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How does the ATM cardholder's money flow?

Follow the path the customer's cash takes from his bank to the dispenser.

November 6, 2000

The Authorization

Whenthe customer swipes his card at the ATM, the Acquirer kicks the transaction up to the card-issuing bank, which gives it an authorization number.
 
"At that point," said Ron Schuldt, COO of Columbus Data Services, "the money is not out of your account yet, but it's been tagged at the bank. So for all practical purposes, it's gone."

With the money set aside, the card-issuing bank's reply to the transaction request is sent back the way it came -- via the networks, to the Acquirer and then on to the ATM.

When the transaction is completed, "You take the money, stick it into your purse, and you're headed down the street," Schuldt said.

Let's say this time the customer asks for $100 when there's only $90 in the account. The card-issuing bank tells the Acquirer 'No way,' and the ATM declines the deal, saying there are non-sufficient funds (NSF) to cover it.

Chances are at this point, the customer will do a balance inquiry to find out how much money really is in his account. And once he knows it's less than he requested, he may do a balance transfer to put more money in, or he may decide to withdraw an amount under the $90, so it will clear.

Or the cardholder may have made previous arrangements with his bank for his credit card or savings account to make up the difference in case of a short fall.

Whatever the case, all this takes place on the Authorization side of the ATM transaction.

Transaction completed? Not totally.

The Settlement

Thecash that was dispensed at the ATM actually came right out of someone's pocket (the owner of the cash) as a loan to the cardholder. Along with any earned fees, this money must be paid back.

Technically, this is called the Settlement side of the equation. Everything related to it harks back to the banks.

"The thing to keep in mind," Schuldt said, "is that the networks were all started by financial institutions (FIs). So everything is geared towards how they think."

From a legal perspective, every action that a processor takes is on the behalf of some Federally Chartered financial institution. That FI (financial institution) typically is called the "sponsor" and many times also acts as the settlement bank.

Every processor in the United States has a sponsor FI standing squarely behind it, authorizing each and every move. It's still a matter of one FI talking to another FI.  

The processors and the ISOs may have seized the initiative of marketing and development, but it is still the FIs that form the foundation of the system.

As many third-party processors aren't financial institutions, they have to have an entree into the banking system to deal with the money. They do this through their relationship with their settlement bank.

This bank is their gateway to the Federal Reserve Bank (Fed), which ultimately acts as a clearinghouse for the money.

Let's look at a typical situation. The Issuer and the Acquirer transact business throughout the day. At the close of day, several things have to occur, depending on your perspective.  In this case, the focus is on the Acquirer.  

The Acquirer must perform two distinct functions. First, he must collect funds from the Issuer. Secondly, he must disburse funds to the owner of the cash.  Typically, the collection of funds is in a lump sum, and the disbursement (or settlement) of funds is itemized per ATM.  

The collection of funds is simply a transfer between accounts at a large bank, such as the Chase, and the disbursement happens through the Fed via Wire or ACH . (Automated Clearing House. This is bank terminology that means an entity authorizes another entity to draft funds on the the former's account.)

All processors are acting on behalf of a bank. These are financial transactions that are governed and authorized by the laws of the state and the United States Constitution. Every withdrawal at an ATM is a banking transaction, and compliance with every law governing such transactions must be observed.

The Authorization and the Settlement play an important role in a carefully crafted system that works consistently to the ATM customer's advantage.

The Acquirer is right in the middle of all this, making sure the cash flows smoothly -- out of the cardholder's bank account and back into the cash-owner's hands. Still, this is a banking game. Processors are only participants. They may be leading the charge, but the banks still make the rules.