As a result, in addition to bank branches, only high traffic locations were thought to be economically
able to support an ATM installation. Other locations, such as supermarkets and casinos fit that model,
but even in those high volume environments banks would require the merchants to sign leases with
monthly payments just for the privilege of placing a
machine. The banks had a stranglehold on the ATM business and thus were the predominate ATM
deployers.
In April, 1996, the ban on surcharging was revoked by the two nationwide networks, Cirrus and Plus,
allowing ATM owners to assess extra fees to non-customers. The introduction of ATM surcharging
created both consternation for some and a windfall for others.
On the one hand, the introduction of ATMs was originally intended to provide a convenience to the
cardholder and a means of reducing costs to the banks deploying those ATMs. Cardholders could
transact bank functions without having to stand in lines and wait for bank tellers to process
transactions. For the most part cardholders could perform almost all of
their basic banking functions unaided by bank personnel. Banks deploying ATMs could provide service
to more customers without having to undertake the additional costs associated with more employees.
With the advent of surcharging, the convenience to the customer and the cost savings to the banks
were far overshadowed by the additional profits which could be derived through surcharging. Prior to
surcharging, the average interchange fee paid to the bank ATM owner was in the $0.37 to $0.75 per
transaction range with a minimal share of the foreign fee, perhaps $0.25 per transaction bringing the
total to $0.62 to $1.00 per transaction. With surcharge fees ranging from $1.00 to $2.00 per
transaction, the overall fee income derived from an ATM transaction increased dramatically.
As a result, the introduction of ATM surcharging by banks brought cries of outrage from critics of ATM
surcharging.
At the same time, ATM surcharging changed the economics of deploying ATMs. Now ATMs could be
deployed in lower traffic locations that previously could not support an ATM installation. The
forecasted demand for new ATM installations created the business case for additional manufacturers
to enter the ATM industry. These new manufacturers, not constrained by their past, developed new,
lower cost ATMs to further improve the profit model for ATM deployment.
With the advent of surcharging in 1996, nonbank organizations began deploying ATMs and sharing the
revenues associated with those surcharges and interchange fees. Initially, these nonbank owners
were able to retain the bulk of the revenue stream, but as competition for the best locations heated
up, the percentages changed in favor of the merchant location.
As new, reliable, low-cost ATMs were introduced to the market and the breakeven point for
profitability ratcheted down, ATM placements proliferated.
Today, about the only function that an off-premise, nonbank owned ATM can't perform is a deposit.
Off-premise ATM's can dispense cash, sell merchandise by accepting cash, cash checks and allow
customers to wire funds.
And, as prime locations have been taken and the need to sell additional ATMs continues to be a
prerequisite of the ATM manufacturers, costs have continued to fall making the economics even more
supportive to placing additional ATMs in lower traffic locations.
You're short on cash, so you walk over to an automated teller machine (ATM), insert your "debit" card
into the card reader, respond to the prompts on the screen and within a minute you walk away with
your money and a receipt. ATMs can now be found at most supermarkets, convenience stores, travel
centers and almost everywhere! Have you ever wondered about the process that makes your bank
account funds available to you at an ATM on the other side of the country, the world or anywhere?
Keep in mind that cash dispensing is only one of the functions performed by an ATM. In addition,
ATM's have the ability to allow cardholders to perform many other functions. In some cases ATMs
accept deposits, dispense merchandise, permit cardholders to pay bills and even wire transfer funds.
This document is intended to answer not only the basics of how an ATM
actually functions, but in addition will provide information on:
What's different between a "bank" ATM and a "nonbank" ATM?
- How•How does ATM interchange work?
- Difference between a regional and a national network
An ATM is simply a data terminal and, like any other data terminal, the ATM has to connect to, and
communicate through, a processor or switch. The processor/switch is analogous to an Internet service
provider (ISP) in that it is the gateway through which all the various ATM networks become available
to the cardholder.
Most host processors can support lease-line and dial-up machines. Lease-line machines connect
directly to the host processor through a four-wire, point-to-point dedicated telephone line. Dial-up
ATMs connect to the host processor through a normal phone line using a modem and a toll-free
number, or through an Internet service provider using a local access number dialed by modem.
Lease-line ATMs are preferred for very high volume locations because of their thru-put
capability and dial-up ATMs are preferred for retail merchant locations where low cost is a
greater factor than thru-put. The initial cost for a dial-up machine is less than half that for a
lease-line machine. The monthly operating costs for dial-up ATMs are only a fraction of the costs for
lease-line machines.
The host processor may be owned by a bank or financial institution, or it may be owned by an
independent service provider. Bank-owned processors normally support only
bank-owned machines, whereas the independent processors support merchant-owned machines.
You're one of the millions who has used an ATM, but don't understand all its pieces and parts, so
here's a basic explanation. An ATM has two input devices:
• Card reader - The card reader captures the account information stored on the magnetic stripe on
the back of an ATM/debit or credit card. The host processor uses this
information to route the transaction to the cardholder's bank.
• Keypad - The keypad lets the cardholder tell the bank what kind of transaction is required (cash
withdrawal, balance inquiry, etc.) and for what amount. Also, the bank requires the cardholder's
personal identification number (PIN) for verification. Federal law requires that the PIN block be sent
to the host processor in encrypted form.
And an ATM has four output devices:
• Speaker - The speaker provides the cardholder with auditory
feedback when a key is pressed.
• Display screen - The display screen prompts the cardholder through each step of the transaction
process. Lease-line machines commonly use a monochrome or color CRT
(cathode ray tube) display. Dial-up machines commonly use a monochrome or color LCD.
• Receipt printer - The receipt printer provides the cardholder with a paper receipt of the
transaction.
• Cash dispenser - The heart of an ATM is the safe and cash-dispensing mechanism. The entire
bottom portion of most small ATMs is a safe that contains the cash.
The cash-dispensing mechanism has an electric eye that counts each bill as it exits the dispenser. The
bill count and all of the information pertaining to a particular transaction is recorded in a journal. The
journal information is printed out periodically, but always when the ATM is replenished with cash. A
hard copy is maintained by the machine owner for two
years (this is a "network" regulation). Whenever a cardholder has a dispute about a transaction, he or
she can ask for a journal printout showing the transaction, and then contact the host processor. If no
one is available to provide the journal printout, the cardholder needs to notify the bank or institution
that issued the card and fill out a form that will be faxed to the host processor. It is the host
processor's responsibility to resolve the dispute. Besides the electric eye that counts each bill, the
cash-dispensing mechanism also has a sensor that evaluates the thickness of each bill. If two bills are
stuck together, then instead of being dispensed to the cardholder they are diverted to a reject bin.
The same thing happens with a bill that is excessively worn, torn or folded. The number of reject bills
is also recorded so that the machine owner can be aware of the quality of bills that are being loaded
into the machine. A high reject rate would indicate a problem with the bills or with the dispenser
mechanism.
"ACH" is short for "Automated Clearing House." This bank terminology means that a person or
business is authorizing another person or business to draft on an account. It is common for fitness
centers and other businesses to ACH a monthly membership fee from member accounts and many
small businesses use ACH for direct deposit of paychecks.
When a cardholder wants to perform an ATM transaction, he or she provides the necessary
information by means of the card reader and keypad. The ATM transmits this information to
the host processor, which routes the transaction request to the cardholder's bank or the
institution that issued the card to validate that the funds are available. If the cardholder is
requesting cash, the host processor causes an electronic funds transfer (EFT) to be withdrawn
from the customer's bank account and deposited in the host processor's account. Once
the funds are transferred to the host processor's bank account, the processor sends an approval code
to the ATM authorizing the machine to dispense the cash. The processor then ACHs the cardholder's
funds into the ATM owner's bank account, usually the next bank business day. In this way, the ATM
owner is reimbursed for all funds dispensed by the ATM.
So when you request cash, the money moves electronically from your account to the host's account to
the ATM owner's account.
Other ATM transactions follow a similar process. For example when a cardholder makes a purchase
through an ATM, the purchase amount is treated in the same manner as a cash withdrawal. In other
words, the cardholder's bank account is still debited for the amount of the purchase but goods and/or
services are dispensed instead of cash.
In some cases, deposits may be made through an ATM, but generally that capability exists only when
the cardholder is utilizing an ATM deployed and operated by the same financial institution that issued
the cardholders card. In that case the funds deposited are credited to the cardholder's bank account
as opposed to being debited in the form of a cash withdrawal.
The second connection that an ATM makes is to a shared network that links many of the banks
operating in a state or region of the country and allows their customers tos use (or share) all the
ATMs of the member banks, these networks are referred to as "regional" networks.
In addition to driving ATM transactions, regional networks also transport POS debit transactions from
merchant locations. Banks that are "members" of the regional network will normally "bug" their debit
cards with the mark of the network. An example of this could be:
Wells Fargo Bank is a member of both the Star and Pulse networks and displays the "bugs" of both of
those networks on their debit cards. When a cardholder utilizes the Wells Fargo debit card with a PIN,
the processor which the merchant has engaged to process credit and debit transactions will route the
POS debit transaction to either of those two networks for
authorization and settlement.
Following is a list of the "regional" debit networks. Keep in mind that although these are referred to as
regional networks, some, such as AFFN have national and even worldwide presence:
• AFFN – The Armed Forces Network
• CU24 – Credit Union Network
• Honor • Star/ MAC
• Pulse • NYCE
• Quest • Shazam
• TYME • Alaska Option
• Accel/Exhange
The third connection available to an ATM is to the national networks operated by the major credit card
associations. These are Cirrus and Plus. The national networks permit ATM cardholders from other
states, regions or nations to use an ATM. Typically, when cardholders insert their cards into the ATM,
the machine checks to see which network connection would
be the most appropriate, starting with the bank's proprietary network, expanding to the regional and
then the national networks.
Cirrus and Plus, unlike the regional networks do not support POS debit transactions. Both Visa and
MasterCard have made an attempt to expand their capabilities to include POS debit transactions and
have created the Maestro and InterLink networks to function as the POS debit equivalent of Cirrus
and Plus. Because of previous pricing model blunders and the expansion of the regional debit
networks through merger and acquisition, the acceptance of the two national networks has not been
successful.
Prior to 1996 almost every ATM deployed was owned by a financial institution. Why?
•ATMs were very expensive and only manufactured by a few providers such as Docutel, NCR and
Diebold.
•Surcharging was prohibited.
•The only transaction-based revenues available to support the deployment of an ATM were the
interchange fee and a portion of the foreign transaction fee (the fee a bank levied on its cardholder
for using a different bank's ATM).
Some banks and financial institutions issue debit cards that can only be utilized in
ATMs. These cards are "bugged" with only the national ATM logos,l Cirrus and Plus.
Other financial institutions issue debit cards referred to as "check cards" which
have fairly ubiquitous acceptance. Check cards generally are either Visa or
MasterCard issued cards and
may be utilized in three forms:
- At an ATM with a PIN to withdraw cash, make purchases and in some cases
make deposits and transfer funds - At the point of sale with a PIN
- At the point of sale without a PIN - this is also referred to as an "off-line" debit
purchase.
In the first instance above, the utilization of these cards are governed by the
operation regulations of the ATM network in which it is being used. In other words
a cardholder can perform any function available at the ATM. In addition,
cardholders may be assessed a convenience/surcharge fe by the ATM owner. In
any case, the owner of the ATM receives "reverse interchange" for all transactions
performed by an ATM.
In the second instance above, the cardholder can make a purchase, get cash back
and incur
a convenience/surcharge. In this instance, the "owner" of the POS device would
receive the proceeds from the surcharge, but would also pay the interchange fee to
the network.
In the last instance above, the transaction would be treated exactly the same as a
credit card transaction and would pay the interchange to the network. Obviously as
with any credit card transaction, no surcharge can be charged to the cardholder for
this type of transaction.
| Debit Networks - What Art They? |
| Debit Cards What Are They? |
| Everything You Need To Know About ATM & Debit |
| DEBIT 101 |
There are three distinct types of networks which exist today: proprietary, regional
and national.
Most automated teller machines in the United States are connected to one or more
networks that let depositors access their accounts virtually anywhere. No longer
must depositors hunt for an ATM connected to "their" bank to get cash from their
account. On the other hand, most POS devices which accept at the point-of sale,
generally connect to a preferred network that is selected by their host processor.
This is determined by the networks displayed on the cardholder's card.
The first connection by an ATM is to the (usually proprietary) network of the bank
or firm that owns the ATM. An example of a proprietary network, would be th
network owned and operated by Bank of America to drive their owned ATMs.
Generally, POS debit transactions are not routed through a proprietary network.
But keep in mind that gift card functions similarly to a debit card and in those cases,
the gift card transactions are routed through a proprietary network.
| Check Cards: Visa Check Card and MasterCard MasterMoney |
| Regional Debit Networks |
| ATM Cards |
| Proprietary ATM Networks |
| Background |
| National Debit Networks |
| Bank Owned vs NonBank Owned ATMs |
| Non Bank (Off Premises) ATM owners |