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ATM: A banking terminal used to make transactions without a human teller

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 (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 dialed by modem. Leased-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 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. 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.

Parts of the Machine


You're probably 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 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. 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.

Sensing Bills
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 a hard copy is maintained by the machine owner for two years. 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.

ATMs for the Visually Impaired


There are ATMs that are accessible to blind and visually impaired people. These machines are located at kiosks rather than bank drivethrus. And the keypads at ATMs are equipped with braille.

Settlement Funds

ACH Transfers

"ACH" is short for "automated clearing house." This bank When a cardholder wants to do an ATM transaction, he or she terminology means that a person provides the necessary information by means of the card reader and or business is authorizing keypad. The ATM forwards this information to the host processor, another person or business to which routes the transaction request to the cardholder's bank or the draft on an account. It is institution that issued the card. If the cardholder is requesting cash, common for fitness centers and the host processor causes an electronic funds transfer to take other businesses to ACH a place from the customer's bank account to the host processor's account. Once the funds are transferred to the host processor's bank monthly membership fee from member accounts, and many account, the processor sends an approval code to the ATM authorizing the machine to dispense the cash. The processor then small businesses use ACH for ACHs the cardholder's funds into the merchant's bank account, direct deposit of paychecks.
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 ATMs 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.

ATM Security
ATMs keep your personal identification number (PIN) and other information safe by using encryption software such as Triple DES (Data Encryption Standard). But there are lots of things that you can do to protect your information and your money at an ATM. Many banks recommend that you select your own PIN. Visa offers the following PIN tips:

Don't write down your PIN. If you must write it down, do not store it in your wallet or purse.

Make your PIN a series of letters or numbers that you can easily remember, but that cannot easily be associated with you personally. Avoid using birth dates, initials, house numbers or your phone number. Visa 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 bent. Get your card out BEFORE you approach the ATM. You'll be more vulnerable to attack if you're standing in front of the ATM, fumbling through your wallet for your card. Stand directly in front of the ATM keypad when typing in your PIN. This prevents anyone waiting to use the machine from seeing your personal information. After your transaction, take your receipt, card and money away. Do 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 possible to prevent anyone from coming up to your window. Also make sure that your doors are locked before you drive up to the machine. Do not leave your car running while using a walk-up ATM. Take your keys with you and lock the doors before your transaction. If someone or something makes you uncomfortable, cancel your transaction and leave the machine immediately. Follow up with your bank to make sure the transaction was cancelled and alert the bank 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, just 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 obvious to any would-be thief that this is not payday.

It's important to use a well-lit, public ATM machine at night.


For safety reasons, ATM users should seek out a machine that is located in a well-lighted public place. Federal law requires that only the last four digits of the cardholder's account number be printed on the transaction receipt so that when a receipt is left at the machine location, the account number is secure. However, the entry of your four-digit personal identification number (PIN) on the keypad should still be obscured from observation, which can be done by positioning your hand and body in such a way that the PIN entry cannot be recorded by store cameras or store employees. The cardholder's PIN is not recorded in the journal, but the account number is. If you protect your PIN, you protect your account.

Your ATM PIN should be a number that you can easily remember, but that would not be readily available to thieves.

How Credit Cards Work


Have you ever stood behind someone in line at the store and watched him shuffle through a stack of what must be at least 10 credit cards? Consumers with this many cards are still in the minority, but experts say that the majority of U.S. citizens have at least one credit card -- and usually two or three. It's true that credit cards have become important sources of identification -- if you want to rent a car, for example, you really need a major 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 before finance charges kick in. That sounds good, in theory. But in reality, many consumers are unable to take advantage of these benefits because they carry a balance on their credit card from month to month, paying finance charges that can go up to a whopping 23 percent. Many find it hard to resist using the old "plastic" for impulse purchases or buying things they really can't afford. The numbers are striking: In 1999, American consumers charged about $1.2 trillion on their general-purpose credit cards. In this article we'll look at the credit card -- how it works both financially and technically -- and we'll offer tips on how to shop for a credit card. (Experts say this should be a project on the scale of shopping for a car loan or mortgage!) We'll also describe the different credit-card plans available, talk about your credit history and how that might affect your card options, and discuss how to avoid credit-card fraud -- both online and in the real world. Let's start at the beginning. A credit card is a thin plastic card, usually 3-1/8 inches by 2-1/8 inches in size, that contains identification information such as a signature or picture, and authorizes the person named on it to charge purchases or services to his account -- charges for which he will be billed periodically. Today, the information on the card is read by automated teller machines (ATMs), store readers, and bank and Internet computers. According to Encyclopedia Britannica, the use of credit cards originated in the United States during the 1920s, when individual companies, such as hotel chains and oil companies, began issuing them to customers for purchases made at those businesses. This use increased significantly after World War II.

The first universal credit card -- one that could be used at a variety of stores and businesses -- was introduced by Diners Club, Inc., in 1950. With this system, the credit-card company charged cardholders an annual fee and billed them on a monthly or yearly basis. Another major universal card -- "Don't leave home without it!" -- was established in 1958 by the American Express company. Later came the bank credit-card system. Under this plan, the bank credits the account of the merchant as sales slips are received (this means merchants are paid quickly -- something they love!) and assembles charges to be billed to the cardholder at the end of the billing period. The cardholder, in turn, pays the bank either the entire balance or in monthly installments with interest (sometimes called carrying charges). The first national bank plan was BankAmericard, which was started on a statewide basis in 1959 by the Bank of America in California. This system was licensed in other states starting in 1966, and was renamed Visa in 1976. Other major bank cards followed, including MasterCard, formerly Master Charge. In order to offer expanded services, such as meals and lodging, many smaller banks that earlier offered credit cards on a local or regional basis formed relationships with large national or international banks.

What Credit Card Numbers Mean


Although phone companies, gas companies and department stores have their own numbering systems, ANSI Standard X4.13-1983 is the system used by most national credit-card systems.

Illustration by Rosaleah Rautert The front of your credit card has a lot of numbers -- here's an example of what they might mean. Here are what some of the numbers stand for: The first digit in your credit-card number signifies the system: 3 - travel/entertainment cards (such as American Express and Diners Club) 4 - Visa 5 - MasterCard 6 - Discover Card The structure of the card number varies by system. For example, American Express card numbers start with 37; Carte Blanche and Diners Club with 38. American Express - Digits three and four are type and currency, digits five through 11 are the account number, digits 12 through 14 are the card number within the account and digit 15 is a check digit. Visa - Digits two through six are the bank number, digits seven through 12 or seven through 15 are the account number and digit 13 or 16 is a check digit. MasterCard - Digits two and three, two through four, two through five or two through six are the bank number (depending on whether digit two is a 1, 2, 3 or other). The digits after the bank number up through digit 15 are the account number, and digit 16 is a check digit. In the next section, we'll look at the stripe on the back of a credit card.

The Stripe on a Credit Card

Illustration by Rosaleah Rautert Your card has a magstripe on the back and a place for your all-important signature. The stripe on the back of a credit card is a magnetic stripe, often called a magstripe. The magstripe is made up of tiny iron-based magnetic particles in a plastic-like film. Each particle is really a tiny bar magnet about 20-millionths of an inch long. The magstripe can be "written" because the tiny bar magnets can be magnetized in either a north or south pole direction. The magstripe on the back of the card is very similar to a piece of cassette tape (see How Cassette Tapes Work for details). A magstripe reader (you may have seen one hooked to someone's PC at a bazaar or fair) can understand the information on the three-track stripe. If the ATM isn't accepting your card, your problem is probably either: A dirty or scratched magstripe An erased magstripe (The most common causes for erased magstripes are exposure to magnets, like the small ones used to hold notes and pictures on the refrigerator, and exposure to a store's electronic article surveillance (EAS) tag demagnetizer.) There are three tracks on the magstripe. Each track is about one-tenth of an inch wide. The ISO/IEC standard 7811, which is used by banks, specifies: Track one is 210 bits per inch (bpi), and holds 79 6-bit plus parity bit read-only characters. Track two is 75 bpi, and holds 40 4-bit plus parity bit characters. Track three is 210 bpi, and holds 107 4-bit plus parity bit characters. Your credit card typically uses only tracks one and two. Track three is a read/write track (which includes an encrypted PIN, country code, currency units and amount authorized), but its usage is not standardized among banks. The information on track one is contained in two formats: A, which is reserved for proprietary use of the card issuer, and B, which includes the following: Start sentinel - one character Format code="B" - one character (alpha only) Primary account number - up to 19 characters Separator - one character Country code - three characters Name - two to 26 characters Separator - one character Expiration date or separator - four characters or one character Discretionary data - enough characters to fill out maximum record length (79 characters total) End sentinel - one character Longitudinal redundancy check (LRC) - one character LRC is a form of computed check character. The format for track two, developed by the banking industry, is as follows:

Start sentinel - one character

Primary account number - up to 19 characters Separator - one character Country code - three characters Expiration date or separator - four characters or one character Discretionary data - enough characters to fill out maximum record length (40 characters total) LRC - one character For more information on track format, see ISO Magnetic Stripe Card Standards. There are three basic methods for determining whether your credit card will pay for what you're charging: Merchants with few transactions each month do voice authentication using a touch-tone phone. Electronic data capture (EDC) magstripe-card swipe terminals are becoming more common -- so is swiping your own card at the checkout. Virtual terminals on the Internet This is how it works: After you or the cashier swipes your credit card through a reader, the EDC software at the point-of-sale (POS) terminal dials a stored telephone number (using a modem) to call an acquirer. An acquirer is an organization that collects credit-authentication requests from merchants and provides the merchants with a payment guarantee. When the acquirer company gets the credit-card authentication request, it checks the transaction for validity and the record on the magstripe for: Merchant ID Valid card number Expiration date Credit-card limit Card usage Single dial-up transactions are processed at 1,200 to 2,400 bits per second (bps), while direct Internet attachment uses much higher speeds via this protocol. In this system, the cardholder enters a personal identification number (PIN) using a keypad. The PIN is not on the card -- it is encrypted (hidden in code) in a database. (For example, before you get cash from an ATM, the ATM encrypts the PIN and sends it to the database to see if there is a match.) The PIN can be either in the bank'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 bank's key and the customer's PIN, but not computationally feasible to obtain the plain-text PIN from the cipher, even if the key is known. This feature was designed to protect the cardholder from being impersonated by someone who has access to the bank's computer files. Likewise, the communications between the ATM and the bank's central computer are encrypted to prevent would-be thieves from tapping into the phone lines, recording the signals sent to the ATM to authorize the dispensing of cash and then feeding the same signals to the ATM to trick it into unauthorized dispensing of cash. If this isn't enough protection to ease your mind, there are now cards that utilize even more security measures than your conventional credit card: Smart Cards.

How Debit Cards Work


There is nothing mysterious about debit cards. With their Visa and MasterCard logos, they may look like they're masquerading as credit cards, but they do not draw money from the same source as credit cards. Debit cards, sometimes called checking cards, draw funds from your checking account, not a line of credit. Many debit cards are actually dual debit/credit cards. You can use them as one or the other. When you make a purchase with such a dual card, the card reader will ask whether you want to use your card as a debit or credit card. If you use it as a debit card, you enter your personal identification number (PIN) to authorize the transaction. You may also have the option to get cash back when you make a debit 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 John Hancock on a sales slip instead of entering your PIN. Up Next

How Credit Cards Work How Banks Work

InvestigationDiscovery.com: Credit Card Fraud Quiz As you can see, the basic process of a debit transaction is not complicated. But why would you choose to use a debit card instead of a credit card? First let's compare debit and credit cards.

Debit Cards vs. Credit Cards

Photo by Wathiq Khuzaie/Getty Images Banks in Baghdad have started issuing debit cards to customers, as advertised by this employee of Warka Bank on March 11, 2008. Debit cards and credit cards each have advantages and disadvantages. The biggest advantage of debit cards over credit cards is that you don't need to worry about interest rates, monthly bills and finance charges. Since a debit card uses only the money you actually have, you won't build up an unmanageable debt by using it, as you might with unchecked use of a credit card. Credit cards, after all, accrue interest on unpaid balances. Unless you pay off your balance every month, you will always end up paying more for a TV, for example, than what the TV actually cost. Credit card limits are often quite high, sometimes significantly higher than the average monthly balance in your checking account. If you aren't careful, your credit card balance can grow out of control. The limit on your debit card, on the other hand, is whatever you have in your checking account. Another advantage of the debit card is how easy it is to acquire one. You can get a debit card with pretty much any checking account, whereas you can obtain a credit card only by applying for one. A debit card does not require an investigation into your credit history; most credit cards do require a credit check. A Matter of Convenience

According to a study by the Federal Reserve Board, 88.1 percent of debit card holders use debit cards because of their convenience, while only 5.8 percent of holders use debit cards to lasso in their spending habits [source: Borzekowski, Kiser and Ahmed].
Just as the advantage of a debit card is that it draws on your actual funds, the disadvantage of a debit card is that you are limited by those funds. You can overdraw your checking account, which can result in your bank charging an overdraft fee. These fees can reach up to $25 [source: Bankrate]. But you can also go over your credit card limit, which results in a similar fee, and this fee can accrue interest. Debit cards don't license you to be irresponsible in your spending; you should always keep tabs on your transactions and account balance. One advantage of credit cards over debit cards is that they can help you to make very large purchases that would be otherwise impossible, such as that plasma TV you've been eyeing. But it is easy with credit cards to feel like you can buy whatever you want, whenever you want. Live and spend within your means. (For

more information on how to do that, take a look at How Discretionary Expenses Work and Ten Tips for Staying on Budget.) A disadvantage of debit cards is the amount of buying protection provided to you by law. Debit card transactions very much resemble cash transactions. The money changes hands quickly, and it's difficult to get it back. If you want to return a broken or unsatisfactory item you purchased with a debit card, many businesses will only give you an exchange or store credit. Also, it's worth noting that the laws that police stolen debit cards aren't as friendly as the laws that police stolen credit cards. You may find it more difficult to get your money when a highway robber steals your debit card than when a highway robber lifts your credit card. Learn more on the next page.

Choosing to Use a Debit Card


There are several things to consider when choosing whether to use a debit card. Debit cards are best for small, run-of-the-mill purchases -- the box of doughnuts for the boys at work or the bottle of water from the corner store as you walk to the beach on a hot day. When you get into large items like computers, TVs and furniture, it's usually better to use a credit card. These purchases can put a big dent in your finances -- a dent you might not be able to afford in one big hit. Spread over several months of credit card payments, the cost of a large item becomes more manageable. Debit cards are convenient for both the customer and the merchant. Checks can be annoying to write, cumbersome to deposit and slow to clear. Debit card transactions usually clear within 24 hours. Plus, business establishments accept debit cards more often than they accept checks, and businesses generally pay less to process debit card payments than they do to process credit card payments. EFTA

The Electronic Funds Transfer Act gives banks ten days to look into reports of "unauthorized transactions" and decide whether your case holds water. Some banks will give you an infusion of funds to cover the loss if the investigation is going to take awhile. Some will not. Ask your bank about its policies on unauthorized transactions [source: FDIC].
Something to keep in mind when using a debit card is that some businesses, such as hotels and gas stations, put a hold on your card to ensure that they are paid for their product or service. For example, gas stations will often put a $50 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 $50 hold. If you use a debit card on gas purchases, this $50 hold could influence the available balance in your checking account, affecting other purchases you might make before the hold is lifted. If you choose to use a debit card, make sure you protect your card and account information. Keep your PIN safe; don't carry it around on a slip of paper tucked into your wallet. Memorize it. Also, don't make your PIN something obvious, a number that a thief could easily connect to other identifying information, such as your street number or a sequence of digits from your phone number. Pretty 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 debit card is stolen, you may find it more difficult to get your money back than you would if your credit card were stolen. Under the Electronic Fund Transfer Act, as long as you report your card stolen within two days, you won't lose more than $50 of the money a thief draws from your account. If you don't report for up to 60 days, you could be liable for as much as $500. Beyond 60 days -- well, let's hope you have a good supply of money in another account. Luckily, Visa and MasterCard, as well as many banks, will not hold you liable for debit transactions you did not authorize. If you'd like to know more about debit cards and related topics, follow the links on the next page.

Advantages of Cash, Credit and Debit


Both credit and debit cards are advantageous because they provide proof of ownership -- your name (and sometimes photo) emblazoned right there on the front of the card. But credit cards extend this protection further. Under the Fair Credit Billing Act, the owner of a lost or stolen credit card is responsible for only up to $50 worth of fraudulent purchases. Even more, many credit cards automatically grant you an extended warranty on items you purchase using them. Debit cards offer similar security through another U.S. law, the Electronic Fund Transfer Act. This law limits a debit card holder's fraud liability to $50 as long as he or she alerts the issuing bank of the fraud within two

days of discovery. After the initial two day period, the liability for the cardholder increases to $500 [source: Bankrate]. While most retailers will demand you produce a photo ID when making a credit card purchase, you aren't bound by law to do so; only a card bearing your signature is required by credit card companies to validate the transaction. Since most banks offer debit cards with personal identification numbers (PINs) that only the cardholder knows (or should know), the card should be useless if it's stolen. So, debit cards actually have a leg up over credit cards as far as security goes.

Bay Ismoyo/AFP/Getty Images Cash's fatal flaw? It's easily stolen. Cash and debit cards hold another advantage over credit cards; they lack the fees associated with credit cards. Credit card companies make their money by charging interest on balances each month, which can be significant, since Americans that use credit cards carry an average of $16,635 in debt, not including home mortgages [source: U.S. News and World Report]. Cash, if withdrawn from the bank where the account is held, is issued both fee- and interest-free. Debit cards can also come without fees. Most banks offer some kind of fee-free debit card account, but beware: Banks have come to make money from the debit cards' popularity with consumers by charging overdraft fees. These fees average almost $35, and pull an annual windfall of $17.5 billion for the banking industry [source: Lorek]. Overall, debit 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 benefit of cash -- if you pay close attention to your account. Being 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 debit are largely context-specific. Depending on the type of shopper and how security-conscious you are, each form has its merits. If you're a shopaholic who wants to become 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 "pain of paying," based on the transparency cash provides [source: APA]. When you pay for an item using cash, you literally watch your money part from you. With credit or debit cards, the transaction is less transparent and the pain of paying is put off until a later date, generally when the credit card bill arrives or the bank account is balanced. By then, however, the purchase has long since been made. Cash'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 debit cards and credit cards; from a security standpoint, both forms of plastic beat cash.

What's the Difference? Credit. Every time you use a credit card, you are actually borrowing money that is

made available to you by a bank or other financial institution. The institution pays the debt to the vendor, and in turn, you pay the money back to the institution. By signing up for a credit card, you agree to pay back the money that you borrowed, in addition to any interest drawn on the amount you borrowed. Debit. Odds are, you have a debit card in your wallet or purse right now, since many ATM cards are programmed to have debit options. Issued by your bank, debit cards take funds directly from the money that you have in your bank account--in a sense acting like a check, just faster. With a debit 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. Debit 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 required PIN number (you can enter your PIN number if your prefer). You also typically don't have to show a picture ID.

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 Direct deposit payroll payments for a business to its employees, possibly via a payroll services company Direct debit payments from customer to business, where the transaction is initiated by the business with customer permission Electronic bill payment in online banking, which may be delivered by EFT or paper check Transactions involving stored value of electronic money, possibly in a private currency Wire transfer via an international banking network (generally carries a higher fee) Electronic Benefit Transfer

Introduction to How Electronic Payment Works When it comes to payment options, nothing is more convenient than electronic payment. You don't have to write a check, swipe a credit card or handle any paper money; all you have to do is enter some information into your Web browser 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.

Photo courtesy Darren Hester Pixel Perfect Digital

In this article, we'll look at the types of electronic payment, discuss its benefits and limitations and explain how to add e-payment capability to your Web site. Methods and Types of Electronic Payment

An electronic payment is any kind of non-cash payment that doesn't involve a paper check. Methods of electronic payments include credit cards, debit cards and the ACH (Automated Clearing House) network. The ACH system comprises direct deposit, direct debit and electronic checks (e-checks). For all these methods of electronic payment, there are three main types of transactions:

Courtesy Amazon

A one-time customer-to-vendor payment is commonly used when you shop online at an ecommmerce site, such as Amazon. You click on the shopping cart icon, type in your credit card information and click on the checkout button. The site processes your credit card information and sends you an e-mail notifiying you that your payment was received. On some Web sites, you can use an e-check instead of a credit card. To pay by e-check, you type in your account number and your bank's routing number. The vendor authorizes payment through the customer's bank, which then either initiates an electronic funds transfer (EFT) or prints a check and mails it to the vendor. 2. You make a recurring customer-to-vendor payment when you pay a bill through a regularly scheduled direct debit from your checking account or an automatic charge to your credit card. This type of payment plan is commonly offered by car insurance companies, phone companies and loan management companies. Some long-term contracts (like those at gyms or fitness centers) require this type of automated payment schedule. 3. To use automatic bank-to-vendor payment, your bank must offer a service called online bill pay. You log on to your bank's Web site, enter the vendor's information and authorize your bank to electronically transfer money from your account to pay your bill. In most cases, you can choose whether to do this manually for each billing cycle or have your bills automatically paid on the same day each month. Next, we'll discuss some of the benefits of electronic payment. Benefits of Electronic Payment Electronic payment is very convenient for the consumer. In most cases, you only need to enter your account information -- such as your credit card number and shipping address -- once. The information is then stored in a database on the retailer's Web server. When you come back to the Web site, you just log in with your username and password. Completing a transaction is as simple as clicking your mouse: All you have to do is confirm your purchase and you're done. Electronic payment lowers costs for businesses. The more payments they can process electronically, the less they spend on paper and postage. Offering electronic payment can also help businesses improve customer retention. A customer is more likely to return to the same e-commerce site where his or her information has already been entered and stored.

1.

Courtesy Bank of America

Scheduled payments confirmation screen


With all the benefits of electronic payment, it's no wonder that its use is on the rise. More than 12 billion ACH payments were made in 2004, a 20 percent increase from 2003 [ref]. The 2004 Federal Reserve Payments Study noted that from 2000 to 2003, electronic payments grew as payment by check declined, which suggests that electronic payments are replacing checks. In order to better serve their customers, banks are swiftly moving to offer online bill pay services. Grant Thornton's 2005 survey of bank executives found that 65 percent of community banks and 94 percent of large banks offer 24/7 online bill payment [ref]. Most of these services are free to members and coordinate easily with personal software programs such as Quicken or MS Money. Alternatively, consumers can subscribe to online bill pay services such as Paytrust or Yahoo! Bill Pay. These services charge a monthly fee in exchange for the convenience of paperless bill paying. In the next section we'll discuss the concerns that some people have about using electronic payment.

A Less Taxing Way to Pay


In 1996, the IRS introduced its free e-payment service, the Electronic Federal Tax Payment System. In 2004, 1.75 million people paid their taxes electronically. To sign up, all you need is your Social Courtesy EFTPS Security Number and checking account information. In addition to paying your tax bill online, you can access your payment history and schedule tax payments for next year.
Concerns About Electronic Payment The main drawbacks to electronic payments are concerns over privacy and the possibility of identity theft. Fortunately, there are many safeguards available to protect your sensitive personal information from falling into the wrong hands. You can defend yourself against identity theft by using virus protection software and a firewall on your computer. You should also make sure that you send your credit card information over a secure server. Your Internet browser will notify you when a server is secure by showing a lock or key icon. In addition, the URL on a secure site is usually designated by the prefix "https" instead of "http." Retailers do their part by using data encryption, which codes your information in such a way that only the key holder can decode it.

Privacy 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 remember. Others simply prefer the familiarity of writing checks and dropping envelopes in the mail. Regardless of these concerns, electronic payment will likely continue to rise in popularity. Next we'll learn how to set up e-payment for your small business. How to Set Up E-Payment for Your Business Let's say you have a small business and you want to set up online payments via your Web site. Your first decision is whether to outsource your payment solution or handle it in-house. For those who want an all-inone solution, services like PayPal and ProPay make it easy for you to accept credit cards and other forms of electronic payment from your site. When a customer enters his or her information on your site, your payment service authorizes the transaction and transfers funds to your account. These services charge a processing fee per transaction.

Courtesy Paypal

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. Secure Socket Layer (SSL) technology is used to encrypt the data. You can apply for an SSL certificate online. Once 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. Now that you've a secure server, you'll need to build or buy shopping software that allows a customer to choose products from your site and add them to a virtual shopping cart. When customers are ready to complete their orders, they click on a "checkout" link that takes them to your secure server, where they enter their credit card information. Finally, you need a system to process credit card payments and an Internet merchant account with a bank. Credit card payment processing services are available through online companies such as Verisign. They provide you with software that validates your customer's credit card information over your secure server. Some businesses also choose to accept electronic checks from customers. Another potential source of information is the National Automated Clearing House Association (NACHA), also known as the Electronic Payments Association. Let's look next at what this group does and the help it offers consumers and small businesses. Electronic Payment Association The National Automated Clearing House Association (NACHA), also known as the Electronic Payments Association, has helped increase the use of e-payments and e-checks. NACHA governs the nationwide Automated Clearing House (ACH) network. Through this network, NACHA's 11,000 member banks and other financial institutions offer direct deposit, direct debit and e-checks for consumers and businesses.

Photographer: Monika Wisniewska | Agency: Dreamstime

The Electronic Payments Association provides safeguards to ensure consumers that they're safe when shopping online.
That activity is fairly invisible as you check bank account balances online, make purchases from online stores with a debit card or pay bills from your bank's Web site. But NACHA's role is an important one. The not-for-profit association develops operating rules and business practices for the ACH network to make sure it stays efficient, reliable and secure -- keeping your electronic payments that way, too. NACHA also offers tools and resources to help its member institutions facilitate electronic payments. And the association develops electronic payment practices beyond the ACH network for areas like Internet commerce, financial electronic data interchange (EDI) and international payments [source: NACHA]. As one of its services, NACHA tracks the growing use of electronic payment through quarterly and annual reports. For example, the ACH network handled nearly 16 billion payments totaling $30.3 trillion in 2006, a 14.5 percent increase over 2005, according to NACHA statistics. That includes payroll direct deposits, Social Security benefits, tax refunds, payment of 8 billion consumer bills and more. The rate shows that the volume of electronic payments continues to double every five years [source: NACHA].

While most of NACHA's offerings are targeted to its member financial institutions, the association offers help for consumers and small businesses through an interactive Web site. On the Web site, you can watch virtual demonstrations of how direct deposit, direct payment and check conversion work. You'll also find explanations of the different types of electronic payment along with information on how to decide whether payroll direct deposit and direct payment of bills are good options for you. The Web site's business section provides a cost benefit analysis of direct deposit and direct payment for businesses of different sizes, marketing tool kits for businesses' employees and customers, and suggested answers to customer questions about check conversion [source: NACHA]. Through its Pay It Green initiative, NACHA is encouraging consumers to receive and pay bills electronically instead of on paper to save trees, fuel and water. The alliance brings together NACHA, the U.S. Federal Reserve, and leaders of the financial and consumer billing industries. The initiative cites a 2007 survey by Javelin Strategy and Research indicating that if all U.S. households received and paid their bills electronically, the United States would: Save 16.5 million trees every year, providing enough lumber for 216,054 single-family homes Reduce toxic air pollutants by 3.9 billion tons of carbon dioxide equivalents, the equivalent of taking 355,015 cars off the road Reduce by 1.6 billion pounds the solid waste generated each year by 1.6 billion pounds, the weight of 56,000 fully loaded garbage trucks Paper isn't the only item consumed through traditional bill paying, the alliance points out. The group is developing tools and resources that show the environmental benefits of choosing electronic options over paper [source: NACHA Pay It Green].

Email Money Transfer - EMT


What Does Email Money Transfer - EMT Mean? A retail banking service that allows users to transfer funds between personal accounts using email and their online banking service. Email money transfers are considered secure because only the notification of transfer is done through email. The actual funds are settled through the existing funds transfer networks that banks have used for years.