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Published on:

April 14, 2025

Alankar Mishra

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How an ATM Works: A Simple Guide to Understanding ATM Functionality

From local banks to shopping centers, gas stations, airports, and even remote villages, Automated Teller Machines, or ATMs, can be found almost anywhere! But have you ever wondered how an ATM operates? Don’t worry because this guide is dedicated to explaining everything about the feature of banking technology in the most user-friendly manner possible.

Students, banking employees, or frequent ATM users; regardless of who you are, rest assured that this article will cover everything regarding the relationship between the customer and the ATM, how the ATM functions, its parts, and how it interacts with your bank.

What Is an ATM?

An ATM (Automated Teller Machine) is an electronic coinage venue through which a customer can execute certain transactions without the requirement of a cash attendant. Some ATM functions include:

‍1. Withdrawing cash

‍2. Checking account balance

‍3. Requesting mini-statements

‍4. Changing PINs

‍5. Transferring funds between associated accounts

Depositing cash or checks (in advance at ATMs)

Accounts can be accessed at almost any time and any day of the week which enhances comfort and convenience for customers.

Types of ATMs

For the most part, ATMs can be split into two primary categories:

1. Basic Units: These allow consumers to withdraw cash, check their account balances, and view mini-statements.

2. Advanced ATMs: These machines allow users to deposit cash, pay bills, transfer funds, and withdraw cash without a physical card.

Additionally, ATMs can be classified as:

1. On-site ATMs: They are found in the branches of most banks.

2. Off-site ATMs: These are the ATMs found in shopping malls, airports, and train stations.

3. White label ATMs: These ATMs are not owned by any bank but they are linked with different banks.

4. Brown label ATMs: These ATMs are owned by a bank but managed by a service provider who is not the bank.

Key Components of an ATM

To understand how an Automated Teller Machine (ATM) works, one must be familiar with its primary parts:

1. Card Reader: This device extracts data from the magnetic stripe or chip embedded in the card, thus identifying the bank account.

2. Keypad: The keypad is used for entering the PIN or transaction’s Personal Identification Number, type, and value.

3. Display Screen: It is either a touchscreen or a conventional computer display. It displays instructions to the customer or shows errors/amendments required to complete a transaction.

4. Cash Dispenser: The mechanism that dispenses the cash requested. The denomination requested is sensed, counted, and verified.

5. Printer: Prints out the receipts related to the transactions including time, date, the transaction carried out, and balance.

6. Depository: Within ATMs with deposit capabilities, cash or cheques can be deposited.

7. Security Camera: Takes the activity of the round the ATM for the security purpose to prevent frauds.

How Does an ATM Work? (Step-by-Step Process)

Let’s break down the step-by-step working of an ATM:

Step 1: Card Insertion

You insert your debit or credit card into the ATM card reader. The machine reads the chip/magnetic stripe to fetch account information.

Step 2: Identity Verification

Enter your 4-6 digit PIN on the keypad. This PIN is encrypted and sent securely to your bank’s server for verification.

Note: The encryption ensures that your PIN is never exposed in raw form during transmission.

Step 3: Bank Communication

Once the ATM has your details and PIN, it connects to your bank’s host processor or ATM switch. This is the central system that processes the request.

Here’s how the communication flows:

The ATM sends a request to the host processor.

The processor forwards the request to your bank's core banking system (CBS).

CBS checks your account for sufficient funds and PIN validity.

The response is sent back through the processor to the ATM.

This all happens in just a few seconds!

Step 4: Transaction Execution

Once verified, the ATM proceeds to fulfill your requested action:

If you're withdrawing ₹2,000, the cash dispenser counts and verifies the notes, ensures they’re not damaged or counterfeit, and then ejects them.

If you're checking your balance or transferring funds, the system updates and displays the information accordingly.

Step 5: Receipt Printing

If you select “Print Receipt,” the printer generates a slip with details like:

Amount withdrawn.

Remaining balance.

Transaction time and date

ATM ID

Step 6: Card Ejection

Your card will be returned once the transaction is complete and the session is terminated for security.

‍How Does the ATM Get Cash?

Like any other machine, Automated Teller Machines (ATMs) don’t magically generate cash. They require regular servicing and replenishing through bank collaboration with cash management companies such as CMS and SIS. Here's how the cash is replenished:

1. Cash is deposited in cassettes which are then stored inside the ATM machine.

2. Cassettes are set in advance for specific denominations of cash which can be ₹100, ₹200, ₹500, or ₹2000.

3. Whenever cash in the ATM is close to running out, the ATM notifies the bank or service provider for a refill.

Security Measures in ATM Transactions

Since ATMs manage sensitive information and money, one of the top priorities is security. Here are a few crucial security attributes:

1. PIN Encryption: A PIN is always encrypted using Triple DES (3DES) or AES encryption while being transmitted.

2. Timeout Sessions: After a certain period of inactivity, the ATM will automatically end the session.

3. Daily Withdrawal Limits: In order to mitigate misuse due to theft, banks set default daily withdrawal limits.

4. Daily CCTV Surveillance: ATMs now feature video surveillance 24/7 in order to reduce fraud and ensure the safety of customers.

5. Anti-skimming Devices: A large number of ATMs are now equipped with anti-skimming devices in order to prevent card cloning.

What Happens If an ATM Fails Mid-Transaction?

An ATM may sometimes fail to give out cash, but withdraw money. This may happen due to power outages, poor internet, or any internal issues.

1. The ATM, along with the bank’s servers, have a record of all transactions.

2. The bank usually refunds the user within 7 days of work if the system picks up a ‘cash not dispensed’ blunder.

3. Another option is starting a dispute, in which case the bank will review the audit logs of the ATM to confirm your claim.

Fun Facts About ATMs

1. Barclays Bank set up the first ATM in London back in 1967.

2. HSBC put in place India's first state-of-the-art ATM in Mumbai in 1987.

3. According to current statistics, there are more than 2.5 lakh ATMs in India.

Currently, some ATMs provide biometric authentication features and even voice assistance for those who are visually impaired.

Advantages of ATMs

1. Always Open

2. Less Congested Banks

3. Easy Reach to Money

4. Multilingual Options

5. No Reliance on Banking Schedules

Limitations of ATMs

1. Power failures or card jams are examples of technical errors.

2. Skimming, card cloning, and shoulder surfing are examples of security risks.

3. Limits on how much one can withdraw each day.

4. No assistance is offered on complex banking questions.

Conclusion

Automated teller machines have changed banking by making cash and basic banking services available 24/7. Identiﬁcation is one of the many functions an ATM performs, so learning how they work reveals not only the technology behind them, but also explains the remarkable integration of machinery, programs, banking institutions, and even security systems.

FAQs

Can I use any ATM to withdraw money?

Indeed, you can access most ATMs in India without restrictions owing to the National Financial Switch (NFS). Nevertheless, there might be some fees for transactions after a specified amount of free transactions.

What should I do if the ATM does not dispense cash but the money is debited?

Relax. Most banks will auto-reverse such transactions that fail to process in 7 business days. If they haven’t, file a complaint with your bank and remember to include the transaction reference number.

‍Can I deposit money using an ATM?

Indeed, there are some Automated Teller Machines (ATMs) which allow cash and cheque deposits such as Cash Deposit Machines (CDMs). Before you proceed, ensure that the device accepts deposits.

Are ATM transactions safe?

Contemporary ATMs employ encryption techniques, anti-skimming devices, and CCTV cameras. Still, it is best to cover your PIN when using an ATM and refrain from using ATMs located in remote or dimly lit places.