Could ATM ads replace fees?

Good news for New Yorkers who've been going out of their way to avoid independent ATMs because of the fees.

Starting this week, FreeATM will roll out 25 surcharge-free ATMS across New York City—from Wall Street to Woodside, Queens. It plans to more than double that number by year's end.

The catch? In exchange for saving $1 to $3 per transaction at independent ATMs, you'll have to sit through a 10-second video ad while you wait for your cash. The Brooklyn-based start-up figures that's a small concession to make in exchange for the convenience of getting money surcharge-free at a neighborhood ATM. "Customers don't want to pay ATM Fees, no matter how rich or poor they are," Clinton Townsend, the company's co-founder and CEO told CNBC.

The company already has plans to expand to other cities like Boston and Washington D.C., once it reaches 250 ATMs in New York. If that expansion is successful, FreeATM could end up rolling out the ad-based ATMs nationwide.

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The ATM ads will vary depending on geographic location, venue type, time of day, and assumptions about your socioeconomic status. Townsend said the company uses a proprietary formula to target ads based on the average immediate spending power of a consumer.

Ads will also play in between customer transactions, changing every 15 to 30 seconds when no one is using the machine. Townsend projects the idle time will account for as much as 50 to 90 percent of revenue, depending on how high the foot traffic is around it. Most of the ATMs are inside coffee shops, pizza places, and delis, which see them as a draw for customers.

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FreeATM

FreeATM is not the first company to offer surcharge-free ATMs. Allpoint, an interbank network that was acquired by Cardtronics in 2005, is probably the largest with more than 55,000 surcharge-free ATMs worldwide. (Allpoint does not charge fees to customers of member banks.) Nor is it the first to enter the New York City market. The Department of Labor estimates there are already about 4,400 ATM locations in the city where direct payment cardholders can get cash without paying a fee.

The start-up also faces competition from a growing array of mobile payment options, in addition to the use of debit and credit cards, which continues to grow. (Last week, Mastercard announced U.S. purchase volume had risen 8.2 percent last quarter to $288 billion and Packaged Facts released a separate report estimating debit card volume and value will grow more than 7 percent in 2014 and 2015.)

Still, Townsend said he's confident cash will continue to be the preferred payment method for smaller transactions. In a report released earlier this year, the Federal Reserve Bank of San Francisco concurred, noting that cash plays a "dominant role" for small-value transactions. It estimated that half of all transactions under $20 are still made in cash.

And as banks continue to increase fees, lower cost ATMs become more attractive, said Ellie Wheeler, a venture capitalist at Greycroft Partners. The average fee for using an out-of-network ATM climbed 5 percent over the past year to a record $4.35 per transaction, according to a survey released this fall by Bankrate.com.

"Privately-owned ATMs have long had higher fees," said Wheeler. "Alternatives to that are likely to be welcomed by consumers."

Investors in FreeATM are betting on that. The start-up, which launched with an initial $214,000 from friends and family, recently raised an additional $745,000 in a series A round led by Cayuga Venture Fund.