The cash machine, next to the town’s Four Square in Tiverton St, is the only banking option in the town.
The last trading bank in Palmerston closed in 1999 and while Credit Union Otago opened a branch five years later, it also closed.
The town has now been without over-the-counter banking services for nearly 10 years.
One unhappy customer told the Otago Daily Times this week they thought twice after going to withdraw $20 pocket money.
The automatic teller machine issued a warning that $20 would incur a 14% surcharge, or $2.80.
Waitaki District Mayor Gary Kircher said more needed to be done to provide an "affordable service" for the community.
The ATM was installed nearly a decade ago by Next Payments NZ.
Waihemo Community Board chairwoman Heather McGregor said the fee was "very high" and questioned the rationale for the surcharge.
"So how do they recoup that money?
"You know, where does that money go to?
"Is that the charge that they put in there for bringing the money out?"
Mrs McGregor said the board, supported by the council, had applied to the Reserve Bank for Palmerston to be included in the bank’s cash service trials for small towns.
Their proposal was to use the Waihemo Service Centre.
But Palmerston among 80 other towns missed out after expressing interest in the trial.
It selected eight small towns, in two districts, for the trial where smart ATMs would be installed to offer broader cash banking services.
Mr Kircher said the lack of easy access to cash and change was an "ongoing problem" across the predominantly rural Waitaki District.
The council had already done considerable work "over the years" to extend cash banking.
But a previous service at the Waihemo Service Centre was ultimately cancelled because the demand for it did not justify the cost of keeping it.
"The problem is that the cost of having that service, of having the security, of having money deliveries and pickups and things, is relatively high for the amount that it gets used," Mr Kircher said.
Despite those challenges, the removal of affordable and accessible cash banking services was a significant cost to rural communities.
The Palmerston ATM charge of $2.80 per withdrawal was "prohibitive".
Regardless of the so called "cashless society" people still wanted a bit of cash, Mr Kircher said.
McGregor’s Bakery and Tearooms manager Corey Hondelink said Palmerston businesses used to be able to deposit cash in the safe of the Palmerston Library.
Mr Hondelink was unhappy that service had been stopped about six months ago, incurring greater risk.
"Instead of doing banking three times a week, we’re doing it one time a week, which is pretty hard on the business as well.
"Local business has nowhere to put their cash, unless they drive all the way to Dunedin," he said.
Mr Hondelink said the local ATM was "pretty hungry" and in a recent $600 transaction he was charged nearly $9 in fees.
"It doesn’t bother me, but I can imagine people on low income and all that." he said.
Mr Kircher said the council would continue to work on a more affordable service.
New Zealand Banking Association spokesman Philip van Dyk said he could not comment on the ATM charges.
Next Payments NZ was approached for comment.
