criminals may also insert objects to block dispensed money from reaching the cash tray. Unsuspecting users think the transaction failed and leave the scene while money stays stuck, available for thieves to collect later.

How can I protect myself from ATM fraud?

While you can’t prevent every form of fraud, here are some easy tips for keeping yourself and your ATM information safe. 

• Never share your PIN with anyone. Memorize it. If you must write it down, keep it in a secure location away from your purse, wallet, or ATM card. 
• Don’t choose a PIN connected to your personal information, like a birthdate, address, phone number, etc. 
• Only use ATMs that are in secure, well-lit locations. 
• Be aware of your surroundings, especially bystanders. If anyone approaches you to assist you with an ATM transaction, decline their help and go to another ATM if you feel uncomfortable. 
• Cover the keypad when you enter your PIN to block pinhole cameras that thieves install to capture passwords. 
• When using an unfamiliar ATM, inspect for skimming devices that fit into the card slot to copy data from the magnetic strip as your card gets swiped. If anything looks loose or damaged, find another machine. 
• Quickly take your card, cash, and receipt before walking away to avoid leaving things behind. Do not count cash at the ATM; criminals can see how much you withdrew. 
• Sign up for transaction alerts from your bank so any fraudulent withdrawals trigger a notification to freeze your ATM card. 

Bottom line 

ATMs offer access to cash almost wherever and whenever you need it. While this represents a win for customers, this convenience comes at a price. 

Out-of-network ATM fees are rising, taking a larger chunk of account holder's deposits. Fraudsters are also after customers’ money through skimming devices that steal personal data from ATMs. 

Before using an ATM to withdraw cash, know what fees you’ll pay and how to keep your data safe.

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