5.3.2 The Evolution of ICT in Banking

The introduction of ICT has had a dramatic effect on the banking industry and employment patterns within it. The information below will give you a good idea of how the use of ICT has developed as well a examples of uses of ICT that you could use to answer examinations questions.

Data processing:

The first applications of ICT within banking were the use of mainframes, and later minicomputers, to process data such as customer accounts, bank inventories, personnel records, and accounting packages.

The ATM:

The next stage was the offering of direct customer services with the invention of the ATM (Automatic Teller Machine).

Advantages of the ATM:

• The ATM enables customers to withdraw cash from machines not belonging to the bank where they have their account.
• For customers abroad, it is possible to withdraw local currency in a foreign country.
• The banks save staffing costs because customers can serve themselves.

How the ATM works:

• ATM's are linked by a wide-area network and can communicate encrypted data.
• The customer inserts their plastic card into the ATM.
• The ATM reads the data held in the magnetic strip or chip on the card.
• The customer verifies their identity by entering a PIN (Personal Identification Number) of four or more digits.
• Upon successful entry of the PIN, the customer keys in the amount of cash to be withdrawn.
• The cash is then counted and issued from the machine.
• An instruction is then sent to the customers bank account and the amount is deducted from their account via EFT (Electronic Funds Transfer).

ATM Security:

• If the PIN is entered incorrectly several times in a row then the ATMs will attempt to retain the card to prevent an unauthorised user from discovering it by guesswork.
• Because the data transferred between the ATM and the bank computers is encrypted, there is little risk of it being intercepted.
• Most fraud involves a criminal getting hold of the PIN  number in some way and copying the information held on the magnetic strip onto a fake card.

EFTPOS:

The next step in direct customer services was the payment for goods or services by debit and credit cards through the EFTPOS (Electronic Funds Transfer at the Point Of Sale) system.

How the EFTPOS system works:

• The amount due is entered by the retailer into the EFTPOS terminal (basically a computerised till).
• The customer checks the amount due then:
• either:
  • The magnetic strip on the customer's card is swiped through a card reader so their account details can be read.
  • The customer signs a receipt to prove their identity.
•  or (using the Chip and PIN system):
  • A ROM chip on customer's smartcard is read by a chip reader so the account details can be read.
  • The customer enters their PIN using the keypad (this can have a cable or wireless link to the EFTPOS terminal)
• The EFTPOS terminal then contacts the computer network of the bank or credit card company (usually over a phone line) to verify the PIN and authorise the transaction.
• The funds are transferred from the customer's bank or credit card account to the bank account of the retailer.

EFTPOS Security:

• The magnetic strips on customer debit or credit cards are easy to copy and a signature is not very secure way to identify someone so the Chip and PIN system has largely replaced it in the UK.  The data is held on a ROM chip on the card making it very difficult to copy.  As long as the customer keeps their PIN secure a criminal cannot use a stolen smartcard to purchase goods.

Smartcard technology:

The latest step is the development of smartcard technology so that funds can be transferred at an ATM or an EFTPOS terminal from a customer's bank account directly onto the smartcard ROM Chip .

These funds can then be used to purchase goods and services from devices not directly connected via the EFTPOS system such as car parking ticket machines etc.  The funds are deducted from the smartcard directly but transferred to the retailer's bank account at a later date.