Supralinear and sublinear pre-synaptic and dendritic integration is considered to be responsible for nonlinear computation power of biological neurons, emphasizing the role of nonlinear integration as opposed to nonlinear output thresholding. How, why, and to what degree the transfer function nonlinearity helps biologically inspired neural network models is not fully understood. Here, we study these questions in the context of echo state networks (ESN). ESN is a simple neural network architecture in which a fixed recurrent network is driven with an input signal, and the output is generated by a readout layer from the measurements of the network states. ESN architecture enjoys efficient training and good performance on certain signal-processing tasks, such as system identification and time series prediction. ESN performance has been analyzed with respect to the connectivity pattern in the network structure and the input bias. However, the effects of the transfer function in the network have not been studied systematically. Here, we use an approach tanh on the Taylor expansion of a frequently used transfer function, the hyperbolic tangent function, to systematically study the effect of increasing nonlinearity of the transfer function on the memory, nonlinear capacity, and signal processing performance of ESN. Interestingly, we find that a quadratic approximation is enough to capture the computational power of ESN with tanh function. The results of this study apply to both software and hardware implementation of ESN.