Chapter 2 Electronic Funds Transfer Technologies and Services Chapter 2 Electronic Funds Transfer Technologies and Services —.—— —- Chapter Summary Electronic funds transfer (EFT) consists of a group of technologies that allow finan- cial transactions to be carried out electronically. Messages sent by several forms of tele- communication cause funds to be transferred from one financial account to another. The messages substitute for an exchange of currency or for a signed check that would bring about the same transfer. The term EFT has also come to include transfer of information critical to such transactions without an immediate transfer of funds; for example, authori- zation of credit or validation of checks by telecommunication. Although most EFT tech- nologies are at most 15 years old, they are already having a significant impact on payment systems and on banks and other financial institutions. It is possible that within the next two decades EFT will transform the way Americans carry out their day-to-day commer- cial activities and personal monetary transactions. Introduction EFT is not one but several technologies, Table 1 .–Financial Services –Non-EFT and EFT all requiring the processing and transmis- - sion of information by electronic means to ef- l Non-EFT financial transactions fect an economic exchange and financial ● Currency ● Checks and magnetic coding of checks service. Some of these services (listed in ● Credit card services table 1) are decentralized and are provided // Consumer orlented/decentralized EFT services directly to the consumer at retail. They con- A Services that facilitate the transfer of lnforma- sist of transactions that may involve an in- tlon dividual, a provider of goods or services that ● Check and credit authorization are purchased by the individual, and one or ● Check verlfication ● Check guarantee more providers of financial services. In some ● Account status Inquiry eases, as in the use of an automated teller B EFT services that lnvolve direct money transfer machine (ATM), the transfer is almost imme- ● Deposit ● Cash withdrawal diate. In others, value is conveyed by a paper ● BiII or loan payment instrument, such as a check, while the elec- ● Interaccount transfer ● Debit of transaction balance with overdraft tronic service provides information to the privileges recipient that good funds are being con- ● Credit purchase veyed. For example, check verification serv- ● Cash advance ices help eliminate uncertainty as to whether /// Institution orriented/centralized EFT services a check will be returned for lack of funds. • Direct deposit of payroll Sometimes the consumer operates a machine ● Preauthorized debit services ● Corporate cash management (including inter- that is used to provide an EFT service. In bank and Intrabank transfers other cases, the consumer gains access to a ● Interbank settlements and clearings service through an intermediary. SOURCE Kent W Col:orI et al E/ecfron/c Funds Transfer 5’ys(ems and Cr/me Pu bl I r Sy sterns Eval u at CI n I nc Feh ruary 1981 draft 9 10 ● Selected Electronic Funds Transfer Issues.” Privacy, Security, and Equity -—.——. —. .—.. — — Other EFT services (listed in table 1) are ise, when fully implemented, to deliver sub- more centralized and generally are used for stantial cost savings. In transferring funds transfers between financial institutions, or between accounts or institutions, the earlier between these institutions and large-scale in the processing cycle that data can be con- users, such as the U.S. Treasury. These are verted to a form suitable for machine proc- also referred to as wholesale services and in- essing, the greater the economies that can be clude wire transfers and automated clearing- realized. The rapidity with which EFT serv- houses (ACHs). Some electronic transfers ices become widely available depends in part take place entirely within the computer of on the rate of diffusion of several supporting one bank. At times individuals will par- technologies. Among these are the Touch- ticipate in wholesale services, but most will Tone” telephone, which allows individuals not do so routinely. These centralized serv- to send digital messages over EFT net- ices are largely invisible to the consumer, works; home computers and interactive TV and chiefly affect relationships between in- cables, which also provide that capability; stitutions. However, there are times when switching and networking techniques, which data that are identifiable with a particular in- facilitate the handling of large numbers of dividual are handled by a wholesale service; small messages generated between large e.g., the transmission of payroll through the numbers of comparatively dispersed loca- ACH network. tions; and improved, more secure access systems. At present, decentralized EFT Most EFT services involve computers, au- devices are usually accessed by the combina- tomated data files, telecommunication links, tion of a plastic card and a personal iden- and access systems. To fulfill the obligations tification number, but future systems could of financial institutions to their users, and to use handprints, fingerprints, voiceprints, or guard against mistakes, EFT services create signature recognition, transaction logs and audit trails. All prom- Automated Teller Machines The EFT technology that appears to have credit cards for cash advances. Frequently been most readily accepted and welcomed by overdraft privileges are offered with ac- the general public is the ATM. These provide counts that are accessible through ATMs. the banking services used most often by con- Some ATMs have direct access to the finan- sumers (except for loans). Most transactions cial institution’s computer and update ac- can be accomplished faster and more conven- counts immediately. Cash disbursements are iently than with human tellers, and many limited to either a predefined amount or the consumers appear to like the technology. actual account balance. Others operate inde- Some use it by preference even when human pendently of the institution’s computer and tellers are available. One big attraction is merely limit the amount that can be with- service 24 hours a day, but customers who drawn within a specified period. Actual ac- rely on this feature are, on occasion, seri- count balances are updated daily. ously inconvenienced by finding the machine ATMs may be located on or off the bank inoperative at a critical moment. premises; most are accessible around the As shown in table 2, ATMs usually allow clock. However, because Federal courts have deposits to and withdrawals from both sav- ruled that an ATM is a branch bank, State ings and checking accounts, transfers be- laws concerning branch banking limit the tween these accounts, and queries about the possible locations. The debit card used to ac- account balance. Some permit the use of tivate the ATM may be proprietary to the - Ch2—Electronic Funds Transfer Technologies and Services ● 11 Table 2 .—EFT Services and Technologies Banks add ATMs to attract new custom- ers and to increase the volume of accounts. E FT services EFT technologies + In 1981, the cost of an ATM transaction, Pos ATM TBP ACH which is very volume-sensitive, reached a Consumer oriented/decentralized services level comparable to the cost incurred using a A EFT services that facilitate the human teller (l). The estimated average transfer of I n formation Check authorizatlon x number of transactions per month at an Check verification x ATM is 5,000, which represents one every 8 Check guarantee x A CCount status Inquiry x x minutes around the clock, Some ATMs re- B EFT services that Involve direct cord as many as 20,000 to 30,000 transac- m o n e y t ransfers tions per month, or one every 1½ to 2 min- De POS It x x Cash w I thdrawal x utes (2). In 1979, the average deposit ranged B I I I or Ioarl pay men t x x from $137 in small communities to $248 in I n teraccoun t t rans f f~r x x Debit of transaction balance large communities, and the average with- WI th ove rd rd ft p rl vi Iegfs x /( x drawal from $20 to $37, again depending on C r~dl t pu rch asf x Cash advance’ x location (3). Thus, an average ATM deposit Institution or fentedlcentralized is much larger than an average withdrawal. servfces DI r~ct dcpo51 t of payrol I ATMs were installed at an average rate of Prea ut horlzed dcb I t se rvrf, es Corporate cash management 1,200 per year from 1974 through 1976. Fly ( I nc I uo I ng I ntc rba n k and I n trd 1979, the number had increased to about ban k f ran 5fe r~) 3,000 per year, with a large backlog of orders N O T F:, P()’> P(JI ,11 j’ ,A 1{ ATM A [If IJrnd! t) j tfl I $,r II )<i( h I III, for 1980 (4). The number of ATMs in opera- ‘ I r> I I, j r j ,,, rf. t r A I L, ff, r r f , A ,ck < tion in 1981 was estimated at 25,000 (5). This SOURCE Off ,(L { T,. hrl, II ,G , A c,c,t~<\IT , should double at least and could rise to 120,000 by 1990 (6). Continuing technolog- ical improvement would lower both initial and operating costs and decrease malfunc- bank, offered under the logo of a credit card tions and downtime. Changes in banking association, or offered by a third party with- laws that would permit interstate deploy- out showing any financial institution identi- ment of full-service ATM networks could fication. Both the card and a personal identi- enhance their utility, and the availability of fication number are necessary for access. interstate access could be cost effective for The Electronic Funds Transfer Act of 1978 both users and providers of financial serv- requires that financial institutions make ices.