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How Do ATMs Work

An ATM is simply a data terminal with two input and four output devices. Like any other data terminal, the
ATM has to connect to, and communicate through, a host processor. The host processor is analogous to
an Internet service provider (IS! in that it is the gateway through which all the various ATM networks
"ecome availa"le to the cardholder (the person wanting the cash!.
Most host processors can support either leased-line or dial-up machines. Leased#line machines connect
directly to the host processor through a four#wire, point#to#point, dedicated telephone line. $ial#up ATMs
connect to the host processor through a normal phone line using a modem and a toll#free num"er, or
through an Internet service provider using a local access num"er dialed "y modem.
Leased#line ATMs are preferred for very high#volume locations "ecause of their thru-put capa"ility, and dial#
up ATMs are preferred for retail merchant locations where cost is a greater factor than thru#put. The initial
cost for a dial#up machine is less than half that for a leased#line machine. The monthly operating costs for
dial#up are only a fraction of the costs for leased#line.
Parts of the Machine
%ou&re pro"a"ly one of the millions who has used an ATM. As you know, an ATM has two input devices'
Card reader # The card reader captures the account information stored on the magnetic stripe on
the "ack of an ATM(de"it or credit card. The host processor uses this information to route the transaction to
the cardholder&s "ank.
Keypad # The keypad lets the cardholder tell the "ank what kind of transaction is re)uired (cash
withdrawal, "alance in)uiry, etc.! and for what amount. Also, the "ank re)uires the cardholder&s personal
identification num"er (PI! for verification. *ederal law re)uires that the I+ "lock "e sent to the host
processor in encrypted form.
And an ATM has four output devices'
!peaker # The speaker provides the cardholder with auditory feed"ack when a key is pressed.
Display screen # The display screen prompts the cardholder through each step of the transaction
process. Leased#line machines commonly use a monochrome or color ,-T (cathode ray tu"e! display. $ial#
up machines commonly use a monochrome or color L,$.
"eceipt 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
"ottom portion of most small ATMs is a safe that contains the cash.
!ensin# $ills
The cash#dispensing mechanism has an electric eye that counts each "ill as it e.its the dispenser. The "ill
count and all of the information pertaining to a particular transaction is recorded in a %ournal. The /ournal
information is printed out periodically and a hard copy is maintained "y the machine owner for two years.
0henever a cardholder has a dispute a"out a transaction, he or she can ask for a /ournal printout showing
the transaction, and then contact the host processor. If no one is availa"le to provide the /ournal printout, the
cardholder needs to notify the "ank or institution that issued the card and fill out a form that will "e fa.ed to
the host processor. It is the host processor&s responsi"ility to resolve the dispute.
1esides the electric eye that counts each "ill, the cash#dispensing mechanism also has a sensor that
evaluates the thickness of each "ill. If two "ills are stuck together, then instead of "eing dispensed to the
cardholder they are diverted to a re%ect &in. The same thing happens with a "ill that is e.cessively worn,
torn, or folded.
The num"er of re%ect &ills is also recorded so that the machine owner can "e aware of the )uality of "ills
that are "eing loaded into the machine. A high re/ect rate would indicate a pro"lem with the "ills or with the
dispenser mechanism.
ATMs for the 2isually Impaired
There are ATMs that are accessi"le to "lind and visually impaired
people. These machines are located at kiosks rather than "ank drive#
thrus. And the keypads at ATMs are e)uipped with &raille.
!ettlement 'unds
0hen a cardholder wants to do an ATM transaction, he or she
provides the necessary information "y means of the card reader and
keypad. The ATM forwards this information to the host processor,
which routes the transaction re)uest to the cardholder&s "ank or the
institution that issued the card. If the cardholder is re)uesting cash,
the host processor causes an electronic funds transfer to take
place from the customer&s "ank account to the host processor&s
account. 3nce the funds are transferred to the host processor&s "ank
account, the processor sends an appro(al code to the ATM
authori4ing the machine to dispense the cash. The processor then
A,5s the cardholder&s funds into the merchant&s "ank account,
usually the ne.t "ank "usiness day. In this way, the merchant is
reim&ursed for all funds dispensed "y the ATM.
An independent ATM host can access any &ank) It also supports a
lar#e num&er of ATMs placed with different merchants)
So when you re)uest cash, the money moves electronically from your account to the host&s account to the
merchant&s account.
ATM !ecurity
ATMs keep your personal identification num"er (PI! and other information safe "y using encryption
software such as Triple $6S ($ata 6ncryption Standard!. 1ut there are lots of things that you can do to
protect your information and your money at an ATM.
Many "anks recommend that you select your own PI. 2isa offers the following I+ tips'
$on&t write down your I+. If you must write it down, do not store it in your wallet or purse.
ACH Transfers
7ACH7 is short for 7automated
clearing house.7 This "ank
terminology means that a person
or "usiness is authori4ing
another person or "usiness to
draft on an account. It is
common for fitness centers and
other "usinesses to A,5 a
monthly mem"ership fee from
mem"er accounts, and many
small "usinesses use A,5 for
direct deposit of paychecks.
Make your I+ a series of letters or num"ers that you can easily remem"er, "ut that cannot easily
"e associated with you personally.
Avoid using "irth dates, initials, house num"ers or your phone num"er.
2isa also recommends the following tips for safe ATM usage'
Store your ATM card in your purse or wallet, in an area where it won&t get scratched or "ent.
8et your card out 16*3-6 you approach the ATM. %ou&ll "e more vulnera"le to attack if you&re
standing in front of the ATM, fum"ling through your wallet for your card.
Stand directly in front of the ATM keypad when typing in your I+. This prevents anyone waiting to
use the machine from seeing your personal information.
After your transaction, take your receipt, card and money away. $o not stand in front of the
machine and count your money.
If you are using a drive#up ATM, get your vehicle as close to the machine as possi"le to prevent
anyone from coming up to your window. Also make sure that your doors are locked "efore you drive up to
the machine.
$o not leave your car running while using a walk#up ATM. Take your keys with you and lock the
doors "efore your transaction.
If someone or something makes you uncomforta"le, cancel your transaction and leave the machine
immediately. *ollow up with your "ank to make sure the transaction was cancelled and alert the "ank to any
suspicious people.
Many retail merchants close their store at night. It is strongly recommended that they pull the money out of
the machine when they close, /ust like they do with their cash registers, and leave the door to the security
compartment wide open like they do with an empty cash#register drawer. This makes it o"vious to any
would#"e thief that this is not payday.
It*s important to use a well-lit+ pu&lic ATM machine at ni#ht)
*or safety reasons, ATM users should seek out a machine that is located in a well#lighted pu"lic place.
*ederal law re)uires that only the last four digits of the cardholder&s account num"er "e printed on the
transaction receipt so that when a receipt is left at the machine location, the account num&er is secure.
5owever, the entry of your four#digit personal identification num&er (I+! on the keypad should still "e
o"scured from o"servation, which can "e done "y positioning your hand and "ody in such a way that the
I+ entry cannot "e recorded "y store cameras or store employees. The cardholder&s I+ is not recorded in
the /ournal, "ut the account num"er is. If you protect your I+, you protect your account.
,our ATM PI should &e a num&er that you can easily
remem&er+ &ut that would not &e readily a(aila&le to thie(es)
How Credit Cards Work
5ave you ever stood "ehind someone in line at the store and watched him shuffle through a stack of what
must "e at least 9: credit cards; ,onsumers with this many cards are still in the minority, "ut e.perts say
that the ma/ority of <.S. citi4ens have at least one credit card ## and usually two or three. It&s true that credit
cards have "ecome important sources of identification ## if you want to rent a car, for e.ample, you really
need a ma/or credit card. And used wisely, a credit card can provide convenience and allow you to make
purchases with nearly a month to pay for them "efore finance charges kick in.
That sounds good, in theory. 1ut in reality, many consumers are una"le to take advantage of these "enefits
"ecause they carry a "alance on their credit card from month to month, paying finance charges that can go
up to a whopping => percent. Many find it hard to resist using the old 7plastic7 for impulse purchases or
"uying things they really can&t afford. The num"ers are striking' In 9???, American consumers charged a"out
@9.= trillion on their general#purpose credit cards.
In this article we&ll look at the credit card ## how it works "oth financially and technically ## and we&ll offer tips
on how to shop for a credit card. (6.perts say this should "e a pro/ect on the scale of shopping for a car loan
or mortgageA! 0e&ll also descri"e the different credit#card plans availa"le, talk a"out your credit history and
how that might affect your card options, and discuss how to avoid credit#card fraud ## "oth online and in the
real world.
Let&s start at the "eginning. A credit card is a thin plastic card, usually >#9(B inches "y =#9(B inches in si4e,
that contains identification information such as a signature or picture, and authori4es the person named on it
to charge purchases or services to his account ## charges for which he will "e "illed periodically. Today, the
information on the card is read "y automated teller machines (ATMs!, store readers, and "ank and Internet
computers.
According to 6ncyclopedia 1ritannica, the use of credit cards originated in the <nited States during the
9?=:s, when individual companies, such as hotel chains and oil companies, "egan issuing them to
customers for purchases made at those "usinesses. This use increased significantly after 0orld 0ar II.
The first uni(ersal credit card ## one that could "e used at a variety of stores and "usinesses ## was
introduced "y $iners ,lu", Inc., in 9?C:. 0ith this system, the credit#card company charged cardholders an
annual fee and "illed them on a monthly or yearly "asis. Another ma/or universal card ## 7$on&t leave home
without itA7 ## was esta"lished in 9?CB "y the American 6.press company.
Later came the "ank credit#card system. <nder this plan, the "ank credits the account of the merchant as
sales slips are received (this means merchants are paid )uickly ## something they loveA! and assem"les
charges to "e "illed to the cardholder at the end of the "illing period. The cardholder, in turn, pays the "ank
either the entire "alance or in monthly installments with interest (sometimes called carryin# char#es!.
The first national "ank plan was $ankAmericard, which was started on a statewide "asis in 9?C? "y the
$ank of America in ,alifornia. This system was licensed in other states starting in 9?DD, and was renamed
2isa in 9?ED.
3ther ma/or "ank cards followed, including Master,ard, formerly Master ,harge. In order to offer e.panded
services, such as meals and lodging, many smaller "anks that earlier offered credit cards on a local or
regional "asis formed relationships with large national or international "anks.
What Credit Card um&ers Mean
Although phone companies, gas companies and department stores have their own num"ering systems,
A!I !tandard -.)/0-/120 is the system used "y most national credit#card systems.
Illustration "y -osaleah -autert
The front of your credit card has a lot of num"ers ## here&s an e.ample of what they might mean.
5ere are what some of the num"ers stand for'
The first digit in your credit#card num"er signifies the system'
0 - tra(el3entertainment cards (such as American 6.press and $iners ,lu"!
. - 4isa
5 - MasterCard
6 - Disco(er Card
The structure of the card num"er varies "y system. *or e.ample, American 6.press card num"ers
start with >EF ,arte 1lanche and $iners ,lu" with >B.
American 78press # $igits three and four are type and currency, digits five through 99 are
the account num"er, digits 9= through 9G are the card num"er within the account and digit 9C is a check
digit.
4isa # $igits two through si. are the "ank num"er, digits seven through 9= or seven
through 9C are the account num"er and digit 9> or 9D is a check digit.
MasterCard # $igits two and three, two through four, two through five or two through si.
are the "ank num"er (depending on whether digit two is a 9, =, > or other!. The digits after the "ank num"er
up through digit 9C are the account num"er, and digit 9D is a check digit.
In the ne.t section, we&ll look at the stripe on the "ack of a credit card.
The !tripe on a Credit Card
Illustration "y -osaleah -autert
%our card has a magstripe on the "ack and a place for your all#important signature.
The stripe on the "ack of a credit card is a ma#netic stripe, often called a ma#stripe. The magstripe is
made up of tiny iron#"ased magnetic particles in a plastic#like film. 6ach particle is really a tiny &ar ma#net
a"out =:#millionths of an inch long.
The magstripe can "e 7written7 "ecause the tiny "ar magnets can "e ma#neti9ed in either a north or south
pole direction. The magstripe on the "ack of the card is very similar to a piece of cassette tape (see 5ow
,assette Tapes 0ork for details!.
A magstripe reader (you may have seen one hooked to someone&s , at a "a4aar or fair! can understand
the information on the three-track stripe. If the ATM isn&t accepting your card, your pro"lem is pro"a"ly
either'
A dirty or scratched magstripe
An erased magstripe (The most common causes for erased magstripes are e.posure to magnets,
like the small ones used to hold notes and pictures on the refrigerator, and e.posure to a store&s electronic
article surveillance (6AS! tag demagneti4er.!
There are three tracks on the magstripe. 6ach track is a"out one#tenth of an inch wide. The IS3(I6,
standard EB99, which is used "y "anks, specifies'
Track one is =9: "its per inch ("pi!, and holds E? D#"it plus parity "it read#only characters.
Track two is EC "pi, and holds G: G#"it plus parity "it characters.
Track three is =9: "pi, and holds 9:E G#"it plus parity "it characters.
%our credit card typically uses only tracks one and two. Track three is a read(write track (which includes an
encrypted I+, country code, currency units and amount authori4ed!, "ut its usage is not standardi4ed
among "anks.
The information on track one is contained in two formats' A, which is reserved for proprietary use of the card
issuer, and 1, which includes the following'
!tart sentinel # one character
'ormat code:;$; # one character (alpha only!
Primary account num&er # up to 9? characters
!eparator # one character
Country code # three characters
ame # two to =D characters
!eparator # one character
78piration date or separator # four characters or one character
Discretionary data # enough characters to fill out ma.imum record length (E? characters total!
7nd sentinel # one character
<on#itudinal redundancy check (L-,! # one character
L-, is a form of computed check character.
The format for track two, developed "y the "anking industry, is as follows'
!tart sentinel # one character
Primary account num&er # up to 9? characters
!eparator # one character
Country code # three characters
78piration date or separator # four characters or one character
Discretionary data # enough characters to fill out ma.imum record length (G: characters total!
<"C # one character
*or more information on track format, see IS3 Magnetic Stripe ,ard Standards.
There are three "asic methods for determining whether your credit card will pay for what you&re charging'
Merchants with few transactions each month do (oice authentication using a touch#tone phone.
7lectronic data capture (6$,! magstripe#card swipe terminals are "ecoming more common ## so
is swiping your own card at the checkout.
4irtual terminals on the Internet
This is how it works' After you or the cashier swipes your credit card through a reader, the 6$, software at
the point-of-sale (3S! terminal dials a stored telephone num"er (using a modem! to call an ac=uirer. An
ac)uirer is an organi4ation that collects credit#authentication re)uests from merchants and provides the
merchants with a payment guarantee.
0hen the ac)uirer company gets the credit#card authentication re)uest, it checks the transaction for validity
and the record on the magstripe for'
Merchant ID
4alid card num&er
78piration date
Credit-card limit
Card usa#e
Single dial#up transactions are processed at 9,=:: to =,G:: "its per second ("ps!, while direct Internet
attachment uses much higher speeds via this protocol. In this system, the cardholder enters a personal
identification num&er (I+! using a keypad.
The I+ is not on the card ## it is encrypted (hidden in code! in a data"ase. (*or e.ample, "efore you get
cash from an ATM, the ATM encrypts the I+ and sends it to the data"ase to see if there is a match.! The
I+ can "e either in the "ank&s computers in an encrypted form (as a cipher! or encrypted on the card itself.
The transformation used in this type of cryptography is called one-way. This means that it&s easy to compute
a cipher given the "ank&s key and the customer&s PI, "ut not computationally feasi"le to o"tain the plain#
te.t I+ from the cipher, even if the key is known. This feature was designed to protect the cardholder from
"eing impersonated "y someone who has access to the "ank&s computer files.
Likewise, the communications "etween the ATM and the "ank&s central computer are encrypted to prevent
would#"e thieves from tapping into the phone lines, recording the signals sent to the ATM to authori4e the
dispensing of cash and then feeding the same signals to the ATM to trick it into unauthori4ed dispensing of
cash.
If this isn&t enough protection to ease your mind, there are now cards that utili4e even more security
measures than your conventional credit card' Smart ,ards.
5ow $e"it ,ards 0ork
There is nothing mysterious a"out de"it cards. 0ith their 2isa and Master,ard logos, they may look like
they&re mas)uerading as credit cards, "ut they do not draw money from the same source as credit cards.
$e"it cards, sometimes called checking cards, draw funds from your checking account, not a line of credit.
Many de"it cards are actually dual de"it(credit cards. %ou can use them as one or the other. 0hen you make
a purchase with such a dual card, the card reader will ask whether you want to use your card as a de"it or
credit card. If you use it as a de"it card, you enter your personal identification num"er (I+! to authori4e the
transaction. %ou may also have the option to get cash "ack when you make a de"it purchase. This is like
accessing an ATM at the same time as your purchase ## you simply consolidate your transactions. If you use
the card as a credit card, you put your Hohn 5ancock on a sales slip instead of entering your I+.
<p +e.t
5ow ,redit ,ards 0ork
5ow 1anks 0ork
Investigation$iscovery.com' ,redit ,ard *raud
Iui4
As you can see, the "asic process of a de"it transaction is not complicated. 1ut why would you choose to
use a de"it card instead of a credit card;
*irst let&s compare de"it and credit cards.
De&it Cards (s) Credit Cards
hoto "y 0athi) Jhu4aie(8etty Images
1anks in 1aghdad have started issuing de"it cards to customers, as advertised "y this employee of 0arka
1ank on March 99, =::B.
$e"it cards and credit cards each have advantages and disadvantages. The "iggest advantage of de"it
cards over credit cards is that you don&t need to worry a"out interest rates, monthly "ills and finance
charges. Since a de"it card uses only the money you actually have, you won&t "uild up an unmanagea"le
de"t "y using it, as you might with unchecked use of a credit card. ,redit cards, after all, accrue interest on
unpaid "alances. <nless you pay off your "alance every month, you will always end up paying more for a
T2, for e.ample, than what the T2 actually cost.
,redit card limits are often )uite high, sometimes significantly higher than the average monthly "alance in
your checking account. If you aren&t careful, your credit card "alance can grow out of control. The limit on
your de"it card, on the other hand, is whatever you have in your checking account.
Another advantage of the de"it card is how easy it is to ac)uire one. %ou can get a de"it card with pretty
much any checking account, whereas you can o"tain a credit card only "y applying for one. A de"it card
does not re)uire an investigation into your credit historyF most credit cards do re)uire a credit check.
A Matter of ,onvenience
According to a study "y the *ederal -eserve 1oard, BB.9 percent of de"it card holders use de"it
cards "ecause of their convenience, while only C.B percent of holders use de"it cards to lasso in
their spending ha"its Ksource' 1or4ekowski, Jiser and AhmedL.
Hust as the advantage of a de"it card is that it draws on your actual funds, the disadvantage of a de"it card
is that you are limited "y those funds. %ou can overdraw your checking account, which can result in your
"ank charging an overdraft fee. These fees can reach up to @=C Ksource' 1ankrateL. 1ut you can also go
over your credit card limit, which results in a similar fee, and this fee can accrue interest. $e"it cards don&t
license you to "e irresponsi"le in your spendingF you should always keep ta"s on your transactions and
account "alance.
3ne advantage of credit cards over de"it cards is that they can help you to make very large purchases that
would "e otherwise impossi"le, such as that plasma T2 you&ve "een eyeing. 1ut it is easy with credit cards
to feel like you can "uy whatever you want, whenever you want. Live and spend within your means. (*or
more information on how to do that, take a look at 5ow $iscretionary 6.penses 0ork and Ten Tips for
Staying on 1udget.!
A disadvantage of de"it cards is the amount of "uying protection provided to you "y law. $e"it card
transactions very much resem"le cash transactions. The money changes hands )uickly, and it&s difficult to
get it "ack. If you want to return a "roken or unsatisfactory item you purchased with a de"it card, many
"usinesses will only give you an e.change or store credit.
Also, it&s worth noting that the laws that police stolen de"it cards aren&t as friendly as the laws that police
stolen credit cards. %ou may find it more difficult to get your money when a highway ro""er steals your de"it
card than when a highway ro""er lifts your credit card. Learn more on the ne.t page.
Choosin# to >se a De&it Card
There are several things to consider when choosing whether to use a de"it card. $e"it cards are "est for
small, run#of#the#mill purchases ## the "o. of doughnuts for the "oys at work or the "ottle of water from the
corner store as you walk to the "each on a hot day. 0hen you get into large items like computers, T2s and
furniture, it&s usually "etter to use a credit card. These purchases can put a "ig dent in your finances ## a
dent you might not "e a"le to afford in one "ig hit. Spread over several months of credit card payments, the
cost of a large item "ecomes more managea"le.
$e"it cards are convenient for "oth the customer and the merchant. ,hecks can "e annoying to write,
cum"ersome to deposit and slow to clear. $e"it card transactions usually clear within =G hours. lus,
"usiness esta"lishments accept de"it cards more often than they accept checks, and "usinesses generally
pay less to process de"it card payments than they do to process credit card payments.
6*TA
The 6lectronic *unds Transfer Act gives "anks ten days to look into reports of 7unauthori4ed
transactions7 and decide whether your case holds water. Some "anks will give you an infusion of
funds to cover the loss if the investigation is going to take awhile. Some will not. Ask your "ank
a"out its policies on unauthori4ed transactions Ksource' *$I,L.
Something to keep in mind when using a de"it card is that some "usinesses, such as hotels and gas
stations, put a hold on your card to ensure that they are paid for their product or service. *or e.ample, gas
stations will often put a @C: hold on your card and then charge you for the actual cost of the gas you
pumped. As soon as they receive the money due them, they will lift the @C: hold. If you use a de"it card on
gas purchases, this @C: hold could influence the availa"le "alance in your checking account, affecting other
purchases you might make "efore the hold is lifted.
If you choose to use a de"it card, make sure you protect your card and account information. Jeep your I+
safeF don&t carry it around on a slip of paper tucked into your wallet. Memori4e it. Also, don&t make your I+
something o"vious, a num"er that a thief could easily connect to other identifying information, such as your
street num"er or a se)uence of digits from your phone num"er. retty much anyone can get this identifying
information, so don&t make it easy for a thief.
As we discussed on the previous page, if your de"it card is stolen, you may find it more difficult to get your
money "ack than you would if your credit card were stolen. <nder the 6lectronic *und Transfer Act, as long
as you report your card stolen within two days, you won&t lose more than @C: of the money a thief draws
from your account. If you don&t report for up to D: days, you could "e lia"le for as much as @C::. 1eyond D:
days ## well, let&s hope you have a good supply of money in another account. Luckily, 2isa and Master,ard,
as well as many "anks, will not hold you lia"le for de"it transactions you did not authori4e.
If you&d like to know more a"out de"it cards and related topics, follow the links on the ne.t page.
Ad(anta#es of Cash+ Credit and De&it
1oth credit and de"it cards are advantageous "ecause they provide proof of ownership ## your name (and
sometimes photo! em"la4oned right there on the front of the card. 1ut credit cards e.tend this protection
further. <nder the *air ,redit 1illing Act, the owner of a lost or stolen credit card is responsi"le for only up to
@C: worth of fraudulent purchases. 6ven more, many credit cards automatically grant you an e.tended
warranty on items you purchase using them.
$e"it cards offer similar security through another <.S. law, the 6lectronic *und Transfer Act. This law limits a
de"it card holder&s fraud lia"ility to @C: as long as he or she alerts the issuing "ank of the fraud within two
days of discovery. After the initial two day period, the lia"ility for the cardholder increases to @C:: Ksource'
1ankrateL. 0hile most retailers will demand you produce a photo I$ when making a credit card purchase,
you aren&t "ound "y law to do soF only a card "earing your signature is re)uired "y credit card companies to
validate the transaction. Since most "anks offer de"it cards with personal identification num"ers (I+s! that
only the cardholder knows (or should know!, the card should "e useless if it&s stolen. So, de"it cards actually
have a leg up over credit cards as far as security goes.
1ay Ismoyo(A*(8etty Images
,ash&s fatal flaw; It&s easily stolen.
,ash and de"it cards hold another advantage over credit cardsF they lack the fees associated with credit
cards. ,redit card companies make their money "y charging interest on "alances each month, which can "e
significant, since Americans that use credit cards carry an average of @9D,D>C in de"t, not including home
mortgages Ksource' <.S. +ews and 0orld -eportL. ,ash, if withdrawn from the "ank where the account is
held, is issued "oth fee# and interest#free. $e"it cards can also come without fees. Most "anks offer some
kind of fee#free de"it card account, "ut "eware' 1anks have come to make money from the de"it cards&
popularity with consumers "y charging overdraft fees. These fees average almost @>C, and pull an annual
windfall of @9E.C "illion for the "anking industry Ksource' LorekL.
3verall, de"it cards tend to emerge as the clear winner among this triumvirate of payment methods. They
provide the security of a credit card and the fee#free "enefit of cash ## if you pay close attention to your
account. 1eing attentive to your account can keep you from the pains of overdrawing and its associated
fees, and help alert you to any fraud.
The advantages of using cash, credit or de"it are largely conte.t#specific. $epending on the type of shopper
and how security#conscious you are, each form has its merits.
If you&re a shopaholic who wants to "ecome more frugal, cash is the way to go. Studies of consumer
psychology suggest that people who use cash are less likely to spend it frivolously or impulsively. This is due
to the 7pain of paying,7 "ased on the transparency cash provides Ksource' AAL. 0hen you pay for an item
using cash, you literally watch your money part from you. 0ith credit or de"it cards, the transaction is less
transparent and the pain of paying is put off until a later date, generally when the credit card "ill arrives or
the "ank account is "alanced. 1y then, however, the purchase has long since "een made.
,ash&s fatal flaw is that it&s easily compromised. Any cash found in a wallet that&s stolen is gone for good ##
there are few ways your local police force can link you to lost cash. This isn&t the case with de"it cards and
credit cardsF from a security standpoint, "oth forms of plastic "eat cash.
What*s the Difference?
Credit. 6very time you use a credit card, you are actually "orrowing money that is
made availa"le to you "y a "ank or other financial institution. The institution pays
the de"t to the vendor, and in turn, you pay the money "ack to the institution. 1y
signing up for a credit card, you agree to pay "ack the money that you "orrowed,
in addition to any interest drawn on the amount you "orrowed.
Debit. 3dds are, you have a de"it card in your wallet or purse right now, since
many ATM cards are programmed to have de"it options. Issued "y your "ank,
de"it cards take funds directly from the money that you have in your "ank
account##in a sense acting like a check, /ust faster. 0ith a de"it card, you don&t
have to carry cash or checks, and it is very convenient to shop at a variety of
places including gas stations, grocery stores, restaurants, and retail stores. They
provide instant access to your money and are accepted worldwide.
$e"it cards are used much like credit cards, meaning that the store you are
shopping at &swipes& them, and you are normally given the option of signing your
receipt instead of using a re)uired I+ num"er (you can enter your I+ num"er if
your prefer!. %ou also typically don&t have to show a picture I$.
Electronic funds transfer(EFT)
Electronic funds transfer or EFT refers to the computer-based systems used to perform
financial transactions electronically.
The term is used for a number of different concepts:
Cardholder-initiated transactions, where a cardholder makes use of a payment
card
irect deposit payroll payments for a business to its employees, possibly !ia a
payroll ser!ices company
irect debit payments from customer to business, where the transaction is
initiated by the business with customer permission
Electronic bill payment in online bankin", which may be deli!ered by EFT or
paper check
Transactions in!ol!in" stored !alue of electronic money, possibly in a pri!ate
currency
#ire transfer !ia an international bankin"
network ("enerally carries a hi"her fee)
Electronic $enefit Transfer
Introduction to 5ow 6lectronic ayment 0orks
0hen it comes to payment options, nothing is more convenient than
electronic payment. %ou don&t have to write a check, swipe a credit
card or handle any paper moneyF all you have to do is enter some
information into your 0e" "rowser and click your mouse. It&s no
wonder that more and more people are turning to electronic payment
## or e-payment ## as an alternative to sending checks through the
mail.
hoto courtesy $arren 5ester
i.el erfect $igital
In this article, we&ll look at the types of electronic payment, discuss its "enefits and limitations and e.plain
how to add e#payment capa"ility to your 0e" site.
Methods and Types of 6lectronic ayment
An electronic payment is any kind of non#cash payment that doesn&t involve a paper check. Methods of
electronic payments include credit cards, de"it cards and the ACH (Automated ,learing 5ouse! network.
The A,5 system comprises direct deposit, direct de"it and electronic checks (e#checks!.
*or all these methods of electronic payment, there are three main types of transactions'
,ourtesy Ama4on
9. A one-time customer-to-(endor payment is commonly used when you shop online at an e#
commmerce site, such as Ama4on. %ou click on the shopping cart icon, type in your credit card information
and click on the checkout "utton. The site processes your credit card information and sends you an e#mail
notifiying you that your payment was received. 3n some 0e" sites, you can use an e#check instead of a
credit card. To pay "y e#check, you type in your account num"er and your "ank&s routing num"er. The
vendor authori4es payment through the customer&s "ank, which then either initiates an electronic funds
transfer (6*T! or prints a check and mails it to the vendor.
=. %ou make a recurrin# customer-to-(endor payment when you pay a "ill through a regularly
scheduled direct de"it from your checking account or an automatic charge to your credit card. This type of
payment plan is commonly offered "y car insurance companies, phone companies and loan management
companies. Some long#term contracts (like those at gyms or fitness centers! re)uire this type of automated
payment schedule.
>. To use automatic &ank-to-(endor payment, your "ank must offer a service called online &ill pay.
%ou log on to your "ank&s 0e" site, enter the vendor&s information and authori4e your "ank to electronically
transfer money from your account to pay your "ill. In most cases, you can choose whether to do this
manually for each "illing cycle or have your "ills automatically paid on the same day each month.
+e.t, we&ll discuss some of the "enefits of electronic payment.
1enefits of 6lectronic ayment
6lectronic payment is very convenient for the consumer. In most cases, you only need to enter your account
information ## such as your credit card num"er and shipping address ## once. The information is then stored
in a data"ase on the retailer&s 0e" server. 0hen you come "ack to the 0e" site, you /ust log in with your
username and password. ,ompleting a transaction is as simple as clicking your mouse' All you have to do is
confirm your purchase and you&re done.
6lectronic payment lowers costs for "usinesses. The more payments they can process electronically, the
less they spend on paper and postage. 3ffering electronic payment can also help "usinesses improve
customer retention. A customer is more likely to return to the same e#commerce site where his or her
information has already "een entered and stored.
,ourtesy 1ank of America
!cheduled payments confirmation screen
0ith all the "enefits of electronic payment, it&s no wonder that its use is on the rise. More than 9= "illion A,5
payments were made in =::G, a =: percent increase from =::> KrefL. The =::G *ederal -eserve ayments
Study noted that from =::: to =::>, electronic payments grew as payment "y check declined, which
suggests that electronic payments are replacing checks.
In order to "etter serve their customers, "anks are swiftly moving to offer online "ill pay services. 8rant
Thornton&s =::C survey of "ank e.ecutives found that DC percent of community "anks and ?G percent of
large "anks offer =G(E online "ill payment KrefL. Most of these services are free to mem"ers and coordinate
easily with personal software programs such as Iuicken or MS Money. Alternatively, consumers can
su"scri"e to online "ill pay services such as aytrust or %ahooA 1ill ay. These services charge a monthly
fee in e.change for the convenience of paperless "ill paying.
In the ne.t section we&ll discuss the concerns that some people have a"out using electronic payment.
A Less Ta.ing 0ay to
ay
In 9??D, the I-S introduced its
free e#payment service, the
6lectronic *ederal Ta.
ayment System. In =::G, 9.EC
million people paid their ta.es
electronically. To sign up, all
you need is your Social
Security +um"er and checking
account information. In addition
to paying your ta. "ill online, you can access your payment history
and schedule ta. payments for ne.t year.
,oncerns A"out 6lectronic ayment
The main draw"acks to electronic payments are concerns over privacy and the possi"ility of identity theft.
*ortunately, there are many safeguards availa"le to protect your sensitive personal information from falling
into the wrong hands.
%ou can defend yourself against identity theft "y using virus protection software and a firewall on your
computer. %ou should also make sure that you send your credit card information over a secure server. %our
Internet "rowser will notify you when a server is secure "y showing a lock or key icon. In addition, the <-L
on a secure site is usually designated "y the prefi. 7https7 instead of 7http.7 -etailers do their part "y using
data encryption, which codes your information in such a way that only the key holder can decode it.
,ourtesy 6*TS
rivacy concerns aside, some people simply dislike making electronic payments. They find the setup too
time#consuming and don&t want more logons and passwords to remem"er. 3thers simply prefer the
familiarity of writing checks and dropping envelopes in the mail. -egardless of these concerns, electronic
payment will likely continue to rise in popularity.
+e.t we&ll learn how to set up e#payment for your small "usiness.
5ow to Set <p 6#ayment for %our 1usiness
Let&s say you have a small "usiness and you want to set up online payments via your 0e" site. %our first
decision is whether to outsource your payment solution or handle it in#house. *or those who want an all#in#
one solution, services like ayal and roay make it easy for you to accept credit cards and other forms of
electronic payment from your site. 0hen a customer enters his or her information on your site, your payment
service authori4es the transaction and transfers funds to your account. These services charge a processing
fee per transaction.
,ourtesy aypal
If you prefer to process payments in#house, the first thing you need to do is set up a secure server. This is a
computer that uses encryption to make it difficult for intruders to intercept confidential information. !ecure
!ocket <ayer (SSL! technology is used to encrypt the data. %ou can apply for an SSL certificate online.
3nce you have an SSL certificate, you need to register your site with a digital authentication service. A
digital certificate validates that the site receiving your customers& information is the correct one. It assures
customers that your site is legitimate and that their information is encrypted.
+ow that you&ve a secure server, you&ll need to "uild or "uy shopping software that allows a customer to
choose products from your site and add them to a virtual shopping cart. 0hen customers are ready to
complete their orders, they click on a 7checkout7 link that takes them to your secure server, where they enter
their credit card information.
*inally, you need a system to process credit card payments and an Internet merchant account with a "ank.
,redit card payment processing services are availa"le through online companies such as 2erisign. They
provide you with software that validates your customer&s credit card information over your secure server.
Some "usinesses also choose to accept electronic checks from customers.
Another potential source of information is the +ational Automated ,learing 5ouse Association (+A,5A!,
also known as the 6lectronic ayments Association. Let&s look ne.t at what this group does and the help it
offers consumers and small "usinesses.
6lectronic ayment Association
The +ational Automated ,learing 5ouse Association (+A,5A!, also known as the 6lectronic ayments
Association, has helped increase the use of e#payments and e#checks. +A,5A governs the nationwide
Automated ,learing 5ouse (A,5! network. Through this network, +A,5A&s 99,::: mem"er "anks and
other financial institutions offer direct deposit, direct de"it and e#checks for consumers and "usinesses.
M hotographer' Monika 0isniewska N Agency' $reamstime
The 7lectronic Payments Association pro(ides safe#uards to
ensure consumers that they*re safe when shoppin# online)
That activity is fairly invisi"le as you check "ank account "alances online, make purchases from online
stores with a de"it card or pay "ills from your "ank&s 0e" site. 1ut +A,5A&s role is an important one. The
not#for#profit association develops operating rules and "usiness practices for the A,5 network to make sure
it stays efficient, relia"le and secure ## keeping your electronic payments that way, too.
+A,5A also offers tools and resources to help its mem"er institutions facilitate electronic payments. And the
association develops electronic payment practices "eyond the A,5 network for areas like Internet
commerce, financial electronic data interchange (6$I! and international payments Ksource' +A,5AL.
As one of its services, +A,5A tracks the growing use of electronic payment through )uarterly and annual
reports. *or e.ample, the A,5 network handled nearly 9D "illion payments totaling @>:.> trillion in =::D, a
9G.C percent increase over =::C, according to +A,5A statistics. That includes payroll direct deposits, Social
Security "enefits, ta. refunds, payment of B "illion consumer "ills and more. The rate shows that the volume
of electronic payments continues to dou"le every five years Ksource' +A,5AL.
0hile most of +A,5A&s offerings are targeted to its mem"er financial institutions, the association offers help
for consumers and small "usinesses through an interactive 0e" site.
3n the 0e" site, you can watch virtual demonstrations of how direct deposit, direct payment and check
conversion work. %ou&ll also find e.planations of the different types of electronic payment along with
information on how to decide whether payroll direct deposit and direct payment of "ills are good options for
you.
The 0e" site&s "usiness section provides a cost "enefit analysis of direct deposit and direct payment for
"usinesses of different si4es, marketing tool kits for "usinesses& employees and customers, and suggested
answers to customer )uestions a"out check conversion Ksource' +A,5AL.
Through its ay It 8reen initiative, +A,5A is encouraging consumers to receive and pay "ills electronically
instead of on paper to save trees, fuel and water. The alliance "rings together +A,5A, the <.S. *ederal
-eserve, and leaders of the financial and consumer "illing industries.
The initiative cites a =::E survey "y Havelin Strategy and -esearch indicating that if all <.S. households
received and paid their "ills electronically, the <nited States would'
Save 9D.C million trees every year, providing enough lum"er for =9D,:CG single#family homes
-educe to.ic air pollutants "y >.? "illion tons of car"on dio.ide e)uivalents, the e)uivalent of taking
>CC,:9C cars off the road
-educe "y 9.D "illion pounds the solid waste generated each year "y 9.D "illion pounds, the weight
of CD,::: fully loaded gar"age trucks
aper isn&t the only item consumed through traditional "ill paying, the alliance points out. The group is
developing tools and resources that show the environmental "enefits of choosing electronic options over
paper Ksource' +A,5A ay It 8reenL.
7mail Money Transfer - 7MT
What Does Email Money Transfer - EMT Mean?
A retail "anking service that allows users to transfer funds "etween personal accounts using
email and their online "anking service. 6mail money transfers are considered secure "ecause
only the notification of transfer is done through email. The actual funds are settled through the
e.isting funds transfer networks that "anks have used for years.