Innovative Payment Solutions LLC

How Do ATMs Work?

You're short on cash, so you walk over to the automated teller machine (ATM), insert your 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. These machines can now be found at most supermarkets, convenience stores and travel centers all over the country from coast to coast and around the world. But have you ever wondered about the process that makes your bank funds available to you at any of the thousands of ATMs?

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 (ISP) in that it is the gateway through which all the various ATM networks become available 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. 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 via a modem.

Leased-line ATMs are preferred for very high-volume locations because of their throughput capability, and dial-up ATMs are preferred for retail merchant locations where cost is a greater factor than throughput. 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. A bank or Financial Institution may own the host processor, or an independent service provider or Merchant may own it. Bank-owned processors normally support only bank-owned machines, whereas the independent processors support merchant-owned machines.

Parts of the Machine

You're probably one of the million consumers who have 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 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 three or four output devices:

• Speaker – The speaker provides the cardholder with tactile feedback 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 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 and the machine owner maintains a hard copy for six months. 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 or torn, or is 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 Transfers

"ACH" is short for "Automated Clearing House." This is bank terminology. It means that a person or business is authorizing another person or business to draft on an account. It is very common for fitness centers and other businesses to ACH a monthly membership fee from member accounts, and many small businesses use ACH to provide electronic deposit for paychecks.

Settlement Funds

When a cardholder wants to do an ATM transaction, he or she provides the necessary information by means of the card reader and keypad. The ATM forwards this information to the host processor, which routes the transaction request to the cardholder's bank or institution that issued the card. If the cardholder is requesting cash, the host processor causes an electronic fund transfer to take place from the customer's checking account to 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 merchant's bank account, usually the next bank Business Day. In this way, the merchant is reimbursed for all funds dispensed by the ATM.

An independent ATM host can access any bank. It also supports a large number of ATM's placed with different merchants.

So when you request cash, the money moves electronically from your account to the host's account to the merchant's account.