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The basics and history of transaction processing

The customer swipes his ATM or credit card, and voila! Out comes cash! How does this marvelous thing happen? When the customer requests money at an ATM, a vast army of electronic networks, people and banks charges into action -- beginning with a transaction processor.

November 13, 2001

Though thousands of miles may separate an ATM from its host bank, the customer may think it's just around the corner. Unfortunately plenty can go wrong.

The customer swipes his ATM or credit card, and voila! Out comes cash! How does this marvelous thing happen?

When a customer requests money at an ATM, a vast army of electronic networks, people and banks charges into action -- beginning with a transaction processor.

From the ATM itself, to the transfer networks, to the bank that issued the customer's credit card, information about the customer's bank account is transmitted, validated and then acted upon. Is the pin number right? Is there a limit on withdrawals? Is there enough money in the account? What's the expiration date of the ATM card?

If all the answers check out, then the transaction processor tells the ATM, "Go for it. Give that person the cash."

In almost every case, the entire transaction goes like clockwork and is completed in about 30 seconds or less. The transaction processor's system works. The ATM customer, happy with his money, has no idea what went into his transaction.

History of Processing

In the mid-1970s, a few banks made ATMs available outside their walls as a convenience, so their customers could get cash after hours. The idea was so popular that almost every bank branch installed one. Then, a couple of competing local banks connected their ATMs electronically, allowing people to get money from an ATM owned by a bank other than their own.

"That's what started the first electronic networks," said third-party processor Ron Schuldt, COO of Columbus Data Services in New Orleans. "One banker got together with another banker and said, 'Look, I'll accept your card, if you will accept mine.' "

Local networks merged and got larger, becoming known as shared EFT (Electronic Funds Transfer) networks. They transferred information and money over communication lines -- like the Internet does today.

This new service was expensive, however, so banks created fees, including the interchange. "That was the compensation paid to the other bank by the card-issuing bank (cardholder's bank) for accepting their customers' ATM cards," Schuldt explained.

It was also the start of the foreign fee, paid by the cardholder to his bank for the privilege of using this "foreign" machine.

Banking rules eased, and banks extended their branches into other states, and the placement of ATMs grew. Regional networks formed, with nearly 180 in existence by the mid-1980s. (By 1998, because of consolidation, the number had shrunk to 41, according to Bank Network News.) The networks were owned primarly by banks, savings and loans or credit unions.

Business and travel in the United States escalated, and cardholders demanded more access to their bank accounts. Regional networks didn't reach far enough, and national networks were formed for these reasons:

• ATM owners -- banks, merchants, Independent Sales or Service Organizations (ISO) and distributors -- wanted to reach more cardholders with a single network. 

• Economies of scale -- costs could be spread across more ATMs.

• The Riegle-Neal Interstate Banking and Branching Efficiency Act took effect in the last quarter of 1995. It expanded banks' ability to operate across state lines. 

• Interstate bank holding companies wanted to reduce the number of networks they participated in.

Today, most regions have a single, dominant network through which transactions pass to reach the national networks, such as Discover and American Express. Plus and Cirrus are operated by Visa and MasterCard, respectively. 

With banks, networks and ATMs, a common carrier that spoke everybody's language was needed to ensure that millions of transactions would run smoothly through the electronic pipelines.

Providing that essential, but little known, link became the job of the transaction processors.

Why the ATM business expanded dramatically

Transactions that were sent through the national networks had to play by Cirrus and Plus rules. Early in the game, these two mammoth networks opposed surcharge fees for transactions. Almost everyone went along, because Cirrus and Plus enabled cross-country (and eventually, international) transactions.

Their tough stance on surcharging took away incentive for most businesses to deploy low-volume ATMs. Banks, in an effort to encourage customer loyalty, were the only deployers of ATMs. 

That changed dramatically in April 1996, when Cirrus and Plus lifted their restrictions on surcharging. Did they do this out of the goodness of their hearts? Experts say more likely it was a result of pressures brought to bear from groups who were determined to place ATMs in "off-premise" (off-bank) locations and make them profitable.

Now, a transaction fee -- called the surcharge -- which was set and collected by the ATM owner, could be charged to the cardholder for the convenience of accessing his cash. With lower-priced cash dispensers, this move by Cirrus and Plus opened the gates to the ATM flood.

By year-end hundreds of ATMs were installed at convenience stores and shopping malls. By December 1999, less than four years later, Bank Network News reported there were 227,000 ATMs in the US, generating nearly 11 billion ATM transactions. For the first time the number of off-premise ATMs exceeded those at bank branches.

As a result of these changes, consumer access to spending money increased; and profits soared for financial institutions, credit-card companies, ATM owners, networks and transaction processors. Everybody associated with ATMs tasted success!

Glitch-free, that's the key

Transaction processors grease the wheels of this success, and the goal is to run the system as quietly and glitch-free as possible.

"We do all the behind-the-scenes stuff that people don't really realize. Your card wouldn't work without us," said Jenny Pedersen, EFT marketing manager for Midwest Payment Systems of Cincinnati.

"Money is very, very dear to everybody's heart. And, from the customer's perspective, when he goes to an ATM, it's got to work 99 percent of the time," said Campbell Burgess, president and CEO of Core Data Resources of Amarillo, Texas.

When the cardholder walks away from the ATM -- as long as he has cash in hand -- does he really care what kind of processor sleight-of-hand made it all happen?

Nope, said Burgess.

When things go right, "It's like going to the store to buy milk. Who cares that it started with a cow in a barn somewhere."