DEBIT 101. Everything You Need To Know About ATM & Debit

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Everything You Need To Know About

ATM & Debit



Debit Cards – What Are They?

ATM Cards

Check Cards: Visa Check Card and MasterCard MasterMoney

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, 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 operating 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 fee 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 Are They?

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 debit 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 the 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 a gift card

functions similarly to a debit card and in those cases, the gift card transactions are routed through a proprietary network.

Proprietary ATM Networks



Regional Debit Networks

National Debit Networks

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 to 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.

Bank Owned vs NonBank Owned ATMs


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).



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.

Portfolio acquisitions

Replacements market, adding additional functionality to the location Flipping service providers

Replacing cash dispensing ATMs with scrip dispensers in low transaction volume locations NonBank (Off Premise) ATM Owners

What's the Next Frontier in the NonBank, Off-Premise Market?



How ATMs Work – An Overview

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 does ATM interchange work?

· What's the difference between a "regional" network and a "national"


· What's "scrip" and how is it different from an ATM transaction?

ATMs are a quick, convenient way to access money in your accounts.

How Do ATMs Work?

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.

Bank Computer Host Computer ATM

Telephone Network Telephone Network

©2001 HowStuffWorks


Parts of the Machine

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.


Screen Buttons


Printer Card

Reader Speaker

Display Screen

Cash Dispenser

Deposit Slot




Settlement Funds

ACH Transfers

"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.












Bank A

Bank B

Your Bank

Bank D






Merchant's Cash Account

Host's Cash Account Your

Checking Account

Electronic Funds Transfer ACH

ACH Transfers – "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.