The Automated Teller Machines

The Automated Teller Machines Automated Teller Machines (ATMs) have gained prominence as a delivery channel for banking transactions in India. Banks have been deploying ATMs to increase their reach. As at the end of December 2007 as per the RBI circular, the number of ATMs deployed in India was 32,342. More people are now moving towards using the automated teller machines (ATM) for their banking needs. According to a survey by Banknet India, 95% people now prefer this modern channel to traditional mode of banking. Almost 60% people use an ATM at least once a week. Increased ATM usage is also helped by the fact that customers have now the flexibility of using ATMs of other banks, as most of the banks are part of major interbank networks like National Financial Switch (NFS), Mitr, BANCS, Cashtree and Cashnet. The interbank networks have brought together ATMs of several banks so that consumers would gain access to any of the participating banks ATMs. Banks find it cheaper to pay membership fees to these networks as against setting up additional units in expensive-to-deploy areas. ATMs are now seen to be more than mere cash dispensing machines. Customers use ATMs to recharge their mobile phone pre-paid connections, pay their utility bills, even mutual fund transactions making them at par with flexibility given in internet banking only more secure. Of the value-added services provided at ATMs, bill-payment is the most used service, followed by prepaid mobile talk-time recharges. However, still about one third of the respondents do not use any value added services at ATMs. The ATM market in India is not yet saturated. Though the concentration of ATMs is greater in metros, the demand is increasing for other cities and even rural areas. ATMs per million people approximately is 33 units is very low. Experts forecast that the growth rate (CAGR) is expected to grow 18 percent up by 2013. Banks going into a self service model can have huge saving potential for banks and may also increase the convenience for the customers. Following is a representative trend taking into account the growth in the number of ATMs in three of the largest Indian banks: ATM Supply Chain Network Activities Following are the major activities carried out as part of the ATM supply chain or in supporting the ATM services of a bank Maintenance Activities Site Telecommunication Link Cash Refilling ATM Monitoring Handling Customer Complaints Reconciliation of Cash And Interbank Transactions Following is a sample ATM Supply chain network: Bank Head Office ATM Vendors Outsourced Agent Bank Branch 1 Bank Branch 2 ATM As can be seen from the network above, the major participants in the ATM supply chain network are: ATM Vendors If the bank ATM and the related IT infrastructure is outsourced then; the ATM infrastructure is operated and maintained by the ATM vendors for a fees. It provides the advantages of cost efficiency and scalability for the banks Outsourced Delivery agents They are the ones who supply cash to the ATMs. They either have a Vault Cash account where the vendors themselves maintain some cash balance or they have an Overdraft Account with the Bank itself, which gets debited after each withdrawal and credited after the deposit at the ATM. Bank Branches These are the Bank branches in-charge of the various ATMs in a particular area Bank Head Office This is the main office branch of a bank in a particular city or district ATM supply chain IT infrastructure ATM Infrastructure Information flow Delivery Channel Coordinator Switch Network Outsourced Delivery Agents Card Issuers Server ATM Information flow for cash withdrawal and for Credit Cards Information flow for cash replenishment MIS Info ATM It interfaces with the switch network to exchange cash withdrawal, cash replenishment and credit card information Outsourced Delivery Agents They receive information from the delivery channel coordinators to replenish the ATM cash Delivery channel coordinator They receive cash replenishment and MIS information from the switching network. There is always more than one ATM under each Delivery channel coordinator to take advantage of the economies of scale. Also, the channel ordination can be either manually managed or automated. Switch Network The switch server authenticates the user, as well as exchanges cash replenishment related information with the individual ATMs Card Issuers Server The banks host server interacts with the switch network to obtain card withdrawal and credit card information while at the same authenticating the credit card transaction from the Card Issuers Server Delivery Channels Delivery channels are medium for information transmission or cash transmission in a banking context. They are also known as touch-points, which deliver service to the end-user in his convenience. The primary medium of touch-point was the brick-mortal form of banking. However as time passed, and information technology proliferated banks were able to extend the touch-points to various other forms such as: Automated Teller Machines (ATM) Point of Sale (POS) Mobile Banking Internet Banking The delivery channel innovation was started by private banks foreign banks after the 1991 reforms when many banks were allowed to carry out operations in India. Advantages of Delivery Channels Deliver channels provide the following benefits to users Easy access 247 availability Security, Reduced transaction costs Options of access per convenience Acceptance Implementation Old generation banks with little or marginal systems have acceptance issues with the disruptive technologies of internet. The acceptance issue also comes with many of the old generation customers who believe in losing the personal touch of banking. Implementation issues center around the following: Centralization of Data Multiple technologies for different systems Security issues (Customer end/Banking end) Multiple interface for different channels Synchronization of information across channels Currency Distribution Banks need to maintain a certain level of cash in order to service its daily withdrawals. There is an entire supply-chain in place which helps in ensuring the same. Below is a diagram of how money travels from the press to the various banks ATM Presses/Mints Public Press-linked offices Currency Chest offices (Banks) An overview of the supply-chain of Banks The presses and mints where notes and coins are printed are under the RBI. The money from the mints and presses is moved daily to the 19 press-linked offices. These are sent to the nearby zonal currency-chest banks, essentially Banks which store current called as Chest offices. There are in all 4279 chests and 4040 coin depots. Functions of the Chest office Fulfills the requirement of peoples funds Withdrawal and acceptance of unfit notes Payments to Governments Operates with minimum balance at all times Each day the records are maintained for the issue/acceptance of currency. It also has to maintain the asset-liability position in cash management. Currency in Circulation Just as a manufacturing supply chain deals with product varieties also known as SKUs, the currency supply chain also has its SKUs through various denominations. The shift towards higher denominations was observed since the wide-usage of ATMs. Various steps were also taken to phase out Rs .5/- notes and replacing with coins for many such low denominations Source:RBI Docs, Currency Management, Section VIII, Dt. 27/08/2009 Clean-Note Policy To ensure the life of currency notes, RBI issued a directive to all bank offices to cease the stapling of notes and instead band them and the soiled notes be returned to RBI. But devalued stapled notes were still lying with banks. IT systems were used to create a Currency Verification Processing (CVP) system. This categorized notes into Fit, Unfit, Reject and Suspect categories. A Citizens charter was also issued providing guidelines on how to identify soiled notes and steps to be taken to return to RBI. However due to implementation issues kept the proportion of soiled notes in circulation from 15.9 million pieces (2002-03) to 10.9 million (2008-09). Logistics Distribution Challenges Each bank generally arranges for personal logistics service with police protection. Security vans are used for short-distances and train for longer distances. The extent and size of the country poses a significant problem in meeting need for currency at various pockets in India. Following are some of the issues faced in distribution Security availability of railway wagons Political boundaries that inefficiently defining jurisdiction of Issue offices which lead to suboptimal logistic services Moving currency across touch-points an exercise that is avoidable is generally carried out Private security is not desirable and police cant be dedicated for this exercise Various existing distribution systems of milk-cooperatives, post-offices, coin-dispenser mechanisms and a directive to issue bulk users with a certain proportion of coins was made. Supply Challenges With 4 printing presses, supply after 1999 was not a problem, but the pace of notes replacement made quality of notes deteriorate. Since the notes that were returned came unsorted there were inefficiencies in understanding the outflow of currency from system. In order to develop capacities to free-up vault space in banks various measures like shredding systems in all offices were setup. Demand-forecasting among banks Banks carry out demand-forecasting using statistical analysis using long-term historical demands to calculate forecasts. These aim to serve the following needs: Incremental needs As and when money is needed by RBI, the presses supply Replacement needs Money is needed to replace specific notes, which are soiled or disfigured Reserve needs Emergency requirements to fulfil reserve requirements by banks Technology in Currency Operations With such a vast network of banks, the Reserve Bank established Integrated Computerized Currency Operations and Management Systems (ICCOMS) which helped in error-free reporting and accounting of chest-level transactions. Security in distribution and ATM Security is increasingly becoming more significant in network environment with the emergence of the internetworking technology. The internetworking technology can act as or provide the communication channels across networks so that machines in different networks can talk to each other. But such kind of technologies like ATM is exposed to all kinds of attacks in such an accessible environment. Most of the network technologies, without integrating with security mechanism originally, are being redesigned to provide some security services. ATMs attempts to be secure by keeping the customers personal identification number (PIN) and other information safe by using encryption software such as Triple DES (Data Encryption Standard) Threats to ATM networks Like other such networks, ATM networks suffer a lot of threats like eavesdropping, spoofing, service denial, VC stealing and traffic analysis etc. And VC stealing and traffic analysis happen only in ATM networks. Eavesdropping Eavesdropping refers to the threat that the attacker connects or taps into the transmission media and gain an unauthorized access to the data. It is one of the most common attacks to the network. Service Denial ATM technology is a connection-oriented technique managed by a set of signals. By sending some anti-signals frequently, the attacker can disturb the communication between user A and user B to a great extent which can disable the Quality of Service(QoS) in ATM. Combining this technique with other tricks like eavesdropping, the attacker can even completely block one user from another. Stealing of VCs If two switches in an ATM network compromise, the attacker can even steal a VC from another user. Some argue that possibility of compromising of the switches is quite low but that is true only if the ATM network is owned by one organization. But this is not the case today since in ATM internetworking, in which case cells travel through different ATM networks, it becomes very easy for two switches to compromise. Traffic Analysis Its a kind of threat in which a hacker can get information by collecting and analyzing the information (not the actual content of communication) like the timing, volume and about the parties communicating through a Virtual Circuit. Encryption effects only the content and not the timing and volume of the communication. So gaining access to even these can reveal a great deal of information to an attacker. Generally this attack doesnt happen but can happen when ATM is used in a highly stringent and securitised environment. Major requirements/functions of an ATM security system User Identity Verification: The system should have the facility to establish and verify the identity of all the users and players in an ATM network. Controlled Access and Authorization: The system should ensure that any player without authority to gain access to some information or resources should not be able to access it. Protection of Confidentiality: Every data that is stored or used in communication should be kept classified. Protection of Data Integrity: Guarantee regarding the integrity of the stored communicated data should be given by the Security system. Strong Accountability: The system should ensure that No entity is able to deny the responsibility of its any of the actions or efforts carried out by her. Activities Logging: The security system should support the capability to retrieve information about security activities in the Network Elements with the possibility of tracing this information to individuals or entities. Alarm reporting: Provision of generation of alarm notifications regarding certain selective events related to security. Audit: Provision of analysing of data logged into the system in case of any security violation so that required measures can be used and checks can be installed. Security Recovery: Provisions of recovery from successful or attempted security violations. Security Management: Proper management of the security services required as a part of above requirements. Suppliers of cash main source: Central bank The most important requirement of an ATM is one major motive behind the technology i.e. making money easily available to the customers. Traditionally there have been a number of suppliers of cash starting from unorganised money lenders in the past to the modern banks today. A bank is a financial intermediary that accepts deposits and gives loans to customers using those deposits. Can be commercial or retail banking or the money can be lend either directly to the customer or also through the use of markets. Banking channels Apart from their branches, bank offers many different channels to access their banking and other services. Among these, few channels help the customers in carrying out transactions without the involvement of real cash. These are E- Mail, Telephone, Call banking, Mobile and Video banking etc. In addition to all these channels, banks provide a source of real cash called ATM through a machine that dispenses cash and sometimes takes deposits without the need for a human representative from bank side. Major source of money: Central Bank A central bank is a banking institution with an exclusive privilege to lend to its government. It behaves both as a normal commercial bank wherein it charges interest on the loans made to borrowers, majorly the government of the country the bank exists for and also as a lender of last resort wherein it lends to the banks when situation is not too good or as a part of the statutory requirements. But Central bank has a monopoly on creating the currency of that nation and it is the kind of bank that can lend money to other banks in times of need. It is the major source of money in a market and acts as the regulator of money supply too. Security in Distribution on and ATM Security is increasingly becoming more significant in network environment with the emergence of the internetworking technology. The internetworking technology can act as or provide the communication channels across networks so that machines in different networks can talk to each other. But such kind of technologies like ATM is exposed to all kinds of attacks in such an accessible environment. Most of the network technologies, without integrating with security mechanism originally, are being redesigned to provide some security services. ATMs attempts to be secure by keeping the customers personal identification number (PIN) and other information safe by using encryption software such as Triple DES (Data Encryption Standard) Major requirements/functions of an ATM security system User Identity Verification: The system should have the facility to establish and verify the identity of all the users and players in an ATM network. Controlled Access and Authorization: The system should ensure that any player without authority to gain access to some information or resources should not be able to access it. Protection of Confidentiality: Every data that is stored or used in communication should be kept classified. Protection of Data Integrity: Guarantee regarding the integrity of the stored communicated data should be given by the Security system. Strong Accountability: The system should ensure that No entity is able to deny the responsibility of its any of the actions or efforts carried out by her. Activities Logging: The security system should support the capability to retrieve information about security activities in the Network Elements with the possibility of tracing this information to individuals or entities. Alarm reporting: Provision of generation of alarm notifications regarding certain selective events related to security. Audit: Provision of analysing of data logged into the system in case of any security violation so that required measures can be used and checks can be installed. Security Recovery: Provisions of recovery from successful or attempted security violations. Security Management: Proper management of the security services required as a part of above requirements. Suppliers of cash main source: Central bank The most important requirement of an ATM is one major motive behind the technology i.e. making money easily available to the customers. Traditionally there have been a number of suppliers of cash starting from unorganised money lenders in the past to the modern banks today. A bank is a financial intermediary that accepts deposits and gives loans to customers using those deposits. Can be commercial or retail banking or the money can be lend either directly to the customer or also through the use of markets. Banking channels Apart from their branches, bank offers many different channels to access their banking and other services. Among these, few channels help the customers in carrying out transactions without the involvement of real cash. These are E- Mail, Telephone, Call banking, Mobile and Video banking etc. In addition to all these channels, banks provide a source of real cash called ATM through a machine that dispenses cash and sometimes takes deposits without the need for a human representative from bank side. Major source of money: Central Bank A central bank is a banking institution with an exclusive privilege to lend to its government. It behaves both as a normal commercial bank wherein it charges interest on the loans made to borrowers, majorly the government of the country the bank exists for and also as a lender of last resort wherein it lends to the banks when situation is not too good or as a part of the statutory requirements. But Central bank has a monopoly on creating the currency of that nation and it is the kind of bank that can lend money to other banks in times of need. It is the major source of money in a market and acts as the regulator of money supply too. nation and it is the kind of bank that can lend money to other banks in times of need. It is the major source of money in a market and acts as the regulator of money supply too. Demand Projections for ATMs Most ATMs are connected to international bank networks, enabling people to withdraw and deposit money from machines not belonging to the bank or country where they have their account. Serving the ATMs network is a costly task: it takes employees time to supervise the network and make decisions about cash management and it involves high operating costs (financial, transport, handling, insurance etc.). As interest rate rises and greater operating efficiencies become paramount. Some banks typically maintain as much as 40% more cash at their ATMs than whats needed, even though many experts consider cash excess of 15% to 20% to be sufficient. Cash related costs represent about 35-60 % of the overall costs of running an ATM. Through currency management optimization, banks can avoid falling into the trap of maintaining too much cash and begin to profit by mobilizing idle cash. Effective currency management and control starts with an automated solution that uses advanced algorithms to accura tely predict currency supply and demand, allowing banks to forecast demand and pro-actively manage currency throughout their network. Transportation and servicing cost increase can be substantial for banks. To achieve the lowest cost of distribution based on accurate supply and demand forecasting and optimization procedures is critical for a bank to lower its operational expenses and improve the return on its cash assets. What is expected of a forecast model of the ATM network is that it simulates historical demand by using data from actual cash-in transactions and cash-out transactions. The historical demand model is overlaid with additional factors, such as paydays, holidays, and seasonal demand in a specific area. Analytical models are aligned with the experience of resources that have intimate knowledge of the banks daily operations and are used to determine the optimum cash amount for each ATM by calculating the transport and money upload costs against interest rates. Cash drawings are subject to trends and generally follow weekly, monthly and annual cycles. An appropriate model for a bank and its branches or ATMs should estimate optimal amount of stocked money plus efficiently manage and control day-to-day cash handling, transportation with reducing of currency transportation and servicing costs. The system should be flexible enough to allow the bank to reforecast future demand, perform WHAT IF analyses, and optimize the network as the cash distribution environment evolves. Cash demand forecast for every ATM is based on linear regression models with seasonality coefficients. The development of such models is relatively complicated and differs for various ATM. Therefore preparation of forecasting models for whole ATM network is difficult task for owners of machines. The parameters of forecasting models are determined in the system implementation stage and are held constant during the operation phase. However, business environment changes continually in real world and, therefore, the model parameters must be also adapted to the changing environment. A recent paper on the optimization techniques proposes the use of artificial neural networks combined with existing what-if analysis tools and simulation modelling procedures. This advanced method will handle the drawbacks of simple regression models but will be more accurate in projecting the demand. Off-late a few advanced software packages developed by traditional financial network giants like Visa are also available that provide powerful cash management facility. Publicly available data regarding these software packages suggest that they also use multi-regression models for prediction purposes. Network optimization models for cash distribution to various ATMs are also important to reduce the costs across the supply chain. In the first instance, it can be very valuable to coordinate cash uploading and service procedures while visiting the ATM network. Coordinated route planning for maintenance of various ATMs could also reduce the ATM networks management costs significantly. Issues in Currency Identification Counterfeit currency notes is one of the biggest problems that are currently plaguing the cash distribution network. A lot of people suffer from this while withdrawing cash from an ATM when they inadvertently receive a fake note in a bundle of proper bills. It is difficult to prove accountability in case of such an incident and fix blame. Of the 48,963 million pieces of currency in circulation in 2009 398,111 pieces were found to be counterfeit. RBI has come with a set of recommendations to be implemented across the distribution network that forms the supply chain of cash distribution to check counterfeit, maintain quality of notes in circulation, strengthening of security systems and procedures and fixing accountability in case of human error. These recommendations are as given below: (A) Measures for facilitating detection of counterfeit notes and maintaining quality of notes in circulation (i) Note Sorting Machines (NSMs) / Desktop Sorters may be installed in all bank branches in a phased manner for early detection of counterfeit notes. (ii) Banks may ensure the quality of the notes fed in ATMs. They may conduct periodic audit of the agents used for outsourcing this activity viz. the CIT companies. Banks may switch over to the cassette swap system for feeding the ATMs. New ATMs installed may be provided with in built note detectors. Over a period existing ATMs may also be required to have in built note detectors. (iii) Performance parameters of NSMs may be standardized by RBI to ensure that all NSMs installed adhere to the laid down standards for detection of counterfeit notes. (iv) RBI may ensure that the plan for withdrawal of notes of old series is implemented strictly as formulated and that the new series of banknotes with more robust security features be introduced as early as possible. RBI may also facilitate R and D efforts for development of new security features. (v) Where any person inadvertently in possession of counterfeit notes upto five (5) pieces tenders the same at a bank counter, the requirement of filing FIR may be done away with. A simple report may be filed with the branch which in turn may include this in the Counterfeit Currency Report (CCR) to FIU-IND / RBI. (vi) RBI may review the system of incentives and disincentives for detection and disclosure of counterfeit notes while assisting the enforcement agencies in dealing appropriately with those involved in making and distribution of counterfeit notes. (B) Measures relating to cash holding and distribution (vii) RBI may stipulate suitable cash holding limits for all currency chests beyond which the cash should necessarily be moved to a chest with larger limits or to RBI. (viii) Each RBI office may undertake a review of the requirement of currency chests in their jurisdiction based on the volume and nature of transactions, accessibility of the chest and other factors including security so as to rationalize the number of chests and upgrade the facilities thereat for better security and efficiency. (ix) To tap advantages arising out of economies of scale, minimize overnight cash risks at bank branches and to benefit from sophisticated logistics techniques banks may be encouraged to establish Currency Processing Centres, which should be permitted to charge other banks for processing services. (x) As NSMs have to be installed at all branches for sorting notes before dispensation, banks will have to make necessary investments. The cost of such investments will need to be recovered from the bulk tenderers of cash. Banks may put in place a transparent policy for such charges of cash handling/processing with the approval of their respective boards as already advised by RBI vide its DBOD directive DIR.BC.86 / 13.10.00 dated September 7, 1999. (xi) RBI may take initiatives in promoting use of cards and electronic means of payment. (C) Measures for strengthening security systems and procedures (xii) RBI may explore enlisting the services of a specialized and dedicated force / other approved agencies to provide security at chests and for movement of treasure. (xiii) RBI may explore upgradation of the security systems in currency chests and RBI vaults incorporating electronic bio-metric access, electronic locking of bins, and surveillance through Closed Circuit Television (CCTVs). Networking of CCTVs at chests within the jurisdiction of a controlling office of the bank may be explored for better surveillance. (xiv) Tamper-proof shrink wrapping of soiled notes with bar coding of details of the branch remitting them may be introduced. (xv) A system of quarterly security audit of currency chest branches by controlling offices may be introduced. Comprehensive guideline / format may be prepared by RBI /IBA. (xvi) A system of risk based inspection of currency chests may be introduced by banks / RBI taking into account various parameters for evaluating the extent of risk. (xvii) Banks may draw up a contingency plan / disaster management plan in consultation with local police. (xviii) RBI may explore the possibility of introducing a defacing system of self inking / marking of banknotes in transit or in chests, which would automatically trigger-in if there is an attack / attempted robbery/ theft etc. (D) HR Measures (xix) Banks may modify their transfer pricing policy or equivalent policy so as to pass on the benefit on account of having a currency chest to the branch where the chest is maintained. (xx) Rotation of staff posted at currency chests may be ensured to prevent vested interest and entrenched non adherence of laid down systems and procedures. (xxi) Where deviations and irregularities are found, controlling offices may take immediate punitive action after fixing accountability. (xxii) Bank may accord recognition to currency handling operations as a sensitive and skilled activity and provide necessary incentives and training. A. Dis