Automated teller machine

An automated teller machine (ATM) or the automatic banking machine (ABM) is a computerized telecommunications device that provides the clients of a financial institution with access to financial transactions in a public space without the need for a cashier, human clerk or bank teller. On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smartcard with a chip, that contains a unique card number and some security information, such as an expiration date or CVVC (CVV). Authentication is provided by the customer entering a personal identification number (PIN).

Using an ATM, customers can access their bank accounts in order to make cash withdrawals (or credit card cash advances) and check their account balances as well as purchasing mobile cell phone prepaid credit. If the currency being withdrawn from the ATM is different from that which the bank account is denominated in (eg: Withdrawing Japanese Yen from a bank account containing US Dollars), the money will be converted at a wholesale exchange rate. Thus, ATMs often provide the best possible exchange rate for foreign travelers , and are heavily used for this purpose as well.

ATMs are known by various other names including automated transaction machine, automated banking machine, cashpoint (in Britain), money machine, bank machine, cash machine, hole-in-the-wall, Bancomat (in various countries in Europe and Russia), Multibanco (after a registered trade mark, in Portugal), and Any Time Money (in India).


An NCR Personas 75-Series interior, multi-function ATM in the USA.

History

The first mechanical cash dispenser was developed and built by Luther George Simjian and installed in 1939 in New York City, USA by the City Bank of New York, but removed after 6 months due to the lack of customer acceptance.

Thereafter, the history of ATMs paused for over 25 years, until De La Rue developed the first electronic ATM, which was installed first in Enfield Town in North London, United Kingdom. This instance of the invention is credited to John Shepherd-Barron, although various other engineers were awarded patents for related technologies at the time; Shepherd-Barron is creditted with standardising PINs as having four-digits because that was the maximum number of digits his wife could remember . Shepherd-Barron was awarded an OBE in the 2005 New Year's Honours List. The machine was launched by the British variety artist and actor Reg Varney. The first ATMs accepted only a single-use token or voucher, which was retained by the machine. These worked on various principles including radiation and low-coercivity magnetism that was wiped by the card reader to make fraud more difficult.The machine dispensed pre-packaged envelopes containing ten pounds sterling. The idea of a PIN stored on the card was developed by the British engineer James Goodfellow in 1965 and he patented the ATM as we know it around this time.

In 1968 the networked ATM was pioneered in Dallas, Texas, by Donald Wetzel who was a department head at an automated baggage-handling company called Docutel. In 1995 the Smithsonian's National Museum of American History recognised Docutel and Wetzel as the inventors of the networked ATM.

ATMs first came into wide UK use in 1973; the IBM 2984 was designed at the request of Lloyds Bank. The 2984 CIT (Cash Issuing Terminal) was the first true Cashpoint, similar in function to today's machines; Cashpoint is still a registered trademark of Lloyds TSB in the U.K. All were online and issued a variable amount which was immediately deducted from the account. A small number of 2984s were supplied to a US bank. Notable historical models of ATMs include the IBM 3624 and 473x series, Diebold 10xx and TABS 9000 series, and NCR 50xx series.

Location

An ATM Encrypting PIN Pad (EPP) with German markings

ATMs are placed not only near or inside the premises of banks, but also in locations such as shopping centers/malls, airports, grocery stores, petrol/gas stations, restaurants, or any place large numbers of people may gather. These represent two types of ATM installations: on and off premise. On premise ATMs are typically more advanced, multi-function machines that complement an actual bank branch's capabilities and thus more expensive. Off premise machines are deployed by financial institutions and also ISOs (or Independent Sales Organizations) where there is usually just a straight need for cash, so they typically are the cheaper mono-function devices. In Canada, when an ATM is not operated by a financial institution it is known as a "White Label ATM".

In North America, banks often have drive-thru lanes providing access to ATMs.

Many ATMs have a sign above them indicating the name of the bank or organization owning the ATM, and possibly including the list of ATM networks to which that machine is connected. This type of sign is called a topper.

Financial networks

Most ATMs are connected to interbank networks, enabling people to withdraw and deposit money from machines not belonging to the bank where they have their account or in the country where their accounts are held (enabling cash withdrawals in local currency). Some examples of interbank networks include PULSE, PLUS, Cirrus, Interac, Interswitch, STAR, and LINK.

ATMs rely on authorization of a financial transaction by the card issuer or other authorizing institution via the communications network. This is often performed through an ISO 8583 messaging system.

Many banks charge ATM usage fees. In some cases, these fees are charged solely to users who are not customers of the bank where the ATM is installed; in other cases, they apply to all users. Where machines make a charge some people will not use them, but go to a system without fees.

In order to allow a more diverse range of devices to attach to their networks, some interbank networks have passed rules expanding the definition of an ATM to be a terminal that either has the vault within its footprint or utilizes the vault or cash drawer within the merchant establishment, which allows for the use of a scrip cash dispenser.

ATMs typically connect directly to their ATM Controller via either a dial-up modem over a telephone line or directly via a leased line. Leased lines are preferable to POTS lines because they require less time to establish a connection. Leased lines may be comparatively expensive to operate versus a POTS line, meaning less-trafficked machines will usually rely on a dial-up modem. That dilemma may be solved as high-speed Internet VPN connections become more ubiquitous. Common lower-level layer communication protocols used by ATMs to communicate back to the bank include SNA over SDLC, TC500 over Async, X.25, and TCP/IP over Ethernet.

In addition to methods employed for transaction security and secrecy, all communications traffic between the ATM and the Transaction Processor may also be encrypted via methods such as SSL.

Global use

There are no hard international or government-compiled numbers totaling the complete number of ATMs in use worldwide. Estimates developed by ATMIA place the number of ATMs in use at over 1.5 million.

For the purpose of analyzing ATM usage around the world, financial institutions generally divide the world into seven regions, due to the penetration rates, usage statistics, and features deployed. Four regions (USA, Canada, Europe, and Japan) have high numbers of ATMs per million people. Despite the large number of ATMs,there is additional demand for machines in the Asia/Pacific area as well as in Latin America.

The world's most northerly installed ATM is located at Longyearbyen, Svalbard,(norway).

The world's most southerly installed ATM is located at McMurdo Station, Antarctica.

While India claims to have the world's highest installed ATM at Nathu La Pass, India installed by the Union Bank of India at 4310 meters, there are higher ATM´s installed in Nagchu County, Tibet at 4500 meters by Agricultural Bank of China.

While ATMs are ubiquitous on modern cruise ships, ATMs can also be found on some US Navy ships.

In the United Kingdom, an ATM may be colloqually referred to as a "Cashpoint", named after the Lloyds Bank ATM brand, or "hole-in-the-wall", . after which the equivalent Barclays brand was later named. In Scotland the term Cashline has become a generic term for an ATM, based on the branding from the Royal Bank of Scotland.

In the Republic of Ireland, ATMs are also commonly referred to as a "Banklink", named after the Allied Irish Bank brand of machines.

Hardware

A block diagram of an ATM

An ATM is typically made up of the following devices:

• CPU (to control the user interface and transaction devices)
• Magnetic and/or Chip card reader (to identify the customer)
• PIN Pad (similar in layout to a Touch tone or Calculator keypad), often manufactured as part of a secure enclosure.
• Secure cryptoprocessor, generally within a secure enclosure.
• Display (used by the customer for performing the transaction)
• Function key buttons (usually close to the display) or a Touchscreen (used to select the various aspects of the transaction)

• Record Printer (to provide the customer with a record of their transaction)
• Vault (to store the parts of the machinery requiring restricted access)
• Housing (for aesthetics and to attach signage to)

Recently, due to heavier computing demands and the falling price of computer-like architectures, ATMs have moved away from custom hardware architectures using microcontrollers and/or application-specific integrated circuits to adopting the hardware architecture of a personal computer, such as, USB connections for peripherals, ethernet and IP communications, and use Microsoft Windows operating systems. Although it is undoubtedly cheaper to use commercial off-the-shelf hardware, it does make ATMs potentially vulnerable to the same sort of problems exhibited by conventional computers.

Business owners often lease ATM terminals from ATM service providers.

Two Loomis employees refilling an ATM at the Downtown Seattle REI.

The vault of an ATM is within the footprint of the device itself and is where items of value are kept. Scrip cash dispensers do not incorporate a vault.

Mechanisms found inside the vault may include:

• Dispensing mechanism (to provide cash or other items of value)
• Deposit mechanism, including a Cheque Processing Module and Bulk Note Acceptor (to allow the customer to make deposits)
• Security sensors (Magnetic, Thermal, Seismic, gas)
• Locks: (to ensure controlled access to the contents of the vault)
• Journaling systems; many are electronic (a sealed flash memory device based on proprietary standards) or a solid-state device (an actual printer) which accrues all records of activity, including access timestamps, number of bills dispensed, etc. - This is considered sensitive data and is secured in similar fashion to the cash as it is a similar liability.

ATM vaults are supplied by manufacturers in several grades. Factors influencing vault grade selection include cost, weight, regulatory requirements, ATM type, operator risk avoidance practices, and internal volume requirements.

Industry standard vault configurations include Underwriters Laboratories UL-291 "Business Hours" and Level1.

ATM manufacturers recommend that vaults be attached to the floor to prevent theft.

Software

With the migration to commodity PC hardware, standard commercial "off-the-shelf" operating systems and programming environments can be used inside of ATMs. Typical platforms previously used in ATM development include RMX or OS/2. Today the vast majority of ATMs worldwide use a Microsoft OS, primarily Windows XP Professional or Windows XP Embedded. A small number of deployments may still be running older versions such as Windows NT, Windows CE or Windows 2000. Notably, Vista was not widely adopted in ATMs, and as at October 2009 no bank has announced a Windows 7 deployment. Java, Linux and Unix may also be used in these environments, but such deployments are rare.

Linux is also finding some reception in the ATM marketplace. An example of this is Banrisul, the largest bank in the south of Brazil, which has replaced the MS-DOS operating systems in its ATMs with Linux. Banco do Brasil is also migrating ATMs to Linux.

Common application layer transaction protocols, such as Diebold 911 or 912, IBM PBM, and NCR NDC or NDC+ provide emulation of older generations of hardware on newer platforms with incremental extensions made over time to address new capabilities, although companies like NCR continuously improve these protocols issuing newer versions (latest NCR Aptra Advance NDC Version 3.x.y (Where x.y are subversions). Most major ATM manufacturers provide software packages that implement these protocols. Newer protocols such as IFX have yet to find wide acceptance by transaction processors.

With the move to a more standardized software base, financial institutions have been increasingly interested in the ability to pick and choose the application programs that drive their equipment. WOSA/XFS, now known as CEN XFS (or simply XFS), provides a common API for accessing and manipulating the various devices of an ATM.

While the perceived benefit of XFS is similar to the Java's "Write once, run anywhere" mantra, often different ATM hardware vendors have different interpretations of the XFS standard. The result of these differences in interpretation means that ATM applications typically use a middleware to even out the differences between various platforms.

With the onset of Windows operating systems and XFS on ATM's, the software applications have the ability to become more intelligent. This has created a new breed of ATM applications commonly referred to as programmable applications. These types of applications allows for an entirely new host of applications in which the ATM terminal can do more than only communicate with the ATM switch. It is now empowered to connected to other content servers and video banking systems.

Notable ATM software that operates on XFS platforms include Triton PRISM, Diebold Agilis, CR2 BankWorld, KAL Kalignite, NCR Corporation Aptra Edge, Phoenix Interactive VISTAatm, and Wincor Nixdorf Protopas.

With the move of ATMs to industry-standard computing environments, concern has risen about the integrity of the ATM's software stack.

Security

Security, as it relates to ATMs, has several dimensions. ATMs also provide a practical demonstration of a number of security systems and concepts operating together and how various security concerns are dealt with.

Physical

Early ATM security focused on making the ATMs invulnerable to physical attack; they were effectively safes with dispenser mechanisms. A number of attacks on ATMs resulted, with thieves attempting to steal entire ATMs by ram-raiding. Since late 1990s, criminal groups operating in Japan improved ram-raiding by stealing and using a truck loaded with a heavy construction machinery to effectively demolish or uproot an entire ATM and any housing to steal its cash.

Another attack method, plofkraak, is to seal all openings of the ATM with silicone and fill the vault with a combustible gas or to place an explosive inside, attached, or near the ATM. This gas or explosive is ignited and the vault is opened or distorted by the force of the resulting explosion and the criminals can break in.

Modern ATM physical security, per other modern money-handling security, concentrates on denying the use of the money inside the machine to a thief, by means of techniques such as dye markers and smoke canisters.

A common method is to simply rob the staff filling the machine with money. To avoid this, the schedule for filling them is kept secret, varying and random. The money is often kept in cassettes, which will dye the money if incorrectly opened.

Transactional secrecy and integrity

The security of ATM transactions relies mostly on the integrity of the secure cryptoprocessor: the ATM often uses commodity components that are not considered to be "trusted systems".

Encryption of personal information, required by law in many jurisdictions, is used to prevent fraud. Sensitive data in ATM transactions are usually encrypted with DES, but transaction processors now usually require the use of Triple DES. Remote Key Loading techniques may be used to ensure the secrecy of the initialization of the encryption keys in the ATM. Message Authentication Code (MAC) or Partial MAC may also be used to ensure messages have not been tampered with while in transit between the ATM and the financial network.

Customer identity integrity

There have also been a number of incidents of fraud by Man-in-the-middle attacks, where criminals have attached fake keypads or card readers to existing machines. These have then been used to record customers' PINs and bank card information in order to gain unauthorized access to their accounts. Various ATM manufacturers have put in place countermeasures to protect the equipment they manufacture from these threats.

Alternate methods to verify cardholder identities have been tested and deployed in some countries, such as finger and palm vein patterns, iris, and facial recognition technologies. However, recently, cheaper mass production equipment has been developed and being installed in machines globally that detect the presence of foreign objects on the front of ATMs, current tests have shown 99% detection success for all types of skimming devices.

Device operation integrity

Openings on the customer-side of ATMs are often covered by mechanical shutters to prevent tampering with the mechanisms when they are not in use. Alarm sensors are placed inside the ATM and in ATM servicing areas to alert their operators when doors have been opened by unauthorized personnel.

Rules are usually set by the government or ATM operating body that dictate what happens when integrity systems fail. Depending on the jurisdiction, a bank may or may not be liable when an attempt is made to dispense a customer's money from an ATM and the money either gets outside of the ATM's vault, or was exposed in a non-secure fashion, or they are unable to determine the state of the money after a failed transaction. Bank customers often complain that banks have made it difficult to recover money lost in this way, but this is often complicated by the bank's own internal policies regarding suspicious activities typical of the criminal element.

Customer security

In some countries, multiple security cameras and security guards are a common feature. In the United States, The NY State Comptroller's Office has criticized the NY State Department of Banking for not following through on safety inspections of ATMs in high crime areas.

Critics of ATM operators assert that the issue of customer security appears to have been abandoned by the banking industry; it has been suggested that efforts are now more concentrated on deterrent legislation than on solving the problem of forced withdrawals.

At least as far back as July 30, 1986, critics of the industry have called for the adoption of an emergency PIN system for ATMs, where the user is able to send a silent alarm in response to a threat. Legislative efforts to require an emergency PIN system have appeared in Illinois, Kansas and Georgia, but none have succeeded as of yet. In January 2009, Senate Bill 1355 was proposed in the Illinois Senate that revisits the issue of the reverse emergency PIN system. The bill is again resisted by the banking lobby and supported by the police. In 1998 three towns outside of Cleveland Ohio, in response to an ATM crime wave, adopted ATM Consumer Security Legislation requiring that a 9-1-1 switch be installed at all outside ATMs within their jurisdiction. Since the passing of these laws 11 years ago, there have been no repeat crimes. In the wake of an ATM Murder in Sharon Hill, Pennsylvania, The City Council of Sharon Hill passed an ATM Consumer Security Bill as well, with the same result. As of July 2009, ATM Consumer Security Legislation is currently pending in New York, New Jersey, and Washington D.C. In China, many efforts to promote security have been made. On-premises ATMs are often located inside the bank's lobby which may be accessible 24 hours a day. These lobbies have extensive CCTV coverage, an emergency telephone and a security guard on the premises. Bank lobbies that aren't guarded 24 hours a day may also have secure doors that can only be opened from outside by swiping your bank card against a wall-mounted scanner, allowing the bank to identify who enters the building. Most ATMs will also display on-screen safety warnings and may also be fitted with convex mirrors above the display allowing the user to see what is happening behind them.

Alternative uses

Although ATMs were originally developed as just cash dispensers, they have evolved to include many other bank-related functions. In some countries, especially those which benefit from a fully integrated cross-bank ATM network (e.g.: Multibanco in Portugal), ATMs include many functions which are not directly related to the management of one's own bank account, such as:

• Deposit currency recognition, acceptance, and recycling
• Paying routine bills, fees, and taxes (utilities, phone bills, social security, legal fees, taxes, etc.)
• Printing bank statements
• Updating passbooks
• Loading monetary value into stored value cards
• Purchasing
  • Postage stamps.
  • Lottery tickets
  • Train tickets
  • Concert tickets
  • Movie tickets
  • Shopping mall gift certificates.
• Games and promotional features
• Donating to charities
• Cheque Processing Module
• Adding pre-paid cell phone credit.

Increasingly banks are seeking to use the ATM as a sales device to deliver pre approved loans and targeted advertising using products such as ITM (the Intelligent Teller Machine) from CR2 or Aptra Relate from NCR. ATMs can also act as an advertising channel for companies to advertise their own products or third-party products and services.

In Canada, ATMs are called guichets automatiques in French and sometimes "Bank Machines" in English. The Interac shared cash network does not allow for the selling of goods from ATMs due to specific security requirements for PIN entry when buying goods. CIBC machines in Canada, are able to top-up the minutes on certain pay as you go phones. Manufacturers have demonstrated and have deployed several different technologies on ATMs that have not yet reached worldwide acceptance, such as:

• Biometrics, where authorization of transactions is based on the scanning of a customer's fingerprint, iris, face, etc. Biometrics on ATMs can be found in Asia.
• Cheque/Cash Acceptance, where the ATM accepts and recognise cheques and/or currency without using envelopes Expected to grow in importance in the US through Check 21 legislation.
• Bar code scanning
• On-demand printing of "items of value" (such as movie tickets, traveler's cheques, etc.)
• Dispensing additional media (such as phone cards)
• Co-ordination of ATMs with mobile phones
• Customer-specific advertising
• Integration with non-banking equipment

Reliability

An ATM running Microsoft Windows that has crashed

Before an ATM is placed in a public place, it typically has undergone extensive testing with both test money and the backend computer systems that allow it to perform transactions. Banking customers also have come to expect high reliability in their ATMs, which provides incentives to ATM providers to minimize machine and network failures. Financial consequences of incorrect machine operation also provide high degrees of incentive to minimize malfunctions.

ATMs and the supporting electronic financial networks are generally very reliable, with industry benchmarks typically producing 98.25% customer availability for ATMs and up to 99.999% availability for host systems. If ATMs do go out of service, customers could be left without the ability to make transactions until the beginning of their bank's next time of opening hours.

This said, not all errors are to the detriment of customers; there have been cases of machines giving out money without debiting the account, or giving out higher value notes as a result of incorrect denomination of banknote being loaded in the money cassettes. Errors that can occur may be mechanical (such as card transport mechanisms; keypads; hard disk failures); software (such as operating system; device driver; application); communications; or purely down to operator error.

An ATM running OS/2 that has crashed

To aid in reliability, some ATMs print each transaction to a roll paper journal that is stored inside the ATM, which allows both the users of the ATMs and the related financial institutions to settle things based on the records in the journal in case there is a dispute. In some cases, transactions are posted to an electronic journal to remove the cost of supplying journal paper to the ATM and for more convenient searching of data.

Improper money checking can cause the possibility of a customer receiving counterfeit banknotes from an ATM. While bank personnel are generally trained better at spotting and removing counterfeit cash, the resulting ATM money supplies used by banks provide no absolute guarantee for proper banknotes, as the Federal Criminal Police Office of Germany has confirmed that there are regularly incidents of false banknotes having been dispensed through bank ATMs. Some ATMs may be stocked and wholly owned by outside companies, which can further complicate this problem. Bill validation technology can be used by ATM providers to help ensure the authenticity of the cash before it is stocked in an ATM; ATMs that have cash recycling capabilities include this capability.

Fraud

As with any device containing objects of value, ATMs and the systems they depend on to function are the targets of fraud. Fraud against ATMs and people's attempts to use them takes several forms.

The first known instance of a fake ATM was installed at a shopping mall in Manchester, Connecticut in 1993. By modifying the inner workings of a Fujitsu model 7020 ATM, a criminal gang known as The Bucklands Boys were able to steal information from cards inserted into the machine by customers.

In some cases, bank fraud could occur at ATMs whereby the bank accidentally stocks the ATM with bills in the wrong denomination, therefore giving the customer more money than should be dispensed. The result of receiving too much money may be influenced on the card holder agreement in place between the customer and the bank.

In a variation of this, WAVY-TV reported an incident in Virginia Beach of September 2006 where a hacker who had probably obtained a factory-default admin password for a gas station's white label ATM caused the unit to assume it was loaded with $5 USD bills instead of $20s, enabling himself—and many subsequent customers—to walk away with four times the money they said they wanted to withdraw. This type of scam was featured on the TV series The Real Hustle.

ATM behavior can change during what is called "stand-in" time, where the bank's cash dispensing network is unable to access databases that contain account information (possibly for database maintenance). In order to give customers access to cash, customers may be allowed to withdraw cash up to a certain amount that may be less than their usual daily withdrawal limit, but may still exceed the amount of available money in their account, which could result in fraud.

Card fraud

ATM lineup

The big queue at an ATM in Masalli, Azerbaijan.

In an attempt to prevent criminals from shoulder surfing the customer's PINs, some banks draw privacy areas on the floor.

For a low-tech form of fraud, the easiest is to simply steal a customer's card. A later variant of this approach is to trap the card inside of the ATM's card reader with a device often referred to as a Lebanese loop. When the customer gets frustrated by not getting the card back and walks away from the machine, the criminal is able to remove the card and withdraw cash from the customer's account.

Another simple form of fraud involves attempting to get the customer's bank to issue a new card and stealing it from their mail.

Some ATMs may put up warning messages to customers to not use them when it detects possible tampering

The concept and various methods of copying the contents of an ATM card's magnetic stripe on to a duplicate card to access other people's financial information was well known in the hacking communities by late 1990.

In 1996 Andrew Stone, a computer security consultant from Hampshire in the UK, was convicted of stealing more than £1 million (at the time equivalent to US$1.6 million) by pointing high definition video cameras at ATMs from a considerable distance, and by recording the card numbers, expiry dates, etc. from the embossed detail on the ATM cards along with video footage of the PINs being entered. After getting all the information from the videotapes, he was able to produce clone cards which not only allowed him to withdraw the full daily limit for each account, but also allowed him to sidestep withdrawal limits by using multiple copied cards. In court, it was shown that he could withdraw as much as £10,000 per hour by using this method. Stone was sentenced to five years and six months in prison.

By contrast, a newer high-tech modus operandi involves the installation of a magnetic card reader over the real ATM's card slot and the use of a wireless surveillance camera or a modified digital camera to observe the user's PIN. Card data is then cloned onto a second card and the criminal attempts a standard cash withdrawal. The availability of low-cost commodity wireless cameras and card readers has made it a relatively simple form of fraud, with comparatively low risk to the fraudsters.

In an attempt to stop these practices, countermeasures against card cloning have been developed by the banking industry, in particular by the use of smart cards which cannot easily be copied or spoofed by un-authenticated devices, and by attempting to make the outside of their ATMs tamper evident. Older chip-card security systems include the French Carte Bleue, Visa Cash, Mondex, Blue from American Express[57] and EMV '96 or EMV 3.11. The most actively developed form of smart card security in the industry today is known as EMV 2000 or EMV 4.x.

EMV is widely used in the UK (Chip and PIN) and other parts of Europe, but when it is not available in a specific area, ATMs must fallback to using the easy to copy magnetic stripe to perform transactions. This fallback behaviour can be exploited. However the fallback option has been removed by several UK banks, meaning if the chip is not read, the transaction will be declined.

In February 2009, a group of criminals used counterfeit ATM cards to steal $9 million from 130 ATMs in 49 cities around the world all within a time period of 30 minutes.

Card cloning and skimming can be detected by the implementation of magnetic card reader heads and firmware that can read a signature embedded in all magnetic stripes during the card production process. This signature known as a "MagnePrint" or "BluPrint" can be used in conjunction with common two factor authentication schemes utilized in ATM, debit/retail point-of-sale and prepaid card applications.

Related devices

A Talking ATM is a type of ATM that provides audible instructions so that persons who cannot read an ATM screen can independently use the machine. All audible information is delivered privately through a standard headphone jack on the face of the machine. Alternatively, some banks such as the Nordea and Swedbank use a built-in external speaker which may be invoked by pressing the talk button on the keypad. Information is delivered to the customer either through pre-recorded sound files or via text-to-speech speech synthesis.

A postal interactive kiosk may also share many of the same components as an ATM (including a vault), but only dispenses items relating to postage.

A scrip cash dispenser may share many of the same components as an ATM, but lacks the ability to dispense physical cash and consequently requires no vault. Instead, the customer requests a withdrawal transaction from the machine, which prints a receipt. The customer then takes this receipt to a nearby sales clerk, who then exchanges it for cash from the till.

A Teller Assist Unit may also share many of the same components as an ATM (including a vault), but they are distinct in that they are designed to be operated solely by trained personnel and not the general public, they do not integrate directly into interbank networks, and are usually controlled by a computer that is not directly integrated into the overall construction of the unit.

source:
http://en.wikipedia.org/wiki/Automated_teller_machine

World Bank Group Historical Chronology: Introduction

The World Bank Group Historical Chronology provides a comprehensive timeline of key events in World Bank Group history. Since its inception in 1944, the World Bank expanded from a single institution to an associated group of coordinated development institutions. The Bank's mission evolved from a facilitator of post-war reconstruction and development to its present day mandate of worldwide poverty alleviation. Whereas heavy infrastructure investment projects once dominated the Bank's portfolio, a broadened focus now includes social sector lending projects, poverty alleviation, and the Comprehensive Development Framework. The World Bank Group Historical Chronology highlights these changes in the institution's history.

Many of the items in the Chronology are "firsts", documenting the first occurrence of significant events, such as the first lending for each member country, the first meetings of consultative groups, first lending in a particular sector, etc. The chronology also includes membership dates for all member countries in each institutions within the World Bank Group.

The chronology is divided into separate section per decade, with salient world events highlighted at the beginning of each year. The complete chronology (2.7 MB PDF) is also available.

The information has been compiled from previously published works, and has been supplemented by research in the World Bank Group Archives. The previously published works are:

Mason, Edward, and Robert E. Asher. The World Bank Since Bretton Woods.Washington, D.C., Brookings Institution, 1973.

Kapur, Devesh, John P. Lewis, and Richard Webb. The World Bank. Its First Half Century. Washington, D.C., Brookings Institution Press, 1997.

Salda, Anne C. M., Historical Dictionary of the World Bank. Lanham, Maryland, The Scarecrow Press, 1997.

The International Events sections of the chronology are heavily indebted to The Oxford History of the Twentieth Century, edited by Michael Howard and William Roger Louis (New York, Oxford University Press, 1998).

These published sources were supplemented by material maintained in the World Bank Group Archives. The most useful collections include:

Series 4117. IPA Press Releases, 1947 -
Series 3985. Administrative Circulars, 1947 - 1974
Series 4534. Administrative Circulars, 1973 - 1993
Series 4684. Administrative Circulars, 1981 -

Note: The Chronology was initially conceived as a means of providing World Bank Group staff with historical context on the evolution of their institution. Thus it contains some items of an internal or administrative nature which will not be of primary interest to the general public, or the significance of which will not be obvious to those outside the institution.


source:
http://go.worldbank.org/Z052FIDA70

World Bank History

Conceived during World War II at Bretton Woods, New Hampshire, the World Bank initially helped rebuild Europe after the war. Its first loan of $250 million was to France in 1947 for post-war reconstruction. Reconstruction has remained an important focus of the Bank's work, given the natural disasters, humanitarian emergencies, and post­conflict rehabilitation needs that affect developing and transition economies.

Today's Bank, however, has sharpened its focus on poverty reduction as the overarching goal of all its work. It once had a homogeneous staff of engineers and financial analysts, based solely in Washington, D.C. Today, it has a multidisciplinary and diverse staff including economists, public policy experts, sectoral experts, and social scientists. 40 percent of staff are now based in country offices.

The Bank itself is bigger, broader, and far more complex. It has become a Group, encompassing five closely associated development institutions: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID).

US Secretary of the Treasury, Henry Morganthau, Bretton Woods, July 1944

Transition

During the 1980s, the Bank was pushed in many directions: early in the decade, the Bank was brought face to face with macroeconomic and debt rescheduling issues; later in the decade, social and environmental issues assumed center stage, and an increasingly vocal civil society accused the Bank of not observing its own policies in some high­profile projects.

To address concerns about the quality of Bank operations, the Wapenhans Report was released and soon after, steps toward reform were taken, including the creation of an Inspection Panel to investigate claims against the Bank. However, criticism increased, reaching a peak in 1994 at the Annual Meetings in Madrid.

Reform and Renewal

Mother and daughter, China, 1993

Since then, the Bank Group has made much progress. All five institutions have been working - separately and in collaboration - to improve internal efficiency and external effectiveness. Clients report to be broadly pleased with the changes they see in Bank Group service levels, commitment, deliveries, and quality.

More than ever before, the Bank is playing an important role in the global policy arena. It has effectively engaged with partners and clients in complex emergencies from post-conflict work in Bosnia to post-crisis assistance in East Asia to post-hurricane clean-up in central America to post-earthquake support in Turkey and in Kosovo and East Timor.

Notwithstanding these considerable progress, the Bank Group's agenda is not yet complete, nor can it ever be, while the challenges of development continue to grow.

For a timeline of key events in Bank history, see the World Bank Group Historical Chronology.


source:

http://go.worldbank.org/2GIYUD9KB0

History of banking

Earliest banks

The first banks were probably the religious temples of the ancient world, and were probably established sometime during the third millennium B.C. Banks probably predated the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates. Temples and palaces were the safest places to store gold as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to would-be thieves. There are extant records of loans from the 18th century BC in Babylon that were made by temple priests/monks to merchants. By the time of Hammurabi's Code, banking was well enough developed to justify the promulgation of laws governing banking operations.Ancient Greece holds further evidence of banking. Greek temples, as well as private and civic entities, conducted financial transactions such as loans, deposits, currency exchange, and validation of coinage. There is evidence too of credit, whereby in return for a payment from a client, a moneylender in one Greek port would write a credit note for the client who could "cash" the note in another city, saving the client the danger of carting coinage with him on his journey. Pythius, who operated as a merchant banker throughout Asia Minor at the beginning of the 5th century B.C., is the first individual banker of whom we have records. Many of the early bankers in Greek city-states were “metics” or foreign residents. Around 371 B.C., Pasion, a slave, became the wealthiest and most famous Greek banker, gaining his freedom and Athenian citizenship in the process.The fourth century B.C. saw increased use of credit-based banking in the Mediterranean world. In Egypt, from early times, grain had been used as a form of money in addition to precious metals, and state granaries functioned as banks. When Egypt fell under the rule of a Greek dynasty, the Ptolemies (332-30 B.C.), the numerous scattered government granaries were transformed into a network of grain banks, centralized in Alexandria where the main accounts from all the state granary banks were recorded. This banking network functioned as a trade credit system in which payments were effected by transfer from one account to another without money passing.In the late third century B.C., the barren Aegean island of Delos, known for its magnificent harbor and famous temple of Apollo, became a prominent banking center. As in Egypt, cash transactions were replaced by real credit receipts and payments were made based on simple instructions with accounts kept for each client. With the defeat of its main rivals, Carthage and Corinth, by the Romans, the importance of Delos increased. Consequently it was natural that the bank of Delos should become the model most closely imitated by the banks of Rome.

Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder in Passionary of Christ and Antichrist.

Ancient Rome perfected the administrative aspect of banking and saw greater regulation of financial institutions and financial practices. Charging interest on loans and paying interest on deposits became more highly developed and competitive. The development of Roman banks was limited, however, by the Roman preference for cash transactions. During the reign of the Roman emperor Gallienus (260-268 AD), there was a temporary breakdown of the Roman banking system after the banks rejected the flakes of copper produced by his mints. With the ascent of Christianity, banking became subject to additional restrictions, as the charging of interest was seen as immoral. After the fall of Rome, banking was abandoned in western Europe and did not revive until the time of the crusades.

Religious restrictions on interest

Most early religious systems in the ancient Near East, and the secular codes arising from them, did not forbid usury. These societies regarded inanimate matter as alive, like plants, animals and people, and capable of reproducing itself. Hence if you lent 'food money', or monetary tokens of any kind, it was legitimate to charge interest.Food money in the shape of olives, dates, seeds or animals was lent out as early as c. 5000 BC, if not earlier. Among the Mesopotamians, Hittites, Phoenicians and Egyptians, interest was legal and often fixed by the state. But the Jews took a different view of the matter.The Torah and later sections of the Hebrew Bible criticize interest-taking, but interpretations of the Biblical prohibition vary. One common understanding is that Jews are forbidden to charge interest upon loans made to other Jews, but allowed to charge interest on transactions with non-Jews, or Gentiles. However, the Hebrew Bible itself gives numerous examples where this provision was evaded.

During Late Antiquity and Middle Ages

Jews were ostracized from most professions by local rulers, the Church and the guilds and so were pushed into marginal occupations considered socially inferior, such as tax and rent collecting and moneylending, while the provision of financial services was increasingly demanded by the expansion of European trade and commerce.

Medieval trade fairs, such as the one in Hamburg, contributed to the growth of banking in a curious way: moneychangers issued documents redeemable at other fairs, in exchange for hard currency. These documents could be cashed at another fair in a different country or at a future fair in the same location. If redeemable at a future date, they would often be discounted by an amount comparable to a rate of interest. Eventually, these documents evolved into bills of exchange, which could be redeemed at any office of the issuing banker. These bills made it possible to transfer large sums of money without the complications of hauling large chests of gold and hiring armed guards to protect the gold from thieves.

Beginning around 1100s, the need to transfer large su

ms of money to finance the Crusades stimulated the re-emergence of banking in western Europe. In 1156, in Genoa, occurred the earliest known foreign exchange contract. Two brothers borrowed 115 Genoese pounds and agreed to reimburse the bank's agents in Constantinople the sum of 460 bezants one month after their arrival in that city. In the following century the use of such contracts grew rapidly, particularly since profits from time differences were seen as not infringing canon laws against usury. In 1162, King Henry the II levied a tax to support the crusades -- the first of a series of taxes levied by Henry over the years with the same objective. The Templars and Hospitallers acted as Henry's bankers in the Holy Land. The Templars' wide flung, large land holdings across Europe also emerged in the 1100-1300 time frame as the beginning of Europe-wide banking, as their practice was to take in local currency, for which a demand note would be given that would be good at any of their castles across Europe, allowing movement of money without the usual risk of robbery while traveling. By 1200 there was a large and growing volume of long-distance and international trade in a number of agricultural commodities and manufactured goods in western Europe; some of the goods traded during that period included wool, finished cloth, wine, salt, wax and tallow, leather and leather goods, and weapons and armour. Individual trading concerns and combines often specialized in one or more of these, as did individual producers; because a large amount of capital was required to establish, e.g., a cloth manufacturing business, only the largest firms could diversify. As a result, businesses and clusters of businesses tended to market fairly narrow product lines. Big firms like the Medici bank could and did specialize; the Medici’s manufacturing division had a number of manufacturing facilities producing many different types of cloth. Perhaps the best example of product policy comes from the Cistercian monastic order, where individual monasteries and granges tended to specialize in particular agricultural products or types of industrial production, usually with an eye to meeting particular local or regional market needs.

Ironically, the Papal bankers were the most successful of the Western world, though often goods taken in pawn were substituted for interest in the institution termed the Monte di Pietà. When Pope John XXII (born Jacques d'Euse (1249 - 1334) was crowned in Lyon in 1316, he set up residency in Avignon. Civil war in Florence between the rival Guelph and Ghibelline factions resulted in victory for a group of Guelph merchant families in the city. They took over papal banking monopolies from rivals in nearby Siena and became tax collectors for the Pope throughout Europe. In 1306, Philip IV expelled Jews from France. In 1307 Philip had the Knights Templar arrested and had gotten hold of their wealth, which had become to serve as the unofficial treasury of France. In 1311 he expelled Italian bankers and collected their outstanding credit. In 1327, Avignon had 43 branches of Italian banking houses. In 1347, Edward III of England defaulted on loans. Later there was the bankruptcy of the Peruzzi (1374) and Bardi (1353). The accompanying growth of Italian banking in France was the start of the Lombard moneychangers in Europe, who moved from city to city along the busy pilgrim routes important for trade. Key cities in this period were Cahors, the birthplace of Pope John XXII, and Figeac. Perhaps it was because of these origins that the term Lombard is synonymous with Cahorsin in medieval Europe, and means 'pawnbroker'. Banca Monte dei Paschi di Siena SPA (MPS) Italy, is the oldest surviving bank in the world.

Of Usury, from Brant's Stultifera Navis (the Ship of Fools); woodcut attributed to Albrecht Dürer

After 1400, political forces turned against the methods of the Italian free enterprise bankers. In 1401, King Martin I of Aragon expelled them. In 1403, Henry IV of England prohibited them from taking profits in any way in his kingdom. In 1409, Flanders imprisoned and then expelled Genoese bankers. In 1410, all Italian merchants were expelled from Paris. In 1401, the Bank of Barcelona was founded. In 1407, the Bank of Saint George was founded in Genoa. This bank dominated business in the Mediterranean. In 1403 charging interest on loans was ruled legal in Florence despite the traditional Christian prohibition of usury. Italian banks such as the Lombards, who had agents in the main economic centres of Europe, had been making charges for loans. The lawyer and theologian Lorenzo di Antonio Ridolfi won a case which legalised interest payments by the Florentine government. In 1413, Giovanni di Bicci de’Medici appointed banker to the pope. In 1440, Gutenberg invents the modern printing press although Europe already knew of the use of paper money in China. The printing press design was subsequently modified, by Leonardo da Vinci among others, for use in minting coins nearly two centuries before printed banknotes were produced in the West.

By the 1390s silver was short all over Europe, except in Venice. The silver mines at Kutná Hora had begun to decline in the 1370s, and finally closed down after being sacked by King Sigismund in 1422. By 1450 almost all of the mints of northwest Europe had closed down for lack of silver. The last money-changer in the major French port of Dieppe went out of business in 1446. In 1455 the Turks overran the Serbian silver mines, and in 1460 captured the last Bosnian mine. The last Venetian silver grosso was minted in 1462. Several Venetian banks failed, and so did the Strozzi bank of Florence, the second largest in the city. Even the smallest of small change became scarce.

Western banking history

Modern Western economic and financial history is usually traced back to the coffee houses of London.[citation needed] The London Royal Exchange was established in 1565. At that time moneychangers were already called bankers, though the term "bank" usually referred to their offices, and did not carry the meaning it does today. There was also a hierarchical order among professionals; at the top were the bankers who did business with heads of state, next were the city exchanges, and at the bottom were the pawn shops or "Lombard"'s. Some European cities today have a Lombard street where the pawn shop was located.

After the siege of Antwerp trade moved to Amsterdam. In 1609 the Amsterdamsche Wisselbank (Amsterdam Exchange Bank) was founded which made Amsterdam the financial centre of the world until the Industrial Revolution.

Banking offices were usually located near centers of trade, and in the late 17th century, the largest centers for commerce were the ports of Amsterdam, London, and Hamburg. Individuals could participate in the lucrative East India trade by purchasing bills of credit from these banks, but the price they received for commodities was dependent on the ships returning (which often didn't happen on time) and on the cargo they carried (which often wasn't according to plan). The commodities market was very volatile for this reason, and also because of the many wars that led to cargo seizures and loss of ships.

Capitalism

Around the time of Adam Smith (1776) there was a massive growth in the banking industry. Within the new system of ownership and investment, the state's role as an economic factor changed substantially.

Global banking

In the 1970s, a number of smaller crashes tied to the policies put in place following the depression, resulted in deregulation and privatization of government-owned enterprises in the 1980s, indicating that governments of industrial countries around the world found private-sector solutions to problems of economic growth and development preferable to state-operated, semi-socialist programs. This spurred a trend that was already prevalent in the business sector, large companies becoming global and dealing with customers, suppliers, manufacturing, and information centres all over the world.

Global banking and capital market services proliferated during the 1980s and 1990s as a result of a great increase in demand from companies, governments, and financial institutions, but also because financial market conditions were buoyant and, on the whole, bullish. Interest rates in the United States declined from about 15% for two-year U.S. Treasury notes to about 5% during the 20-year period, and financial assets grew then at a rate approximately twice the rate of the world economy. Such growth rate would have been lower, in the last twenty years, were it not for the profound effects of the internationalization of financial markets especially U.S. Foreign investments, particularly from Japan, who not only provided the funds to corporations in the U.S., but also helped finance the federal government; thus, transforming the U.S. stock market by far into the largest in the world.

Nevertheless, in recent years, the dominance of U.S. financial markets has been disappearing and there has been an increasing interest in foreign stocks. The extraordinary growth of foreign financial markets results from both large increases in the pool of savings in foreign countries, such as Japan, and, especially, the deregulation of foreign financial markets, which has enabled them to expand their activities. Thus, American corporations and banks have started seeking investment opportunities abroad, prompting the development in the U.S. of mutual funds specializing in trading in foreign stock markets.

Such growing internationalization and opportunity in financial services has entirely changed the competitive landscape, as now many banks have demonstrated a preference for the “universal banking” model so prevalent in Europe. Universal banks are free to engage in all forms of financial services, make investments in client companies, and function as much as possible as a “one-stop” supplier of both retail and wholesale financial services.

Many such possible alignments could be accomplished only by large acquisitions, and there were many of them. By the end of 2000, a year in which a record level of financial services transactions with a market value of $10.5 trillion occurred, the top ten banks commanded a market share of more than 80% and the top five, 55%. Of the top ten banks ranked by market share, seven were large universal-type banks (three American and four European), and the remaining three were large U.S. investment banks who between them accounted for a 33% market share.

This growth and opportunity also led to an unexpected outcome: entrance into the market of other financial intermediaries: nonbanks. Large corporate players were beginning to find their way into the financial service community, offering competition to established banks. The main services offered included insurances, pension, mutual, money market and hedge funds, loans and credits and securities. Indeed, by the end of 2001 the market capitalisation of the world’s 15 largest financial services providers included four nonbanks.

In recent years, the process of financial innovation has advanced enormously increasing the importance and profitability of nonbank finance. Such profitability priorly restricted to the nonbanking industry, has prompted the Office of the Comptroller of the Currency (OCC) to encourage banks to explore other financial instruments, diversifying banks' business as well as improving banking economic health. Hence, as the distinct financial instruments are being explored and adopted by both the banking and nonbanking industries, the distinction between different financial institutions is gradually vanishing.

Major events in banking history

• Florentine banking — The Medicis and Pittis among others.
• Knights Templar- earliest Euro wide /Mideast banking 1100-1300.
• Banknotes — Introduction of paper money.
• 1602 - First joint-stock company, the Dutch East India Company founded.
• 1720 - The South Sea Bubble and John Law's Mississippi Scheme, which caused a European financial crisis and forced many bankers out of business.
• 1781 - The Bank of North America was found by the Continental Congress.
• 1800 - Rothschild family founds Euro wide banking.
• 1930-33 In the wake of the Wall Street Crash of 1929, 9,000 banks close, wiping out a third of the money supply in the United States.^[6]
• 2008 - Washington Mutual collapses. It was the largest bank failure in history.

Oldest private banks

• Monte dei Paschi di Siena 1472 - present, the oldest surviving bank in the world. Founded in 1472 by the Magistrate of the city state of Siena, Italy.
• Rolo Banca founded 1473 - now part of Unicredit Group of Italy
• C. Hoare & Co founded 1672
• Barclays, which was founded by John Freame and Thomas Gould in 1690^[7] and renamed to Barclays by Freame's son-in-law, James Barclay, in 1736
• Rothschild family 1700 - present
• Wegelin & Co. Private Bankers 1741 - present, the oldest Swiss bank, founded in 1741 in St. Gallen, third largest private bank in Switzerland
• Hope & Co., founded in 1762

For French banking history, read the History of banks in France (in English or in French) on the FBF website.

Oldest national banks

• Bank of Sweden — The rise of the national banks, began operations in 1668
• Bank of England — The evolution of modern central banking policies, established in 1694
• Bank of America — The invention of centralized check and payment processing technology
• Swiss banking
• United States Banking
• The Pennsylvania Land Bank, founded in 1723 and receiving the support of Benjamin Franklin who wrote "Modest Enquiry into the Nature and Necessity of a Paper Currency" in 1729[1].
• Imperial Bank of Persia (Iran) Founded in 1888 and was merged in Tejarat Bank in 1979 — History of banking in the Middle-East

References

1. ^ The word "bank" reflects the origins of banking in temples. According to the famous passage from the New Testament, when Christ drove the money changers out of the temple in Jerusalem, he overturned their tables. Matthew 21.12. In Greece, bankers were known as trapezitai, a name derived from the tables where they sat. Similarly, the English word bank comes from the Italian banca, for bench or counter.
2. ^ Cohen, Edward: Athenian Economy and Society: A Banking Perspective (Princeton, NJ: Princeton University Press, 1992) ISBN 0-691-03609-8
3. ^ The references cited in the Passionary for this woodcut: 1 John 2:14-16, Matthew 10:8, and The Apology of the Augsburg Confession, Article 8, Of the Church
4. ^ Johnson cites Fritz E. Heichelcheim: An Ancient Economic History, 2 vols. (trans. Leiden 1965), i.104-566
5. ^ Johnson, Paul: A History of the Jews (New York: HarperCollins Publishers, 1987) ISBN 0-06-091533-1. pp.172-173
6. ^ http://www.washingtontimes.com/news/2008/may/12/panic-control
7. ^ "Barclays - Our Beginnings". http://www.aboutbarclays.com/content/detail.asp?NewsAreaID=138. Retrieved 2007-09-21.

source:
http://en.wikipedia.org/wiki/History_of_banking

Internet Banking

Internet banking can save you time and travelling, but there’s a wide choice.

In the past five years, every high street bank has begun to offer internet banking, and plenty more internet-only banks have sprung up. Sometimes they just offer convenience, but some can give you deals you won’t find in branches.

Internet banking refers confusingly to two different experiences. The first is a new type of bank only found online. Big internet banking names are IF, Smile, the One Account and Cahoot. These offer a selection of banking services, usually not as broad as a high street bank, but also offer innovative products which use technology to cut costs or add convenience to you the customer. For example, one feature of many internet banking outfits is offsetting- using the interest from savings in one account to offset borrowing on another account.

Many of these internet banks have been bought by ordinary banks anyway- for example IF is owned by the Halifax.

The second type of internet banking is online banking offered by most ordinary high street banks as part of their service. It’s highly unlikely that you picked your bank because of its internet banking facilities, but you should ask about their internet security and also how far back you can check statements online, for example. The Co-operative has particularly good security and a very flexible system for managing your account. Repeat statements usually cost up to £10, so signing up for internet banking can save you money- and don’t forget by reducing traffic in branches, you’re saving them money too. Look for internet-only offers (even from high street banks)- often you’ll be offered rates online that aren’t publicised elsewhere.


source:
http://www.bank.org.uk/internet-banking/

Deposit account

A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the bank, and represent the amount owed by the bank to the customer. Some banks charge a fee for this service, while others may pay the customer interest on the funds deposited.

Major types

• Checking accounts: A deposit account held at a bank or other financial institution, for the purpose of securely and quickly providing frequent access to funds on demand, through a variety of different channels. Because money is available on demand these accounts are also referred to as demand accounts or demand deposit accounts.

• Savings accounts: Accounts maintained by retail banks that pay interest but can not be used directly as money (for example, by writing a cheque). Although not as convenient to use as checking accounts, these accounts let customers keep liquid assets while still earning a monetary return.

• Money market deposit account: A deposit account with a relatively high rate of interest, and short notice (or no notice) required for withdrawals. In the United States, it is a style of instant access deposit subject to federal savings account regulations, such as a monthly transaction limit.

• Time deposit: A money deposit at a banking institution that cannot be withdrawn for a preset fixed 'term' or period of time. When the term is over it can be withdrawn or it can be rolled over for another term. Generally speaking, the longer the term the better the yield on the money.

Legal framework

Although restrictions placed on access depend upon the terms and conditions of the account and the provider, the account holder retains rights to have their funds repaid on demand. The customer may or may not be able to pay the funds in the account by cheque, internet banking, EFTPOS or other channels depending on those provided by the bank and offered or activated in respect of the account.

The banking terms "deposit" and "withdrawal" tend to obscure the economic substance and legal essence of transactions in a deposit account. From a legal and financial accounting standpoint, the term "deposit" is used by the banking industry in financial statements to describe the liability owed by the bank to its depositor, and not the funds (whether cash or checks) themselves, which are shown an asset of the bank. For example, a depositor opening a checking account at a bank in the United States with $100 in currency surrenders legal title to the $100 in cash, which becomes an asset of the bank. On the bank's books, the bank debits its currency and coin on hand account for the $100 in cash, and credits a liability account (called a demand deposit account, checking account, etc.) for an equal amount. (See double-entry bookkeeping system.) In the audited financial statements of the bank, on the balance sheet, the $100 in currency would be shown as an asset of the bank on the left side of the balance sheet, and the deposit account would be shown as a liability owed by the bank to its customer, on the right side of the balance sheet. The bank's financial statement reflects the economic substance of the transaction -- which is the bank has actually borrowed $100 from its depositor and has contractually obliged itself to repay the customer according to the terms of the demand deposit account agreement. To offset this deposit liability, the bank now owns the actual, physical funds deposited, and shows those funds as an asset of the bank.

Typically, an account provider will not hold the entire sum in reserve, but will loan the money at interest to other clients, in a process known as fractional-reserve banking. It is this process which allows providers to pay out interest on deposits.

By transferring the ownership of deposits from one party to another, they can replace physical cash as a method of payment. In fact, deposits account for most of the money supply in use today. For example, if a bank in the United States makes a loan to a customer by depositing the loan proceeds in the customer's checking account, the bank typically records this event by debiting an asset account on the bank's books (called loans receivable or some similar name) and credits the deposit liability or checking account of the customer on the bank's books. From an economic standpoint, the bank has essentially created economic money (although obviously not legal tender). The customer's checking account balance has no dollar bills in it, as a demand deposit account is simply a liability owed by the bank to its customer. In this way, commercial banks are allowed to increase the money supply (without printing currency, or legal tender).

source:
http://en.wikipedia.org/wiki/Deposit_account

Profitability

A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers. In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on an array of deposit activities and ancillary services (international banking,

foreign exchange, insurance, investments, wire transfers, etc.). Lending activities, however, still provide the bulk of a commercial bank's income. In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability). Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise been denied credit. Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the cards. Helps in making profit and economic development as a whole.

source : http://en.wikipedia.org/wiki/Bank

Brokered deposits

One source of deposits for banks is brokers who deposit large sums of money on the behalf of investors. This money will generally go to the banks which offer the most favorable terms, often better than those offered local depositors. It is possible for a bank to be engaged in business with no local deposits at all, all funds being brokered deposits. Accepting a significant quantity of such deposits, or "hot money" as it is sometimes called, puts a bank in a difficult and sometimes risky position, as the funds must be lend or invested in a way that yields a return sufficient to pay the high interest being paid on the brokered deposits. This may result in risky decisions and even in eventual failure of the bank. Banks which failed during 2008 and 2009 in the United States during the global financial crisis had, on average, four times more brokered deposits as a percent of their deposits than the average bank. Such deposits, combined with risky real estate investments, factored into the Savings and loan crisis of the 1980s. Regulation of brokered deposits is opposed by banks on the grounds that the practice can be a source of external funding to growing communities with insufficient local deposits.

source : http://en.wikipedia.org/wiki/Bank

Challenges within the banking industry

The banking industry is a highly regulated industry with detailed and focused regulators. All banks with FDIC-insured deposits have the FDIC as a regulator; however, for examinations,[clarification needed] the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (“OCC”) is the primary federal regulator for national banks; and the Office of Thrift Supervision, or OTS, is the primary federal regulator for thrifts. State non-member banks are examined by the state agencies as well as the FDIC. National banks have one primary regulator—the OCC. Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere. The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing. In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve, FDIC, OTS and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced and budgets have been cut. The remaining regulators face an increased burden with increased workload and more banks per regulator. While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures across the United States. The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations. It has been a challenge for banks to effectively set their growth strategies with the recent economic market. A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders. The management of the banks’ asset portfolios also remains a challenge in today’s economic environment. Loans are a bank’s primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. While always an issue for banks, declining asset quality has become a big problem for financial institutions. There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of “good times.” The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. Problems are more likely to go undetected, resulting in a significant impact on the bank when they are recognized. In addition, banks, like any business, struggle to cut costs and have consequently eliminated certain expenses, such as adequate employee training programs. Banks also face a host of other challenges such as aging ownership groups. Across the country, many banks’ management teams and board of directors are aging. Banks also face ongoing pressure by shareholders, both public and private, to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various categories of risk. Banking is also an extremely competitive industry. Competing in the financial services industry has become tougher with the entrance of such players as insurance agencies, credit unions, check cashing services, credit card companies, etc. As a reaction, banks have developed their activities in financial instruments, through financial market operations such as brokerage and trading and become big players in such activities.

source : http://en.wikipedia.org/wiki/Bank