How ATMs Work

By: Jim Bowen

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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. Have you ever wondered about the process that makes your bank funds available to you at an ATM on the other side of the country?


In this article, we will look at the ATM device that allows you access to your money and examine the network that the ATM connects to.

ATM Card vs. Check Card

ATM cards and check cards can be used in different ways. See more banking­ pictures.
ATM cards and check cards can be used in different ways. See more banking­ pictures.

­As an alternative to writing checks and using a credit card, most major banks have teamed up with major credit-card companies to issue check cards.

Check cards are different from straight ATM cards in a couple of ways. First, check cards are also known as debit cards because of how they work -- instead of getting credit for your purchase and receiving a monthly bill, like you do with a credit card, a check/debit card deducts money from your checking or savings account.


Also, while you can only use your ATM card at the ATM machine (and some grocery stores), you can use a check card at most retailers that accept credit cards, such as:

  • Grocery stores
  • Gas stations
  • Discount superstores
  • Book stores
  • Ticket counters (concert tickets, airline tickets, etc.)
  • Pharmacies
  • Hotels
  • E-tailers
  • Restaurants

There are exceptions. Some hotels and rental car services only accept credit cards because it's easier, cheaper, and less of a risk to them than check cards. Those that do accept check cards often put a certain amount of money in your bank account "on hold" (unavailable to you) -- usually the cost of the room or rental including taxes and other fees, plus a percentage of the total or a fee to cover possible damages. When you check out of the hotel or turn in your rental car, the difference between the "hold" amount and what you're actually billed is released back into your account. This is something to consider when using your debit card to reserve a hotel room or rent a car.

You can use your check card as either a credit card or a debit card -- either way, it comes out of your account. The only difference is that if you tell the clerk "credit card," you sign a slip, and if you tell the clerk "debit card," you enter your PIN number instead of signing. Some banks charge you a fee if you use your check card as a debit card (if it costs them more to process those transactions), but not if you use it as a credit card.

It's easy to tell the difference between a plain ATM card and a check card: A check card has your name, "credit" account number, the credit company's logo, the bank's logo and "Check Card" printed across the front of it; an ATM card has only your name, account number and bank's logo on the front of it. Both cards have strips on the back for the authorized cardholder to sign on. A check card company, such as Visa, has agreements with banks to issue what looks like a Visa credit card. A Visa check card can be used at any retailer that accepts Visa credit cards and at ATMs worldwide.

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.

Settlement Funds

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

­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 the institution that issued the card. If the cardholder is requesting cash, the host processor causes an electronic funds transfer to take place from the customer's bank 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.

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


ATM Security

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

­ ­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.

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