While banks have long been putting ads for their own products on ATM screens, a startup insists there is a market for showing third-party ads in exchange for waiving fees.

But its approach raises concerns among industry experts who have explored the possibility before. They say there are customer-service issues and even safety concerns around placing ads on ATMs.

Nevertheless, Free ATMs NYC (something of a misnomer because it owns and operates just one machine so far) has garnered a huge amount of press from national media for its approach.

Though company founder Clinton Townsend was short on most details, he said the advertisements, which are static, are 10 and 15 seconds long and take place in the length of time it takes a transaction to be completed.

"Banks are doing everything in their power to ensure that they have the trust and support of their customers," Townsend says.

But despite their best efforts, banks face widespread resentment over fees and other practices that are perceived as unfriendly, as evidenced by the Occupy Wall Street movement and other protests.

"Banks have already struck a certain note with customers," Townsend says.

Wells Fargo & Co., which has been aggressive in its experimentation with ATMs, says that displaying third-party ads may raise more customer-relations issues than it solves.

While Wells Fargo does advertise its own products on its ATMs, it is not considering third-party ads.

"I am trying to figure out how to provide more convenience through our 12,000 ATMs and more convenience broadly throughout Wells Fargo," says Jonathan Velline, head of Wells Fargo ATM banking and store strategy.

"Third-party advertising would distract from this mission and it is not what our customers would expect," he says. Velline did not comment specifically on Free ATMs NYC.

The Free ATMs NYC approach "is a novelty thing, and it looks like a one-hit wonder" says Mark Schwanhausser, a senior analyst with Javelin Strategy & Research.

There are also significant safety concerns involved with independently operated ATMs, which don't reside in the typically higher security lobbies and ante-rooms of banks. If customers are focused on the ads displayed on an ATM's screen, they are not focused on their surroundings, he says.

Similarly, independently operated ATMs are easier to equip with malware and skimming devices, Schwanhausser says.

Townsend says his company plans to put its ATMs in safe and secure locations, but he did not elaborate on how it would enforce that policy.

Consumers pay about $4 billion a year in ATM fees outside their bank's network, according to research Aite Group conducted in the second quarter 2011. On average consumers pay $2.78 for these fees, according to Aite Group. They may pay an additional $1.25 on average to their home bank for going outside the network.

Banks operate about 285,000 ATMs, and independent sales organizations operate about 165,000. About a quarter of the ISO machines operate within Cardtronics Inc.'s Allpoint network, which is free to customers.

The Allpoint network has 43,000 surcharge-free ATMs. Banks pay to participate in the Allpoint network, which in turn pays the merchant to occupy space in the retailer's store.

Customers do not have to look at advertisements on the Allpoint machines to withdraw their money.

The Allpoint model is "a win-win for merchants because they make plenty of money for hosting the ATM and end up with customers in the store with lots of cash," says Bob Meara, a senior analyst in Celent's banking group.

(Cardtronics did not to make anyone available to comment for this story.)

Replacing ATM fees with advertisements is likely to be unsustainable and expensive, Meara says. On average an independently operated ATM performs about 1,000 transactions per month, he says.

Conservatively speaking, Free ATMS NYC would charge about $300 per 1,000 advertisements to cover the cost of the typical surcharge.

That compares to more highly targeted ad forums, such as LinkedIn, that charge about $75 per 1,000 ads, Meara says. Targeted ads served by Yahoo and Google would be even cheaper, experts say.

"Who would pay north of $2 for a 15-second advertisement?" Meara says, adding advertisers can't be assured that consumers will even look at the ads on Free ATMs NYC's screen.

Merchant-funded rewards providers, who present merchant incentives in the consumer's online banking view, agree with Free ATMs NYC's premise that there is a potential advertisement opportunity on ATMs. But they warn that this approach must be handled delicately.

"This does seem to be a part of a broader outlook for the next generation of ATMs and extending some of the richness of interaction from the Web and mobile onto ATM screens," says Schwark Satyavolu, chief executive and co-founder of Truaxis Inc. in Redwood City, Calif.

Bank-owned ATMs would work best for a third-party advertising campaign, not ones operated by an ISO, Satyavolu says. Potentially, the bank, based on its understanding of customer transaction data, could pitch a merchant-funded reward on an ATM receipt. It could also place targeted offers from merchants that are close to the ATM.

Such advertising arrangements could also be accessed from a new section or tab on the ATM, which would list the customer's relevant offers, says Rod Witmond, senior vice president of product management and marketing for Cardlytics Inc. of Atlanta.

Generally speaking, merchants are only interested in participating if they can be assured a large base of customers who come to a bank site, including its ATMs, about 10 times a month. They also want to be able to measure the effectiveness of their ads, and they only want to pay when their offers have been successfully redeemed.

"We have learned the hard way that it takes having an engaged scale and a huge volume of customers, and paying for performance, for the merchant to consider taking on a new channel," Witmond says.