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Debit card data breach: How exactly does an ATM work?

Automated Teller Machine or ATM is a data terminal or rather a digital interface with two input and four output devices. Like any other data terminal, the ATM has to connect to, and communicate through, a host processor.

business Updated: Oct 22, 2016 15:11 IST
Automated Teller Machine or ATM is a data terminal or rather a digital interface with two input and four output devices. Like any other data terminal, the ATM has to connect to, and communicate through, a host processor.
Automated Teller Machine or ATM is a data terminal or rather a digital interface with two input and four output devices. Like any other data terminal, the ATM has to connect to, and communicate through, a host processor. (Wikipedia)

You probably have walked into a lot of ATMs and transacted on one hundreds of times. But have you ever wondered how exactly does the ATM machine work.

Automated Teller Machine or ATM is a data terminal or rather a digital interface 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 similar to an Internet service provider (ISP) and it is the gateway through which all the various ATM networks become available to the cardholder or in other words (the person wanting the cash). Nearly 99% of ATMs in India communicate through leased lines -- which is a high speed network. Others work on dial-up systems which are slow and are meant for low traffic areas.

Read more: RBI set to come out with new norms on debit cards

But before we get into all the technical aspects, one needs to understand who handles the ATM or how is maintained. Any bank that wants an ATM installed contacts an ATM-maker like NCR or Diebold Nixdorf who provides the machine and the software for the bank at its preferred location.

After the ATM is installed, the bank needs to connect it to its servers and allow it to connect to other bank servers to help a consumer get cash.

Here comes in companies like FSS, CMS and Hitachi Payment Services who provide the ‘switch’ -- a technical term for a payment transfer engine that allows the ATM software to connect to interbank networks and in turn bank servers so that it can relay information and cash as and when it is necessary. But most of the switches are placed in remote locations and in other cases bank themselves maintain the interconnection network.

For example, a branch which has an ATM is more prone to managing its own switch

Read more: Banks need to raise firewalls to protect debit cards

But what is an interbank network? An interbank network, also known as an ATM consortium or ATM network, is a computer network that enables ATM cards issued by a financial institution that is a member of that particular network to be used to perform ATM transactions through teller machines that belong to another member of the network.

While Visa, Mastercard/Maestro or Rupay are card service providers, Cirrus, Pulse, Bancs are examples of interbank networks present in the country. This simply means that these card service providers connect to services (that it subscribes or owns) such as Cirrus or Pulse when a transaction is being processed by a user in an ATM.

However, the functions which may be performed at the network ATM vary. For example, special services, such as the purchase of mobile phone airtime, may be available to own-bank but not to network ATM cardholders. Furthermore, the network ATM owner may charge a fee for use of network cards (in addition to any fees imposed by the own-bank).