Reading Material

Concepts and definitions of

various banking terminology.

All the information is collected using various free web-sites on internet for the
purpose of enhancing knowledge of the participants in the field of banking.

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Banks in the economy
Role in the money supply
A bank raises funds by attracting deposits, borrowing money in the inter-bank market, or
issuing financial instruments in the money market or a capital market. The bank then
lends out most of these funds to borrowers.
However, it would not be prudent for a bank to lend out all of its balance sheet. It must
keep a certain proportion of its funds in reserve so that it can repay depositors who
withdraw their deposits. Bank reserves are typically kept in the form of a deposit with a
central bank. This behaviour is called fractional-reserve banking and it is a central issue
of monetary policy. Some governments (or their central banks) restrict the proportion of
a bank's balance sheet that can be lent out, and use this as a tool for controlling the
money supply. Even where the reserve ratio is not controlled by the government, a
minimum figure will still be set by regulatory authorities as part of bank regulation.
Size of global banking industry
Worldwide assets of the largest 1,000 banks grew 15.5% in 2005 to reach a record $60.5
trillion. This follows a 19.3% increase in the previous year. EU banks held the largest
share, 50% at the end of 2005, up from 38% a decade earlier. The growth in Europe’s
share was mostly at the expense of Japanese banks whose share more than halved during
this period from 33% to 13%. The share of US banks also rose, from 10% to 14%. Most
of the remainder was from other Asian and European countries.
The US had by far the most banks (7,540 at end-2005) and branches (75,000) in the
world. The large number of banks in the US is an indicator of its geographical dispersity
and regulatory structure resulting in a large number of small to medium sized institutions
in its banking system. Japan had 129 banks and 12,000 branches. In Western Europe,
Germany, France and Italy had more than 30,000 branches each. This was twice the
number of branches in the UK.
Bank crises
Banks are susceptible to many forms of risk which have triggered occasional systemic
crises. Risks include liquidity risk (the risk that many depositors will request withdrawals
beyond available funds), credit risk (the risk that those that owe money to the bank will
not repay), and interest rate risk (the risk that the bank will become unprofitable if rising
interest rates force it to pay relatively more on its deposits than it receives on its loans),
among others.
Banking crises have developed many times throughout history when one or more risks
materialize for a banking sector as a whole. Prominent examples include the U.S.
Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during the
1990s, and the bank run that occurred during the Great Depression, and the recent
liquidation by the central Bank of Nigeria.where about 25 banks were liquidated
Types of retail banks
Commercial bank is the term used for a normal bank to distinguish it from an
investment bank. Since the two no longer have to be under separate ownership, some use
the term "commercial bank" to refer to a bank or a division of a bank that mostly deals
with corporations or large businesses.

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Community development bankare regulated banks that provide financial services and
credit to underserved markets or populations.
Postal savings banks are savings banks associated with national postal systems.
Private banks manage the assets of high net worth individuals.
Offshore banks are banks located in jurisdictions with low taxation and regulation, .
Many offshore banks are essentially private banks.
Savings banks traditionally accepted savings deposits and issued mortgages. Today,
some countries have broadened the permitted activities of savings banks.
Building societies and Landesbanks both conduct retail banking
A commercial bank is a type of financial intermediary and a type of bank. It raises funds
by collecting deposits from businesses and consumers via checkable deposits, savings
deposits, and time deposits. It makes loans to businesses and consumers. It also buys
corporate bonds and government bonds. Its primary liabilities are deposits and primary
assets are loans and bonds.
This is what people normally call a "bank". The term "commercial" was used to
distinguish it from an investment bank. Since the two genres of banks no longer have to
be separate companies, some have used the term "commercial bank" to refer to banks
which focus mainly on companies.
Community development banks (CDBs) are a special kind of bank designed to serve
the residents of and spur economic development in low to moderate income (LMI) areas.
When CDBs provide retail banking services, they usually target customers from
"financially underserved" demographics. Community development banks can apply for
formal certification as a Community Development Financial Institution (CDFI) from the
Community Development Financial Institutions Fund of the U.S. Department of the
Treasury.
Organizers wishing to start a de novo CDB in the United States can seek either a State or
National bank charter. Like any national bank, all Federally-chartered CDBs are
regulated primarily by the Office of the Comptroller of the Currency. According to the
OCC Charter Licensing Manual, CDBs are required "to lend, invest, and provide services
primarily to LMI individuals or communities in which it is chartered to conduct
business." State-chartered Community Development Banks are subject to regulations,
qualifications, and definitions that vary from state to state.
The largest and oldest community development bank holding company is ShoreBank,
headquartered in the South Shore neighborhood of Chicago. Through its holding
company structure, ShoreBank Corporation promotes its community development
mission by operating CDBs and other affiliates in certain U.S. cities.
Private bank
Private banks are banks which are not incorporated, and hence the entirety of their
assets is available to meet the liabilities of the bank. These banks have a long tradition in
Switzerland, dating back to at least the revocation of the Edict of Nantes (1685).
However most have now become incorporated companies, so the term is rarely true
anymore.
Private banking is a term which refers to major institutional banks which offer financial
services to private individuals. These banks would normally have two distinct divisions -
private banking, and corporate banking.

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Historically private banking has been viewed as very exclusive, only catering for wealthy
individuals with liquidity over $1 million, although it is now possible to open some
private bank accounts with no more than $50,000. An institution's private banking
division will provide various services such as investment (wealth management), savings,
inheritance and tax planning for their clients.
The word "private" also alludes to client privacy and minimizing taxes via careful
allocation of assets. A Swiss bank or offshore bank account may be used for this purpose.
The largest private banking division is at UBS AG, and the most profitable private
banking division is at Merrill Lynch.
Scale
Private banking institutions showed an increase in profits and assets under management
in 2004 following a period of slow growth between 2000 and 2003 caused by declines in
equity markets and the slowdown of the global economy. According to Scorpio
Partnership’s annual Private Banking Benchmark study, pre-tax profits of 120 private
banks in their study grew 30% in 2004 while their assets under management rose 13% to
$6 trillion. More recent data shows that the top 25 private banks increased their assets by
a further 7% in local currency terms in the first six months of 2005. According to
Goldman Sachs, the flow of capital to private banking will increase by about 7% a year
until 2007. After several years of decreases, private banking employment increased by
3.8% in 2004.
Switzerland is the major location of private banking. Swiss banks hold an estimated 35
percent of the world's private and institutional funds, or 3 trillion Swiss francs.
Offshore bank
An offshore bank is a bank located outside the country of residence of the depositor,
typically in a low tax jurisdiction (aka "tax haven") that provides financial and legal
advantages. These advantages typically include some or all of strong privacy (see also
bank secrecy, a principle born with the 1934 Swiss Banking Act)
 less restrictive legal regulation
 low or no taxation (i.e. tax havens)
 easy access to deposits (at least in terms of regulation)
 protection against local political or financial instability
 An alternative to oppressive governement taxation and Banking regulations.
While the term originates from the Channel Islands "offshore" from Britain, and most
offshore banks are located in island nations to this day, the term is used figuratively to
refer to such banks regardless of location (Switzerland, Luxembourg and Andorra in
particular are landlocked).
Offshore banking has often been associated with the underground economy and
organized crime, via tax evasion and money laundering; however, legally, offshore
banking does not prevent assets from being subject to personal income tax on interest.
Except for certain persons who meet fairly complex requirements, the personal income
tax of most countries makes no distinction between interest earned in local banks and
those earned abroad. Persons subject to US income tax, for example, are required to
declare on penalty of perjury, any offshore bank accounts—which may or may not be
numbered bank accounts—they may have. Although offshore banks may decide not to
report income to other tax authorities, and have no legal obligation to do so as they are

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protected by bank secrecy, this does not make the non-declaration of the income by the
tax-payer or the evasion of the tax on that income legal. Following September 11, 2001,
there have been many calls for more regulation on international finance, in particular
concerning offshore banks, tax havens and clearing houses such as Clearstream, based in
Luxembourg and being accused of being a crossroads for major illegal money flows. In
reality it is simply the Domestic Banks and tax agencies trying to get some of the money
held in offshore accounts. Offshore banking offers a real threat in terms of competition to
the the banking and taxation systems in developed countries. The 80's and 90's saw
financial deregulation around the developed world which benefited the consumer, but
now rather than compete on a level playing field, OECD countries are trying to stamp out
competition.
Advantages of offshore banking
Offshore banks provide access to politically and economically stable jurisdictions. This
may be an advantage for those resident in areas where there is a risk of political turmoil
who fear their assets may be frozen, seized or disappear.
Some offshore banks may operate with a lower cost base and can provide higher interest
rates than the legal rate in the home country due to lower overheads and a lack of
governement intervention which acts as a tax on domestic banks.
Offshore finance is one of the few industries, along with tourism, that geographically
remote island nations can competitively engage in. Yet OECD countries are determined
to stamp out this competition in order to preserve their own dominance.
Interest is generally paid by offshore banks without being tax imposed. This is an
advantage to individuals who do not pay tax on worldwide income, or who do not pay tax
until the tax return is agreed, or who feel that they can illegally evade tax by hiding the
interest income.
Some offshore banks offer banking services that may not be available from domestic
banks such as anonymous bank accounts, higher or lower rate loans based on risk and
Investment opportunities not available from your country of residence.
Offshore banks in some countries participate in mandatory bank account deposit
protection insurance systems.
Offshore banking is often linked to other services, such as trust and corporate
management, which may have specific tax advantages or disadvantages for some
individuals .
Offshore banking ecourages financial deregulation by creating tax and banking
competition. As first discussed by Charles Tiebout, there should be Tax competition so
that people choose the right balance of service and taxes which they desire. Taxes have
grown in real terms over the last 30 years in developed countries.
Offshore Banking Helps developing countries to source investment and create growth in
their economy.
offshore Banking helps redistribute world finance.
Disadvantages of offshore banking
Not all offshore jurisdictions have depositor compensation schemes, to bail out depositors
in the event that a bank becomes insolvent. Yet Most are much safer and have less history
of banking problems than US banks for instance.
Offshore banking has been associated with the underground economy and organized
crime, through tax evasion and money laundering. Following September 11, 2001,

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offshore banks and tax havens, along with clearing houses, have been accused of helping
various organized crime gangs, terrorist groups, and other state or non-state actors in their
shady operations. Henceforth, there is a risk of reputation being tarnished by association.
This has come about due to propaganda supplied by government and financial bodies
who have a vested interest in the extermination of competitive offshore banks.
Offshore jurisdictions are often remote, so physical access and access to information can
be difficult. Yet in a world with global telecommunications this is rarely a problem.
Accounts can be set up online, by phone or by mail.
Developing countries can suffer due to the speed at which money can be transferred in
and out of their economy as "hot money". This "Hot money" is aided by offshore
accounts, and can increase problems in financial disturbance.
Banking services
It is possible to obtain the full spectrum of financial services from offshore banks,
including:
 deposit taking
 credit
 wire- and electronic funds transfers
 foreign exchange
 letters of credit and trade finance
 investment management and investment custody
 fund management
 trustee services
 corporate administration
Not every bank provides each service. Banks tend to polarise between retail services and
private banking services. Retail services tend to be low cost and undifferentiated, whereas
private banking services tend to bring a personalised suite of services to the client.
Statistics concerning offshore banking
Offshore banking, which has a historic association with tax evasion or organized crime, is
an important part of the international financial system. Experts believe that as much as
half the world's capital flows through offshore centers. Tax havens have 1.2% of the
world's population and hold 26% of the world's wealth, including 31% of the net profits
of United States multinationals. According to Merrill Lynch and Gemini Consulting's
“World Wealth Report” for 2000, one third of the wealth of the world's “high net-worth
individuals”—nearly $6 trillion out of $17.5 trillion—may now be held offshore. Some
$3 trillion is in deposits in tax haven banks and the rest is in securities held by
international business companies (IBCs) and trusts. The IMF said that between $600
billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of
global economic output. Today, offshore is where most of the world's drug money is
allegedly laundered, estimated at up to $500 billion a year, more than the total income of
the world's poorest 20%. Add the proceeds of tax evasion and the figure skyrockets to $1
trillion. Another few hundred billion come from fraud and corruption. "These offshore
centers awash in money are the hub of a colossal, underground network of crime, fraud,
and corruption" commented Lucy Komisar quoting these statistics. Among offshore
banks, Swiss banks hold an estimated 35% of the world's private and institutional funds
(or 3 trillion Swiss francs), and the Cayman Islands are the fifth largest banking centre
globally in terms of deposits.

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Regulation of offshore banks
In the 21st century, regulation of offshore banking is allegedly improving, although
critics maintain it remains largely insufficient. The quality of the regulation is monitored
by supra-national bodies such as the International Monetary Fund (IMF). Banks are
generally required to maintain capital adequacy in accordance with international
standards. They must report at least quarterly to the regulator on the current state of the
business.
Since the late 1990s, especially following September 11, 2001, there has been a number
of initiatives to increase the transparency of offshore banking, although critics such as the
Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC)
non-governmental organization (NGO) maintain that they have been insufficient. A few
examples of these are:
The tightening of anti-money laundering regulations in many countries including most
popular offshore banking locations means that bankers are required, by good faith, to
report suspicion of money laundering to the local police authority, regardless of banking
secrecy rules. There is more international co-operation between police authorities.
In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary
requirements, which mean that the names of the recipients of US-source investment
income are passed to the IRS.
Following 9/11 the US introduced the USA PATRIOT Act, which authorises the US
authorities to seize the assets of a bank, where it is believed that the bank holds assets for
a suspected criminal. Similar measures have been introduced in some other countries.
The European Union has introduced sharing of information between certain jurisdictions,
and enforced this in respect of certain controlled centres, such as the UK Offshore
Islands, so that tax information is able to be shared in respect of interest.
Joseph Stiglitz, 2001 Nobel laureate for economics and former World Bank Chief
Economist, told to reporter Lucy Komisar, investigating on the Clearstream scandal:
"You ask why, if there's an important role for a regulated banking system, do you allow a
non-regulated banking system to continue? It's in the interest of some of the moneyed
interests to allow this to occur. It's not an accident; it could have been shut down at any
time. If you said the US, the UK, the major G7 banks will not deal with offshore bank
centers that don't comply with G7 banks regulations, these banks could not exist. They
only exist because they engage in transactions with standard banks."[1]
In the 1970s through the 1990s it was possible to own your own personal offshore bank;
mobster Meyer Lansky had done this to launder his casino money. Changes in offshore
banking regulation in the 1990s in the form of "due diligence" (a legal construct) make
offshore bank creation really only possible for medium to large multinational
corporations that may be family owned or run.
Savings bank
A savings bank is a financial institution whose primary purpose is accepting savings
deposits. It may also perform some other functions.
Building society
A building society is financial institution, owned by is members, that offers banking and
other financial services, especially mortgage lending.

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The term building society first arose in 19th century Britain from working men's co-
operative savings groups: by pooling savings, members could buy or build their own
homes.
In the UK today building societies actively compete with banks for most "banking
services" especially mortgage lending and deposit accounts. There are currently (2006)
63 building societies in the UK with total assets exceeding £260 billion.
Origins
The original Building Society was formed in Birmingham in 1774. Most of the original
societies were fully terminating, where they would be dissolved when all members had a
house: the last of them was wound up in 1980. In the 1830s and 1840s a new
development took place with the Permanent Building Society, where the society
continued on a rolling basis, continually taking in new members as earlier ones
completed purchases. The main legislative framework for the Building Society was the
Building Society Act of 1874, with subsequent amending legislation in 1894, 1939 and
1960.
In their heyday, there were hundreds of building societies: just about every town in the
country had a building society named after that town. Over succeeding decades the
number of societies has decreased, as various societies merged to form larger ones, often
renaming in the process: most of the existing larger building societies are the end result
of the mergers of many smaller societies.
Investment bank
Investment banks assist public and private corporations in raising funds in the capital
markets (both equity and debt), as well as in providing strategic advisory services for
mergers, acquisitions and other types of financial transactions. They also act as
intermediaries in trading for clients. Investment banks differ from commercial banks,
which take deposits and make commercial and retail loans. In recent years, however, the
lines between the two types of structures have blurred, especially as commercial banks
have offered more investment banking services. In the US, the Glass-Steagall Act,
initially created in the wake of the Stock Market Crash of 1929, prohibited banks from
both accepting deposits and underwriting securities; Glass-Steagall was repealed by the
Gramm-Leach-Bliley Act in 1998. Investment banks may also differ from brokerages,
which in general assist in the purchase and sale of stocks, bonds, and mutual funds.
However some firms operate as both brokerages and investment banks; this includes
some of the best known financial services firms in the world.
Definitions
There appears to be considerable confusion today about what does and does not
constitute an "investment bank" and "investment banker". In the strictest definition,
investment banking is the raising of funds, both in debt and equity, and the name of the
division handling this in an investment bank is often called the "Investment Banking
Division" (IBD). However, only a few small boutique firms solely provide this - such as
Greenhill, with almost all investment banks heavily involved in providing additional
financial services for clients such as the trading of fixed income, foreign exchange,
commodity and equity securities. It is therefore acceptable to refer to both the
"Investment Banking Division" and other 'front office' divisions such as "Fixed Income"
as part of "investment banking", and any employee involved in either side an "investment
banker".

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More commonly used today to characterize what was traditionally termed "investment
banking" is "sell side". This is trading securities for cash or securities (i.e., facilitating
transactions, market making), or the promotion of securities (i.e. underwriting, research,
etc.).
The "buy side" constitutes the pension funds, mutual funds, hedge funds, and the
investing public who consume the products and services of the sell side in order to
maximize their return on investment. Some firms have both buy and sell side
components.
Role of modern investment banks - Today's Society
The original purpose of an investment bank was to raise capital and advise on mergers
and acquisitions and other corporate financial strategies. As banking firms have
diversified, investment banks have come to fill a variety of roles (list taken from the
Swiss Banking Institute):
 Underwriting and distributing new security issues
 Offering brokerage services to public & institutional investors
 Providing financial advice to corporate clients, especially on security issues,
M&A deals
 Providing financial security research to investors and corporate customers
 Market-Making, in particular securities.
 Investment banks have also moved into foreign exchange markets, private
banking, asset management and bridge financing.
 Raising capital in the capital markets
 The main activities and units
Large, global investment banks typically have several business units, including
Investment Banking, concerned with advising public and private corporations; Research,
concerned with producing reports on valuations of financial products; and Sales and
Trading, concerned with buying and selling products both on behalf of the bank's clients
and also for the bank itself. Banks undertake risk through Proprietary Trading, done by a
special set of traders who do not interface with clients and through Principal Risk, risk
undertaken by a trader after he buys or sells a product to a client and does not hedge his
total exposure. Banks seek to maximize profitability for a given amount of risk on their
balance sheet.
An investment bank is split into the so-called Front Office, Middle Office and Back
Office, with Front Office widely deemed as having the highest-caliber employees in
terms of intellectual and/or interpersonal capital, and Back Office the least. The
individual activities are described below:
FRONT OFFICE
Investment Banking, is the traditional aspect of investment banks which involves
helping customers raise funds in the Capital Markets and advising on mergers and
acquisitions. Investment bankers prepare idea pitches that they bring to meetings with
their clients, with the expectation that their effort will be rewarded with a mandate when
the client is ready to undertake a transaction. Once mandated, an investment bank is
responsible for preparing all materials necessary for the transaction as well as the
execution of the deal, which may involve subscribing investors to a security issuance,
coordinating with bidders, or negotiating with a merger target. Other terms for the

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Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate
Finance.
Financial Markets is split into four key divisions: Sales, Trading, Research and
Structuring.
Sales and Trading, is often the most profitable area of an investment bank, responsible
for the majority of revenue of most investment banks. In the process of market making,
traders will buy and sell financial products with the goal of making an incremental
amount of money on each trade. Sales is the term for the investment banks sales force,
whose primary job is to call on institutional and high-net-worth investors to suggest
trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate
their clients' orders to the appropriate trading desks, who can price and execute trades, or
structure new products that fit a specific need.
Research, is the division which reviews companies and writes reports about their
prospects, often with "buy" or "sell" ratings. While the research division generates no
revenue, its resources are used to assist traders in trading, the sales force in suggesting
ideas to customers, and investment bankers by covering their clients. In recent years the
relationship between investment banking and research has become highly regulated,
reducing its importance to the investment bank.
Structuring has been a relatively recent division as Derivatives have come into play,
with highly technical and numerate employees working on creating complex structured
products which typically offer much greater margins and returns than underlying cash
securities.
MIDDLE OFFICE
Risk Maagement involves analysing the risk that traders are taking onto the balance
sheet in conducting their daily trades, and setting limits on the amount of capital that they
are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk
overall.
BACK OFFICE
Operations involves data-checking trades that have been conducted, ensuring that they
are not erroneous, and transacting the required transfers. Whilst it provides the greatest
job security of divisions within an investment bank, it is widely known to involve the
most monotonous work at relatively low pay.
Technology - Every major investment bank has considerable amounts of in-house
software, created by the Technology team, who are also responsible for Computer and
Telecommunications-based support.
Size of industry
Global investment banking revenue increased for the third year running in 2005 to
$52.8bn. This was up 14% on the previous year but 7% below the 2000 peak. The
recovery in the global economy and capital markets resulted in an increase in M&A
activity which has been the primary source of investment banking revenue in recent
years. There was a decline in revenue between 2000 and 2002 caused by the adverse
economic conditions, and a sharp fall in equity markets.
The US was the primary source of investment banking income in 2005 with 51% of the
total, a proportion which has fallen somewhat during the past decade. Europe (with
Middle East and Africa) generated 31% of the total, slightly up on its 30% share a decade
ago. Asian countries generated the remaining 18%. Between 2002 and 2005, fee income

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from Asia increased by 98%. This compares with a 55% increase in Europe and 46%
increase in the US during this period.
Recent evolution of the business
Investment Banking is one of the most global industries, and is hence continuously
challenged to respond to new developments and innovation in the global financial
markets. Throughout Investment Banking history, many have theorized that all
investment banking products and services would be commoditized. However, new
products with higher margins are constantly invented and manufactured by bankers in
hopes of winning over clients and developing trading know-how in new markets.
However, since these cannot be patented or copyrighted, they are very often copied
quickly by competing banks, pushing down trading margins. For example, trading bonds
and equities for customers is now a commodity business, but structuring and trading
derivatives is highly profitable. Each contract has to be uniquely structured to match the
client's need, may involve complex pay-off and risk profiles, and is not listed on any
market. In addition, while many products have been commoditized, an increasing amount
of investment bank profit has come from proprietary trading, where size creates a positive
network benefit (since the more trades an investment bank does, the more it knows about
the market flow, allowing it to theoretically make better trades and pass on better
guidance to clients).
Securities underwriting
Securities underwriting is a way of placing a newly issued security, such as stocks or
bonds, with investors. A syndicate of banks (the lead-managers), underwrite the
transaction, which means they have taken on the risk of distributing the securities. Should
they not be able to find enough investors, then they end up holding some securities
themselves.
League tables
Underwriting activity reported in Thomson Financial League Tables (numbers in $
billion) (number of issues in parenthesis):
 Global debt, equity & equity-related
 2004: 5,693 (20,066) (Q4 2004 report)
 2003: 5,326 (19,706) (Q4 2003 report)
 2002: 4,257 (?) (Q4 2003 report), 3,902 (14,070) (Q4 2002 report)
 2001: 4,112 (?) (Q4 2002 report)
Insurance underwriting
Underwriting may also refer to insurance; insurance underwriters figure out how risky it
is to insure people and businesses. They also decide how much coverage they should
receive and how much they should pay for it. Underwriting involves measuring risk
exposure and determining the premium with which to insure that risk.
Each insurance company uses its own set of underwriting guidelines in order to
determine whether or not the company should accept a proposal. In life insurance this
decision process sometimes requires that applicants provide further medical evidence.
The underwriters can decide to make a counteroffer in which the premiums have been
loaded, or in which various exclusions have been stipulated, which restrict the
circumstances under which a claim would be paid. Some companies use automated
underwriting systems to encode these rules, and reduce the amount of manual work in
processing proposals; some such systems are available from reinsurers.

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Merchant bank
In banking, a merchant bank is a traditional term for an Investment Bank. It can also
used to describe the private equity activities of banking. This article is about the history
of banking as developed by merchants, from the Middle Ages onwards.
History
Merchant banks, now so called, are in fact the original "banks". These were invented in
the middle ages by Italian grain merchants. As the Lombardy merchants and bankers
grew in stature on the back of the Lombard plains cereal crops many of the displaced
Jews who had fled persecution in Spain after 613 entered the trade. They brought with
them to the grain trade ancient practices that had grown to normalcy in the middle and far
east, along the Silk Road, for the finance of long distance goods trades.
The Jews could not hold land in Italy, so they entered the great trading piazzas and halls
of Lombardy, along side the local traders, and set up their benches to trade in crops.
They had one great advantage over the locals. Christians were strictly forbidden the sin of
usury. The Jewish newcomers, on the other hand, could lend to farmers against crops in
the field, a high-risk loan at what would have been considered usurous rates by the
Church. In this way they could secure the grain sale rights against the eventual harvest.
They then began to advance against the delivery of grain shipped to distant ports. In both
cases they made their profit from the present discount against the future price. This two-
handed trade was time consuming and soon there arose a class of merchants, who were
trading grain debt instead of grain.
It was a short step from financing trade on their own behalf to settling trades for others,
and then to holding deposits for settlement of "billete" or notes written the people who
were still brokering the actual grain. And so the merchant's "benches" (bank is a
corruption of the Italian for bench, as in a counter) in the great grain markets became
centers for holding money against a bill (billette, a note, a letter of formal exchange, later
a bill of exchange, later still, a cheque).
These deposited funds were intended to be held for the settlement of grain trades, but
often were used for the bench's own trades in the meantime. The term bankrupt is a
corruption of the Italian banca rotta, or broken bench, which is what happened when
someone lost his traders' deposits. Being "broke" has the same connotation.
A sensible manner of discounting interest to the depositors against what could be earned
by employing their money in the trade of the bench soon developed; in short, selling an
"interest" to them in a specific trade, thus overcoming the usury objection. Once again
this merely developed what was an ancient method of financing long distance transport of
goods.
Islamic banking has the same constraints against usury as Christianity and from the same
old testament notions. It will be interesting to see if, as Islam ages and matures, it relaxes
its insistence that money cannot be earned from deposits held as debt.
The medieval Italian markets were disrupted by wars and in any case were limited by the
fractured nature of the Italian states. And so the next generation of bankers arose from
migrant Jewish merchants in the great wheat growing areas of Germany and Poland.
Many of these merchants were from the same families who had been part of the
development of the banking process in Italy. They also had links with family members
who had, centuries before, fled Spain for both Italy and England.

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This course of events set the stage for the rise of banking names which still resonate
today: Schroders, Warburgs, Rothschilds, even the ill-fated Barings, were all the product
of the continental grain trade, and indirectly, the early Iberian persecution of Jews.

Venture capital firm

A venture capital firm is a financial intermediary that pools the resources of its partners
and uses the funds to help entrepreneurs start up new businesses.
Financial services
Financial services is a term used to refer to the services provided by the finance industry.
Financial services is also the term used to describe organizations that deal with the
management of money. Banks, investment banks, insurance companies, credit card
companies and stock brokerages, are examples of the types of firms comprising the
industry, which provides a variety of money and investment and related services.
Financial services is the largest industry (or industry category) in the world, in terms of
earnings; as of 2004, the industry represents 20% of the market capitalization of the S&P
500.
Islamic banking refers to a system of banking or banking activity which is consistent
with Islamic law (Sharia) principles and guided by Islamic economics. In particular,
Islamic law prohibits usury, the collection and payment of interest, also commonly called
riba in Islamic discourse. Generally, Islamic law also prohibits trading in financial risk
(which is seen as a form of gambling). In addition, Islamic law prohibits investing in
businesses that are considered haram (such as businesses that sell alcohol or pork, or
businesses that produce un-Islamic media). In the late 20th century, a number of Islamic
banks were created, to cater to this particular banking market.

Financial instruments
Financial instruments package financial capital in readily tradeable forms - they do not
exist outside the context of the financial markets. Their diversity of forms mirrors the
diversity of risk that they manage.
Financial instruments can be categorised according to whether they are cash instruments
or derivatives of other instruments.
Cash instruments can be divided into securities, which are readily transferable, and other
cash instruments such as loans and deposits, where both borrower and lender have to
agree on a transfer.
Derivative instruments can be divided into exchange traded derivatives and over-the-
counter (OTC) derivatives.
Alternatively they can be categorised by 'asset class' depending on whether they are
equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan
the investor has made to the issuing entity). If it is debt, it can be further categorised into
short term (less than one year) or long term. Foreign Exchange instruments and
transactions are neither debt nor equity based and belong in their own category.

13
Combining the above methods for categorisation, the main instruments can be organized
into a matrix as follows:

INSTRUMENT TYPE
ASSET CLASS
Other Exchange traded
Securities OTC derivatives
cash derivatives
Interest rate swaps
Debt (Long Bond futures
Interest rate caps and floors
Term) Bonds Loans Options on bond
Interest rate options
>1 year futures
Exotic instruments
Debt (Short- Bills, e.g. T-Bills Deposits
Short term interest
Term) Commercial Certificates Forward rate agreements
rate futures
<=1 year paper of deposit
Stock options Stock options
Equity Stock N/A
Equity futures Exotic instruments
Foreign exchange options
Spot
Foreign Outright forwards
N/A foreign Currency futures
Exchange Foreign exchange swaps
exchange
Currency swaps
Some instruments defy categorisation into the above matrix, for example repurchase
agreements.
Bank regulation
Bank regulations are a form of government regulation which subjects banks to certain
requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of
the financial system.
Reserve requirement
The reserve requirement sets the minimum reserves each bank must hold to customer
deposits and notes. This type of regulation has perhaps lost the role it once had in places
like the United States. In 2004 deposits in United States banks were roughly $8 trillion
while central bank "reserves of depository institutions" were less than $50 billion. This is
because reserve requirements apply to just transaction deposits today.
The reason for these reserves are both to put a limit on how much the supply of deposits
(money and credit) can grow. They also work as a cushion in case of a severe recession
that leads to a "bank run."
Capital requirement
The capital requirement sets a framework on how banks and depository institutions must
handle their capital in relation to their assets. Internationally, the Bank for International
Settlements's Basel Committee on Banking Supervision influences each country's capital
requirements. In 1988, the Committee decided to introduce a capital measurement system
commonly referred to as the Basel Capital Accords. The latest capital adequacy
framework is commonly known as Basel II.
In the United States, "depository institutions" are subject to risk-based capital guidelines
issued by the Board of Governors of the Federal Reserve System (FRB).
Deposit insurance
Deposit insurance is a measure taken by banks in many countries to protect their clients'
savings, either fully or in part, against any possible situation that would prevent the bank

14
from returning said savings. Deposit insurance institutions are for the most part
government run or established, and may or may not be a part of a country's central bank.
Many national deposit insurance agencies are members of the International Association
of Deposit Insurers (IADI), an international organization established to promote deposit
insurance, help countries without deposit insurance to establish their own agencies, and
promote the exchange of knowledge and experiences between deposit insurers of
different countries.
The United States was the first country to establish an official deposit insurance scheme,
during a great Depression banking crisis in 1934. By 2003, 88 countries had such
schemes.
Bank Size Information
Top ten banking groups in the world ranked by tier 1 capital in 2004 (in U.S. dollars)
 Citigroup — 73 billion
 JP Morgan Chase — 69 billion
 HSBC — 67 billion
 Bank of America — 64 billion
 Credit Agricole Group — 63 billion
 Royal Bank of Scotland — 43 billion
 Mitsubishi Tokyo Financial Group — 40 billion
 Mizuho Financial Group — 39 billion
 HBOS — 36 billion
 BNP Paribas — 35 billion

Top ten banking groups in the world ranked by assets in 2003 (in U.S. dollars)
 Mizuho Financial Group — 1,265 billion
 Citigroup — 1,097 billion
 Allianz — 1,002 billion
 UBS — 907 billion
 Sumitomo Mitsui Financial Group — 903 billion
 Deutsche Bank — 892 billion
 Fannie Mae — 888 billion
 ING Group — 843 billion
 BNP Paribas — 835 billion
 Mitsubishi Tokyo Financial Group — 832 billion
Top ten bank holding companies in the world ranked by profit in 2003 (in U.S. dollars)
 Citigroup — 21 billion
 Bank of America — 15 billion
 HSBC — 10 billion
 Royal Bank of Scotland — 8 billion
 Wells Fargo — 7 billion
 JP Morgan Chase — 7 billion
 UBS AG — 6 billion
 Wachovia — 5 billion
 Morgan Stanley — 5 billion
 Merrill Lynch — 4 billion

15
Top ten bank holding companies in the U.S. ranked by deposits (in U.S. dollars)
As of June 30, 2004. These are U.S. deposits only. This is not a ranking of the largest
U.S. based global banks.
Bank of America Corp. — 526 billion
Wells Fargo & Co. — 256 billion
Wachovia Corp. — 238 billion
J.P. Morgan Chase & Co. — 227 billion (1)
Citigroup Inc. — 193 billion
Bank One Corp. — 150 billion (1)
U.S. Bancorp — 112 billion
SunTrust Banks, Inc. — 78 billion
BB&T Corporation — 67 billion
National City Corp. — 64 billion
Online banking
Online banking (or Internet banking) is a term used for performing transactions,
payments etc. over the internet through a bank's secure website. This can be very useful,
especially for banking outside bank hours (which tend to be very short) and banking from
anywhere where internet access is available. In most cases a web browser such as Internet
Explorer or Mozilla Firefox is utilised and any normal internet connection is suitable. No
special software or hardware is usually needed.
Convenience
The number of customers who choose online banking as their preferred method of
dealing with their finances is growing rapidly. Many people appreciate the convenience.
Online banking usually offers such features as electronic bill payment and the
downloading of bank statements for import in a personal finance program. There is a
growing number of banks that operate exclusively online. Because these online banks
have low costs compared to traditional banks they can offer high interest rates.
Security
Protection through single password authentication, as is the case in most secure internet
shopping sites, is not considered secure enough for personal online banking applications
in some countries. Online banking user interfaces are secure sites (generally employing
the https protocol) and traffic of all information - including the password - is encrypted,
making it next to impossible for a third party to obtain or modify information after it is
sent. However, encryption alone does not rule out the possibility of hackers gaining
access to vulnerable home PCs and intercepting the password as it is typed in
(keylogging). There is also the danger of password cracking and physical theft of
passwords written down by careless users.
Many online banking services therefore impose a second layer of security. Strategies
vary, but a common method is the use of transaction numbers, or TANs, which are
essentially single use passwords. Another strategy is the use of two passwords, only
random parts of which are entered at the start of every online banking session. This is
however slightly less secure than the TAN alternative and more inconvenient for the user.
A third option, used in many European countries and currently being trialled in the UK is
providing customers with security token devices capable of generating single use
passwords unique to the customer's token (this is called two-factor authentication or
2FA). Another option is using digital certificates, which digitally sign or authenticate the

16
transactions, by linking them to the physical device (e.g. computer, mobile phone, etc). In
the United States, most online banking still uses single password protection.
Banks in many European countries (including the Scandinavian countries, The
Netherlands, Austria and Belgium) are offering online banking for e-commerce payments
directly from customer to merchants.
Fraud
Some customers avoid online banking as they perceive it as being too vulnerable to fraud.
The security measures employed by most banks are never 100% safe, but in practice the
number of fraud victims due to online banking is very small. Indeed, conventional
banking practices may be more prone to abuse by fraudsters than online banking. Credit
card fraud, signature forgery and identity theft are far more widespread "offline" crimes
than malicious hacking. Bank transactions are generally traceable and criminal penalties
for bank fraud are high. Online banking can be more insecure if users are careless,
gullible or computer illiterate. An increasingly popular criminal practice to gain access to
a user's finances is phishing, whereby the user is in some way persuaded to hand over
their password(s) to the fraudster.

Checkable deposits includes demand deposits, automatic transfer service account,

Negotiable Order of Withdrawal account, and other deposits on which a check may be
drawn.
Savings deposits are accounts maintained by commercial banks, savings and loan
associations, credit unions, and mutual savings banks that pay interest but can not be used
directly as money (by, for example, writing a check). These accounts let customers set
aside a portion of their liquid assets that could be used to make purchases. But to make
those purchases, savings account balances must be transferred to "transaction deposits"
(or "checkable deposits") or currency. However, this transference is easy enough that
savings accounts are often termed near money. Savings accounts, as such constitute a
sizeable portion of the M2 monetary aggregate.
With savings accounts you can make withdrawals, but you do not have the flexibility of
using checks to do so. As with an MMDAs (money market deposit account), the number
of withdrawals or transfers you can make on the account each month is limited.
Loan
A loan is a type of debt. All material things can be lent but this article focusses
exclusively on financial loans. Like all debt instruments, a loan entails the redistribution
of financial assets over time, between the lender and the borrower. The borrower
initially receives an amount of money from the lender, which they pay back, usually but
not always in regular installments, to the lender. This service is generally provided at a
cost, referred to as interest on the debt.
Acting as a provider of loans is one of the principal task for financial institutions. For
banks loans are generally funded by deposits. For other institutions issuing of debt
contracts, such as bonds is a typical source of funding.
Other types of debt include mortgages, credit card debt, bonds, and lines of credit. A
mortgage is a very common type of debt instrument, used by many individuals to
purchase housing. In this arrangement, the money is used to purchase the property. The
bank, however, is given the title to the house until the mortgage is paid off in full. If the

17
borrower defaults on the loan, the bank can repossess the house and sell it, to get their
money back.
The abuse in the granting of loans is known as predatory lending. It usually involves
granting a loan in order to put the borrower in a position that one can gain advantage over
him or her.
Cheque
A cheque, or (in American English) check, thought to have developed from Persian ‫كچ‬
chek, is a negotiable instrument instructing a financial institution to pay a specific amount
of a specific currency from a specific demand account held in the maker/depositor's name
with that institution. Both the maker and payee may be natural persons or legal entities.
History
During the first century A.D., banks in the Persia (Iran) and other territories in Persian
empire under Sassanid dynasty issued letters of credit known as Sakks. They are
considered the basis for the modern cheque.
The cheque had its origins in the ancient banking system, in which bankers would issue
orders at the request of their customers, to pay money to identified payees. Such an order
was referred to as a bill of exchange. The use of bills of exchange facilitated trade by
eliminating the need for merchants to carry large quantities of currency (e.g. gold) to
purchase goods and services. A draft is a bill of exchange which is payable on demand of
the payee.
The cheque was originally titled such (variously spelled 'check', 'checque' and 'cheque') in
reference to the counterfoil used to check against forgery and alterations. In usage up to
and including 18th century, 'cheque' had survived as a variant spelling for the word in
other meanings (e.g., 'examination', 'inspection') as well, but during that period, the
spelling 'cheque' in the sense 'bank note' and 'check' in all other senses appear to have
become distinct and cemented among all the English-speaking world outside the U.S.
J. W. Gilbart in 1828 (A practical treatise on banking, 2nd ed, 1828, Effingham Wilson,
London) explains in a footnote 'Most writers spell it check. I have adopted the above
form because it is free from ambiguity and is analogous to the ex-chequer, the royal
treasury. It is also used by the Bank of England "Cheque Office"'. According to Holden,
the spelling 'check' survived in some English text-books into the 1920s (M J Holden,
History of Negotiable Instruments in English Law, 1955, University of London Press,
London).
While the British Isles and all Commonwealth countries have adopted the spelling
"cheque", the U.S. has retained the form "check".
Parts of a cheque
A cheque shall contain:
 place of issue
 cheque number
 account number
 date of issue
 payee
 amount of currency
 signature of the drawer

18
A cheque is generally valid for six months after the date of issue unless otherwise
indicated, but this varies depending on where the cheque is drawn. In Australia, for
example, it is fifteen months. Legal amount (amount in words) is also highly
recommended but not strictly required.
Types of cheque in the United States
In the United States, cheques (or checks) are governed by Article 3 of the Uniform
Commercial Code.
An order check – the most common form in the US – is payable only to the named payee
or his or her indorsee, as it usually contains the language "Pay to the order of (name)."
A bearer check is payable to anyone who is in possession of the document: this would
be the case if the check does not state a payee, or is payable to "bearer" or to "cash" or "to
the order of cash", or if the check is payable to someone who is not a person or legal
entity, e.g. if the payee line is marked "Happy Birthday".
In the United States, the terminology for a cheque historically varied with the type of
financial institution on which it is drawn. In the case of a savings and loan association it
was a negotiable order of withdrawal; if a credit union it was a share draft. Checks as
such were associated with chartered commercial banks. However, common usage has
increasingly conformed to more recent versions of Article 3, where check means any or
all of these negotiable instruments.
Usage
Parties to regular cheques generally include a maker or drawer, the depositor writing a
cheque; a drawee, the financial institution where the cheque can be presented for
payment; and a payee, the entity to whom the maker issues the cheque. Ultimately there
is also at least one endorsee which would typically be the financial institution servicing
the payee's account, or in some circumstances may be a third party to whom the payee
owes or wishes to give money.
A payee that accepts a cheque will typically deposit it in an account at the payee's bank,
and have the bank process the cheque. In some cases, the payee will take the cheque to a
branch of the drawee bank, and cash the cheque there. If a cheque is refused at the
drawee bank (or the drawee bank returns the cheque to the bank that it was deposited at)
because there are insufficient funds for the cheque to clear, it is said that the cheque has
bounced.
When a maker directs the maker's bank to deduct the funds for the amount of a cheque
from the maker's account, thus guaranteeing funds will be available for the cheque to
clear, and the bank indicates this fact by making a notation on the face of the cheque
(technically called an acceptance), the instrument is then referred to as a certified cheque.
In Europe, a drawer may present a cheque guarantee card with the cheque when paying a
retailer. If the retailer writes the card number on the back of the cheque, the cheque was
signed in the retailer's presence, and the retailer verifies the signature on the cheque
against the signature on the card, then the cheque cannot be cancelled and payment
cannot be refused.
A cheque used to pay wages due is referred to as a payroll cheque. Payroll cheques issued
by the military to soldiers, or by some other government entities to their employees,
beneficiants, and creditors, are referred to as warrants.

19
A travelers cheque is designed to allow the person signing it to make an unconditional
payment to someone else as a result of paying the account holder for that privilege.
Travelers cheques can usually be replaced if lost or stolen, they are often used by people
on vacation instead of cash. The use of credit or debit cards has, however, begun to
replace the travelers cheque as the standard for vacation money, with an increase in usage
by spenders due to ease of use, and an increase of businesses preferring transfers of this
kind over travelers cheques. This has resulted in some businesses to no longer accept
travelers cheques as currency.
A cheque sold by a post office or merchant such as a grocery for payment by a third party
for a customer is referred to as a money order or postal order.
A cheque issued by a bank on its own account for a customer for payment to a third party
is called a cashier's cheque, a treasurer's cheque, a bank cheque, or a bank draft. A
cheque issued by a bank but drawn on an account with another bank is a teller's cheque.
In addition to issuing cashier's and teller's cheques, banks often sell money orders, and
travelers cheques are usually purchased from banks.
Some public assistance programs such as the Special Supplemental Nutrition Program for
Women, Infants and Children, or Aid to Families with Dependent Children make
vouchers available to their beneficiaries, which are good up to a certain monetary amount
for purchase of grocery items deemed eligible under the particular program. The voucher
can be deposited like any other cheque by a participating supermarket or other approved
business.
Paper checks have a major advantage to the maker over debit card transactions in that the
maker's bank will release the money several days later. Paying with a check and making a
deposit before it clears the maker's bank is called "kiting" and is generally illegal in the
United States, but rarely enforced unless the maker uses multiple checking accounts with
multiple institutions to increase the delay or to steal the funds.
The decline of cheques
Cheques have been in decline for many years, both for point of sale transactions (for
which credit cards and debit cards are increasingly preferred) and for third party
payments (e.g. bill payments), where the decline has been accelerated by the emergence
of telephone banking and online banking. Being paper-based, cheques are costly for
banks to process in comparison to electronic payments, so banks in many countries now
discourage the use of cheques, either by charging for cheques or by making the
alternatives more attractive to customers.
In some European countries, cheques are now very rarely used, even for third party
payments. In these countries, it is standard practice for businesses to publish their bank
details on invoices in order to facilitate the receipt of payments. Even before the
introduction of online banking, it has been possible in some countries to make payments
to third parties using ATMs. One of the essential procedural differences is that with a
cheque, the onus is on the payee to initiate the payment in the banking system, whereas
with a bank transfer, the onus is on the payer to effect the payment.
In Finland, banks stopped issuing personal cheques in about 1993.
In Germany, cheques have almost completely vanished in favour of direct bank transfer
and electronic payment. Direct bank transfer using so-called Giro accounts (current
accounts) has been standard procedure since the 1950s to send and receive regular
payments like rent and wages, even mail-order invoices. It is very common to allow the

20
payee to automatically withdraw the requested amount from the payer's account
(Lastschrifteinzug). Though similar to paying by cheque, the payee only needs the payer's
bank and account number. Since the early 1990s this method of payment has also been
available to merchants. Due to this, credit cards are rather uncommon in Germany and are
mostly used for the credit function rather than for cashless payment. Acceptance of
cheques has been further diminished since the late 1990s, because of the abolishment of
the Eurocheque.
In the United Kingdom and France, there is still a heavy reliance on cheques by some
sectors of the population, partly because cheques remain free of charge to personal
customers, but bank-to-bank transfers are increasing in popularity. Since 2001,
businesses in the United Kingdom have made more electronic payments than cheque
payments. In a bid to discourage cheques, most utilities in the United Kingdom charge
higher prices to customers who choose to pay by a means other than direct debit, even if
the customer pays by another electronic method. Many shops in France no longer accept
cheques as a means of payment, and Shell announced in September 2005 that it would no
longer accept cheques in its UK petrol stations. Cheques are now widely predicted to
become a thing of the past in the United Kingdom.
Despite being one of the world's most developed countries, the United States still relies
heavily on cheques, caused by the absence of a high volume system for low value
electronic payments. When sending a payment by online banking in the United States, the
sending bank usually mails a cheque to the payee's bank rather than sending the funds
electronically. This is changing rapidly, however, and certain companies with whom a
person pays with a cheque will turn that check into an ACH or electronic transaction.
Wire transfer
A wire transfer is an electronic transfer of funds.
Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a
cash office.
History: Wire transfers have been available since the advent of the telegraph, when the
sender, at one bank, would communicate by telegraph (wire) the amount of money to be
given to another person.
Wire transfer companies:One of the largest companies that offers wire transfer is
Western Union (minimum of £25, $15). Its wire transfer network has caused much
controversy due to the anonymity of the service.
Modern usage
In modern times, the word wire transfer or bank transfer (sometimes combined as bank
wire transfer) is used for domestic or international transactions where no cash or cheque
exchange is involved, but the account balance is directly (electronically) transferred from
one bank account to the other. A transfer might be done to support family back home,
rescue travelers in unexpected emergencies, or to pay a business expense.
Regulation
Bank transfer is the most common payment method in Europe, with several million
transactions done each day. While in 2002 the European Commission has regulated the
fees banks may charge between Eurozone countries down to the domestic level
international wire transfers can be quite expensive.

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Security features
However, wire transfer, done bank-to-bank, is considered the safest international
payment method. Both account holders must have a proven identity, and there is no
possibility of a chargeback.
Caution: risks in non-bank transfers
Wire transfers done through cash offices, however, are usually unsafe and are not
recommended for international trade.

Cashier's check
A cashier's check (also known as a treasurer's check, bank check, or teller's check) is
a check issued by a bank on its own account for the amount paid to the bank by the
purchaser with a named payee, and stating the name of the party purchasing the check
(the remitter).
The check is usually received as cash since it is guaranteed by the bank and does not
depend on an account of a private individual or business. Cashier's checks are commonly
used when payment must be credited immediately upon receipt for business, real estate
transfers, tax payments and the like.
Characteristics
Cashier's checks feature the name of the issuing bank in a prominent location, usually the
upper left-hand corner or upper center of the check. In addition, they are generally
produced with enhanced security features, including watermarks, security thread, color-
shifting ink, and special bond paper. These are designed to decrease the vulnerability to
counterfeit items. In order to be recognized as a cashier's check, words to that effect must
be included in a prominent place on the front of the item.
The payee's name, the written and numeric dollar amounts, the remitter's information, and
other tracking information (such as the branch of issue), are printed on the front of the
check. The check is generally signed by one or two bank employees or officers; however,
some banks issue cashier's checks featuring a facsimile signature of the bank's CEO,
CFO, or other senior official.
Some banks contract out the maintenance of their cashier's check accounts and check
issuing. One leading contractor is Integrated Payment Systems, who issues cashier's
checks and coordinates redemption of the items for many banks, in addition to issuing
money orders and other payment instruments. In theory, teller's checks are checks issued
by a financial institution but drawn on another institution, as is often the case with credit
unions.
Legal definition
Under Article 3 of the Uniform Commercial Code, a cashier's check is effective as a note
of the bank. Also, according to Regulation CC (Reg CC) of the Federal Reserve,
Cashier's checks are recognized as "guaranteed funds" and amounts under $5000 are not
subject to deposit holds, except under certain circumstances.
Alternatives and risks
Money orders are a popular alternative to cashier's checks and are considered safer than
personal bank checks, however, they are generally not recognized as "guaranteed funds"
under Reg CC.
Cashier's checks have been used in certain scams to steal from those who sell their goods
online.

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Credit card
A credit card system is a type of retail transaction settlement and credit system, named
after the small plastic card issued to users of the system. A credit card is different from a
debit card in that the credit card issuer lends the consumer money rather than having the
money removed from an account. It is also different from a charge card (though this
name is sometimes used by the public to describe credit cards) in that charge cards
require that the balance be paid in full each month. In contrast, a credit card allows the
consumer to 'revolve' their balance, at the cost of having interest charged. Most credit
cards are the same shape and size, as specified by the ISO 7810 standard.
How they work
A user is issued a credit card after an account has been approved by the credit provider
(often a general bank, but sometimes a captive bank created to issue a particular brand of
credit card, such as American Express Centurion Bank), with which they will be able to
make purchases from merchants accepting that credit card up to a preestablished credit
limit.
When a purchase is made, the credit card user agrees to pay the card issuer. Originally the
user would indicate his/her consent to pay, by signing a receipt with a record of the card
details and indicating the amount to be paid, but many merchants now accept verbal
authorizations via telephone and electronic authorization using the internet.
Electronic verification systems allow merchants (using a strip of magnetized material on
the card holding information in a similar manner to magnetic tape or a floppy disk) to
verify that the card is valid and the credit card customer has sufficient credit to cover the
purchase in a few seconds, allowing the verification to happen at time of purchase. Other
variations of verification systems are used by ecommerce merchants to determine if the
user's account is valid and able to accept the charge.
Each month, the credit card user is sent a statement indicating the purchases undertaken
with the card, and the total amount owed. The cardholder must then pay a minimum
proportion of the bill by a due date, and may choose to pay the entire amount owed or
more. The credit provider charges interest on the amount owed (typically at a much
higher rate than most other forms of debt).
Credit card issuers usually waive interest charges if the balance is paid in full each
month, but typically will charge full interest on the entire outstanding balance from the
date of each purchase if the total balance is not paid.
For example, if a user had a $1,000. outstanding balance for purchases and pays the entire
$1,000. there would be no interest charged. If, however, even $1.00 of the total balance
remained unpaid, interest would be charged on the full $1,000 from the date of purchase
until the payment is received. The precise manner in which interest is charged is usually
detailed in a cardholder agreement which may be summarized on the back of the monthly
statement.
The credit card may serve as a form of revolving credit, or the user may choose to apply
any payments toward recent rather than previous debt. Interest rates can vary
considerably from card to card, and the interest rate on a particular card may jump
dramatically if the card user is late with a payment on that card or any other credit
instrument. As the rates and terms vary, services have been set up allowing users to
calculate savings available by switching cards, which can be considerable if there is a
large outstanding balance.

23
Because profit margins in the credit card industry can be quite high, credit providers
often offer incentives such as frequent flier miles, gift certificates, or cash back (typically
1 percent) to try attract customers to their program.
Low interest credit cards or even 0% interest credit cards are available. The only
downside to consumers is that the period of low interest credit cards is limited to a fixed
term, usually between 6 and 12 months. However, services are available which alert
credit card holders when their low interest period is due to expire. Most such services
charge a monthly or annual fee.
The merchant's side
For merchants, a credit card transaction is often more secure than other forms of
payment, such as checks, because the issuing bank commits to pay the merchant the
moment the transaction is verified. The bank charges a commission to the merchant for
this service and there may be a certain delay before the agreed payment is received by the
merchant. In addition, a merchant may be penalized or have their ability to receive
payment using that credit card restricted if there are too many cancellations or reversals
of charges.
Secured credit cards
A secured credit card is a type of credit card secured by a deposit account owned by the
cardholder. Typically, the cardholder must deposit between 100% and 200% of the total
amount of credit desired. Thus if the cardholder puts down $1000, he or she will be given
credit in the range of $500–$1000. This deposit is held in a special savings account.
The cardholder of a secured credit card is still expected to make regular payments, as he
or she would with a regular credit card, but should he or she default on a payment, the
card issuer has the option of recovering the cost of the purchases paid to the merchants
out of the deposit.
Often, though, if the cardholder does not make the required payment, many issuers of
secured credit cards consider that the account must be paid before the security is released
instead of using the security to pay the balance due. The card is not cancelled, the balance
is not set off the deposit, and interest continues to accumulate on the unpaid balance for
considerable periods of time. In some cases the total charges may far exceed the original
deposit and the cardholder not only loses their deposit but is left with an additional debt.
Most of these conditions are usually described in a cardholder agreement which the
cardholder signs when their account is opened.
Secured credit cards are an option to allow a person with a poor credit history or no credit
history to have a credit card which might not otherwise be available. They are often
offered as a means of rebuilding one's credit. Secured credit cards are available with both
Visa and MasterCard logos on them. Fees and service charges for secured credit cards
often exceed those charged for ordinary non-secured credit cards.
Features
As well as convenient, accessible credit, the cards offer consumers an easy way to track
expenses, which is necessary both for monitoring personal expenditures and the tracking
of work-related expenses for taxation and reimbursement purposes. They have now
spread worldwide, and are offered in a huge variety of permutations with differing credit
limits, repayment arrangements such as automatic payment from a personal bank account
(some cards offer interest-free periods, while others do not but compensate with much
lower interest rates), and other perks (such as rewards schemes in which points earned by

24
purchasing goods with the card can be redeemed for further goods and services or credit
card cashback).
Some countries such as the United States and the United Kingdom limit the amount for
which a consumer can be held liable due to fraudulent transactions as a result of a
consumer's credit card being lost or stolen.
Security
The low security of the credit card system presents countless opportunities for fraud. This
opportunity has created a huge black market in stolen credit card numbers, which are
generally used quickly before the cards are reported stolen.
The goal of the credit card companies, as they say, is not to eliminate fraud, but to
"reduce it to manageable levels", such that the total cost of both fraud and fraud
prevention is minimized. This implies that high-cost low-return fraud prevention
measures will not be used if their cost exceeds the potential gains from fraud reduction.
Most Internet fraud is done through the use of stolen credit card information which is
obtained in many ways, the simplest being copying information from retailers, either
online or offline. There have been many cases of hackers obtaining huge quantities of
credit card information from company databases. Not unusual are cases of employees of
companies that deal with millions of customers in which they were selling the credit card
information to criminals.
Despite efforts to improve security for remote purchases using credit cards, systems with
security holes are usually the result of poor implementations of card acquisition by
merchants. For example, a website that uses SSL to encrypt card numbers from a client
may simply email the number from the webserver to someone who manually processes
the card details at a card terminal. Naturally, anywhere card details become human-
readable before being processed at the acquiring bank is a security risk. However, many
banks offer systems such as Clear Commerce, where encrypted card details captured on a
merchant's webserver can be sent directly to the payment processor.

The Federal Bureau of Investigation is the agency responsible for prosecuting criminals
who engage in credit card fraud in the United States, but they do not have the resources to
pursue all criminals. In general, they only prosecute in cases exceeding $5,000 in value.
Even though the FBI usually does not investigate, most common credit card networks
have not implemented procedures to prevent credit card fraud. Three improvements to
card security have been introduced to the more common credit card networks but none
has proven to help reduce credit card fraud so far. First, the on-line verification system
used by merchants is being enhanced to require a 4 digit Personal Identification Number
(PIN) known only to the card holder. Second, the cards themselves are being replaced
with similar-looking tamper-resistant smart cards which are intended to make forgery
more difficult. The majority of smartcard (IC card) based credit cards comply with the
EMV (Europay MasterCard Visa) standard. Third, an additional 3 or 4 digit code is now
present on the back of most cards, for use in "card not present" transactions.
Profits and losses
Credit card issuers (banks) cover their costs (including the interest costs for the money
that is paid to merchants prior to the bank being paid by customers), and earn profits, by:
Interchange fees. Interchange fees are charged by the merchant's acquirer to a card-
accepting merchant as component of the so-called merchant discount fee. The merchant

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pays a merchant discount fee that is typically 2 to 3 percent (this is negotiated), which is
why some merchants prefer cash, debit cards, or even checks. The majority of this fee,
called the interchange fee, goes to the issuing bank, but parts of it go to the processing
network, the card brand (American Express, Visa, MasterCard, etc.), and the merchant's
acquirer. The interchange fee that applies to a particular merchant is a function of many
variables including the type of merchant, the merchant's average ticket dollar amount,
whether the cards are physically present, if the card's magnetic stripe is read or if the
transaction is hand-keyed, the specific type of card, when the transaction is settled, the
authorized and settled transaction amounts, etc. For a typical credit card issuer,
interchange fee revenues may represent about fifteen percent of total revenues.
Charging interest on outstanding balances: Customers who do not pay in full the
amount owed on their monthly statement (the "balance") by the due date (that is, at the
end of the "grace period") owe interest ("finance charges"). These customers are known
in the industry as "revolvers". Those who pay in full (pay the entire balance) do not.
These customers are known in the industry as "transactors" or "deadbeats". Interest
charges vary widely from card issuer to card issuer. Often, there are "teaser" rates in
effect for initial periods of time (as low as zero percent for, say, six months), whereas
rates for those with poor credit can be as much as 29.74 percent (annualized). In the U.S.
rules governing interest rates are set at the state level; some banks have chosen to
establish their credit card operations in states such as South Dakota that have less
restrictive limits on interest rates.
Fees charged to customers: The major fees are for (1) late payments; (2) charges that
result in exceeding the credit limit on the card (whether done deliberately or by mistake);
(3) cash advances and convenience checks (often 3 percent of the amount); (4)
transactions in a foreign currency (as much as 3 percent of the amount; a few financial
institutions charge no fee for this); and (5) membership fees (annual or monthly),
sometimes a percentage of the credit limit.
Credit card companies generally guarantee the merchant will be paid on legitimate
transactions regardless of whether the consumer pays their credit card bill. However,
credit card companies generally will not pay a merchant if the consumer challenges the
legitimacy of the transaction and will fine merchants who have a large number of
chargebacks.
In recent times, credit card portfolios have been very profitable for banks, largely due to
the booming economy of the late nineties. However in the case of credit cards, such high
returns go hand in hand with risk, since the business is essentially one of making
unsecured (uncollateralized) loans, and thus dependent on borrowers to not default in
large numbers.
In some areas, such as Ireland, governments profit from credit cards through the
imposition of a stamp duty or credit card tax. This is usually done where a cheque tax
previously existed. This tax is taken automatically from the account, just like a purchase,
by the bank on behalf of the government annually. This tax - unlike its cheque
counterpart - is payable in arrears so no refund is possible.
History
The credit card was the successor of a variety of merchant credit schemes. It was first
used in the 1920s, in the United States, specifically to sell fuel to a growing number of
automobile owners. In 1938 several companies started to accept each other's cards.

26
The concept of using a card for purchases was invented in 1887 by Edward Bellamy and
described in his utopian novel Looking Backward. Bellamy uses the explicit term "Credit
Card" 11 times in his novel (Chapters 9, 10, 11, 13, 25 and 26) and 3 times (Chapters 4, 8
and 19) in its sequal, Equality.
The concept of paying merchants using a card was invented in 1950 by Ralph Schneider
and Frank X. McNamara in order to consolidate multiple cards. The Diners Club
produced the first charge card, which is similar but required the entire bill to be paid with
each statement; it was followed shortly thereafter by American Express.
Bank of America created the BankAmericard in 1958, a product which eventually
evolved into the Visa system ("Chargex" also became Visa). MasterCard came to being
in 1966 when a group of credit-issuing banks established Master Charge. The fractured
nature of the US banking system meant that credit cards became an effective way for
those who were travelling around the country to, in effect, move their credit to places
where they could not directly use their banking facilities.
There are now countless variations on the basic concept of revolving credit for
individuals (as issued by banks and honored by a network of financial institutions),
including organization-branded credit cards, corporate-user credit cards, store cards and
so on.
In contrast, although having reached very high adoption levels in the US, Canada and the
UK, it is important to note that in other cultures which were much more cash-oriented in
the latter half of the twentieth century such as Germany, France, Switzerland among
many others, take-up of credit cards was initially much slower. It took until the 1990s to
reach anything like the percentage market-penetration levels achieved in the US, Canada
or UK. In many countries acceptance still remains poor as the use of a credit card system
depends on the banking system being perceived as reliable.
In contrast because of the legislative framework surrounding banking system overdrafts,
some countries, France in particular, were much faster to develop and adopt chip-based
credit cards which are now seen as major anti-fraud credit devices.
Controversy
Credit card companies do not want merchants to charge credit card users more than they
charge other customers, even though the merchant pays a fee of 2 to 3 percent (merchants
negotiate an exact percentage with their banks) to process credit payments. In some
countries this fee may be significantly more. If customers were responsible for this fee, it
would often discourage credit card usage.
In many places, governments have passed laws (at the urging of the credit card industry)
to make this illegal. Despite this, some retailing sectors flout this regulation, especially in
areas of very competitive, commodity products such as personal computers, where the
fine print of an advertisement states "prices already cash discounted -- surcharge for
credit card". Other retailers offer incentives or bonus coupons for using cash, such as
Canadian Tire Money.
Some critics have observed that this results in what is effectively a hidden tax on all
transactions conducted by merchants who accept credit cards since they must build the
cost of transaction fees into their overall business expense. The end result is that cash
consumers are essentially subsidizing credit card holder purchases. The cost of the
convenience enjoyed by card holders and the profits taken from transaction fees by the
card industry (which has come to rely increasingly on this revenue stream over the years)

27
is partially offloaded onto the backs of the cash consumer. Critics go on to say that
further compounding the issue is the fact that the consumers most likely to pay in cash
are the least able to afford the additional expense (card holders are more likely to be
affluent, non-card holders less so). Australia is currently acting to reduce this by allowing
merchants to apply surcharges for credit card users. In the United Kingdom, merchants
won the right through The Credit Cards (Price Discrimination) Order 1990 to charge
customers different prices according to the payment method, but few merchants do so
(the most notable exceptions being budget airlines and travel agents).
However, there also exists an economic argument that credit card use increases the
"velocity" of money in an economy, the result, higher consumer spending rates and
higher GDP. Although there is many a sad story of credit card abuse, the trend is
increasing use, with some predicting a cashless society in the not so distant future. There
is some controversy about credit card usage in recent years. Credit card debt has soared,
particularly among young people. The major credit card companies have been accused of
targeting a younger audience, in particular college students, many of whom are already in
debt with college tuition fees and college loans, and who typically are less experienced at
managing their own finances. Credit card usage has tripled since 2001 amongst teenagers
as well. The United Kingdom is the world's most credit-card-intensive country, with 67
million credit cards for a population of 59 million people.
Since the late 1990s, lawmakers, consumer advocacy groups, college officials and other
higher education affiliates, have become increasingly concerned about the rising use of
credit cards among college students. A recent study by United College Marketing
Services has shown that student credit lines have increased to over $6,000. Since eighteen
year-olds in many countries and most U.S. states are eligible for a card without parental
consent or employment, the likelihood of increased balances, unwise use of credit and
damaged credit scores increases.
According to Larry Chiang of United College Marketing Services, an example of a credit
card class action was where issuers were "rolling back" posting times to extract more late
fees. The due dates were "rolled back" from 1pm to 10am because mail was delivered in
the afternoon so due dates were actually rolled back to charge more late fees.
Another controversial area is the universal default feature of many North American credit
card contracts. When a cardholder is late paying a particular credit card issuer, that card's
interest rate can be raised, often considerably. Given this circumstance with one credit
card, universal default allows other card issuers to raise the cardholder's interest rates on
other accounts, even if those other accounts are not in default.
In the USA, Congress has been slow to introduce credit card reform legislation. A push
toward expanding the disclosure box and incorporating balance payoff disclosures on
credit card statements would go a long way in clarifying credit card debt's ramifications.
Credit card numbering
The numbers found on credit cards have a certain amount of internal structure, and share
a common numbering scheme.
The card number's prefix is the sequence of digits at the beginning of the number that
determine the credit card network to which the number belongs. The card number's
length is its number of digits.

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In addition to the main credit card number, credit cards also carry issue and expiry dates
(given to the nearest month), as well as extra codes such as issue numbers and security
codes. Not all credit cards have the same sets of extra codes.
Credit cards in ATMs
Many credit cards can also be used in an ATM to withdraw money against the credit limit
extended to the card but many card issuers charge interest on cash advances before they
do so on purchases. The interest on cash advances is commonly charged from the date the
withdrawal is made, rather than the monthly billing date. Many card issuers levy a
commission for cash withdrawals, even if the ATM belongs to the same bank as the card
issuer. Merchants do not offer cashback on credit card transactions because they would
pay a percentage commission of the additional cash amount to their bank or merchant
services provider, thereby making it uneconomical.
Many credit card companies will also, when applying payments to a card, do so at the end
of a billing cycle, and apply those payments to everything before cash advances. For this
reason, many consumers have large cash balances, which have no grace period and incur
interest at a rate that is (usually) higher than the purchase rate, and will carry those
balance for years, even if they pay off their statement balance each month.
Credit card networks
 American Express
 Bankcard
 China UnionPay
 Diners Club
 Discover
 JCB
 MasterCard
 VISA
Automated teller machine
An automated teller machine or automatic teller machine (ATM) (also called cash
machine, ATM Scrip to Cash machine, or guichet) is an electronic computerized
telecommunications device that allows a bank's customers to directly use a secure method
of communication to access their bank accounts, order or make cash withdrawals and
check their account balances without the need for a human bank teller. Some ATMs
allow withdrawals funded by clerical staff in retail merchant locations. The clerical staff
are not considered bank tellers. Many ATMs also allow people to deposit cash or
cheques, transfer money between their bank accounts, top up their mobile phones' pre-
paid accounts or even buy postage stamps.
History
The world's first ATM was developed by De La Rue and installed in Enfield Town in
North London on June 27, 1967 by Barclays Bank. This instance of the invention is
credited to John Shepherd-Barron, although Luther George Simjian registered patents in
New York, USA in the 1930s and Donald Wetzel and two other engineers from Docutel
registered a patent on June 4, 1973. Shepherd-Barron was awarded an OBE in the 2005
New Year's Honours.
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.

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The idea of a personal identification number (PIN) stored on a physical card being
compared with the PIN entered when retrieving the money was developed by the British
engineer James Goodfellow in 1965, who also holds international patents regarding this
technology.
Usage
In most modern ATMs, the customer identifies him or herself by inserting a plastic card
with a magnetic stripe or a plastic smartcard with a chip, that contains his or her account
number. The customer then verifies his or her identity by entering a passcode (PIN) of
four or more digits. If the number is entered incorrectly several times in a row (usually
three), most ATMs will retain the card as a security precaution to prevent an unauthorised
user from discovering the PIN by guesswork (these cards are often destroyed if the ATM
owner is not the card issuing bank as non customer's identities cannot be checked). In
some cases, the customer's PIN may be changed using the machine.
Networking
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.
This is a convenience, especially for people who are travelling: it is possible to make
withdrawals in places where one's bank has no branches, and even to withdraw local
currency in a foreign country, often at a better exchange rate than would be available by
changing cash. Some examples of interbank networks include Hong Kong's JETCO and
the Philippines' Expressnet.
ATMs rely on authorization of a transaction by the card issuer or other authorizing
institution via the communications network.

Usage fees
Many banks in the United States charge fees for the use of their ATMs. In some cases,
these fees are assessed solely for non-bank members, in other cases they apply to all
users. Many oppose these fees because ATMs are actually less costly for banks than
withdrawals from human tellers. Two charges exist in the consumer world of ATM
usage, the surcharge, and the foreign fee. The surcharge fee may be imposed by the ATM
deployer and will be charged to the consumer using the machine, this fee has been on the
rise as ATM deployment continues to rise and ATM transaction volumes remain
stagnant. The foreign fee or transaction fee is a fee charged by the card issuer (financial
institution, stored value provider) to the consumer for conducting a transaction outside of
their network of machines in the case of a financial institution, this fee is also on the rise
as financial institutions seek more fee based income.
Hardware and software
ATMs contain secure cryptoprocessors, generally within an IBM PC compatible host
computer in a secure enclosure. The security of the machine relies mostly on the integrity
of the secure cryptoprocessor: the host software often runs on a commodity operating
system.
ATMs typically connect directly to their ATM Transaction Processor via either a dial-up
modem over a telephone line or directly via a leased line. The latter is preferable as the
time required to establish the connection is much less. Such connections are rather
expensive, though, meaning less-trafficked machines will usually rely on a dial-up

30
modem. That dilemma may be solved as more ATMs use dedicated high-speed Internet
connections, which are much cheaper than leased lines.
Reliability
ATMs are generally reliable, but if they do go wrong customers will be left without cash
until the following morning or whenever they can get to the bank during opening hours.
Of course, 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.
Many ATMs usually print each transaction in a paper journal that is rolled into a roll of
paper stored inside the ATMs, 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 reduce the need
for paper trails.
Some ATMs, in particular those situated in retail outlets, are stocked with cash by the
store, causing the possibility that a customer can receive forged banknotes from the
ATM.
Security
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.
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. This change in emphasis has meant that ATMs
are now frequently found free-standing in places like shops, rather than mounted into
walls.
Another trend in ATM security leverages the existing security of a retail establishment. In
this scenario, the fortified cash dispenser is replaced with nothing more than a paper-tape
printer. The customer requests a withdrawal from the machine, which dispenses no
money, but merely prints a receipt. The customer then takes this receipt to a nearby sales
clerk, who then exchanges it for cash from the till.
ATM transactions are usually encrypted with DES but most transaction processors will
require the use of the more secure Triple DES by 2005.
There are also many "phantom withdrawals" from ATMs, which banks often claim are
the result of fraud by customers. Many experts ascribe phantom withdrawals to the
criminal activity of dishonest insiders. Ross Anderson, a leading cryptography researcher,
has been involved in investigating many cases of phantom withdrawals, and has been
responsible for exposing several errors in bank security.
There have also been a number of incidents of fraud where criminals have used fake
machines or have attached fake keypads or card readers to existing machines. These have
then been used to record customers' PINs and bank account details in order to gain
unauthorised access to their accounts.
A bank is always liable when a customer's money is stolen from an ATM, but there have
been complaints that banks have made it difficult to recover money lost in this way.

31
In some cases, bank fraud occurs 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. Individuals who unknowingly use such ATMs are probably
never tried, but those who withdraw a second time are usually prosecuted.
In some areas, multiple security cameras and watch guards are an ubiquitous ATM
feature.
The issue of customer security appears to have been abandoned by the banking industry;
efforts are now more concentrated on deterring legislation than on solving the problem of
forced withdrawals. This may be reflective of the industry's greater concern with the
image of safety as opposed to actual safety. At least as far back as July 30, 1986, critics
of the industry have called for the adoption of an emergency PIN system for ATM users.
Fraud
In the early 2000s, ATM-specific crimes became common. These had two common
forms. In the low-tech form, the user's PIN is observed by someone watching as they use
the machine; they are then mugged for their card by a second person, who has taken care
to stay out of range of the ATM's surveillance cameras. However, this offers little
advantage compared to simply mugging the victim for their money, and carries the same
risks to the offender as other violent crimes. By contrast, the most common 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 to observe the user's PIN.
Although the latter fraud would have seemed like something from a spy novel until
recently, 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.
As of 2005, banks are working hard to develop countermeasures for this latter kind of
fraud, in particular by the use of smart cards which cannot easily be read by un-
authenticated devices, and by attempting to make the outside of their ATMs tamper
evident.
Alternate uses
Although ATMs were originally developed as 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:
Paying routine bills, fees, and taxes (utilities, phone bills, social security, legal fees,
taxes, etc.)
Loading monetary value into pre-paid cards (cell phones, tolls, multi purpose stored value
cards, etc.)
Ticket purchases (train, concert, etc.).
Talking ATM
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 jack on the face of the machine. A user plugs a
standard headset into the jack, and can hear instructions such as "press 1 for withdrawal",
"press 2 for deposit." There is an audible orientation for first time users, and audible
information describing the location of features such as the number keypad, deposit slot,
and card slot. The world’s first talking ATM for the blind was an NCR machine unveiled

32
by the Royal Bank of Canada on October 22, 1997 at a bank branch on the corner of
Bank Street and Queen Street in Ottawa, Ontario. The talking ATM was a result of
concerns Chris and Marie Stark, two blind customers, raised with the bank beginning in
1984. Their concerns turned into a discrimination complaint with the Canadian Human
Rights Commission in 1991. The machine was manufactured by NCR and adapted by
Ottawa based T-Base Corp. at a cost of about 500,000 Canadian dollars, the October 23,
1997 Ottawa Sun reported. By the summer of 2001, an inquiry to the Royal Bank found
only about 50 talking ATMs and these machines were scattered throughout Canada. Four
years after the first talking ATM, only royal bank had deployed the machines in Canada.
The first public actions in the United States to achieve ATM access for the blind occurred
in June 1999. On June 3, Mellon Bank and PNC Bank were sued in federal courts in
Philadelphia and Pittsburgh respectively, the June 4, 1999 Philadelphia Inquirer reported.
On June 25, 1999, Wells Fargo became the first bank in the United States to commit to
installing talking ATMs. In a legal settlement with blind community leaders, the bank
agreed to install a talking ATM at all of its 1,500 ATM locations in California. The
company has subsequently installed talking ATMs at all ATM locations in all states. In
July 1999, Citibank agreed to pilot five talking ATMs in and around San Francisco and
Los Angeles. The Citibank machine represented a marvel of rehabilitation engineering
and research at the time as it was the first public touch screen interface without any kind
of keypad to offer access to the blind. All Citibank locations with this kind of machine
have been adapted with talking functionality.
The first talking ATM in the United States was a Diebold machine installed on October 1,
1999 in San Francisco’s City Hall by the San Francisco Federal Credit Union. Like the
royal Bank machine, it was adapted by T-base corp. of Ottawa. In March 2000, Bank of
America became the first financial institution to commit to installing a talking ATM at all
of its ATM locations nationwide. A legal settlement called for the installation of
hundreds of machines with later negotiations for a schedule for the remainder.
In the early 2000s, many of the largest banks in the United States and Canada announced
plans to install substantial numbers of talking ATM’s. This included royal Bank, which
announced an additional 250 talking ATM deployments in early 2003, the January 28,
2003 Edmonton Journal reported. As of fall 2005, talking ATMs are being deployed to a
substantial number of locations by the majority of the biggest banks in all regions of the
United States and Canada. Many mid-sized banks and some smaller banks are also
making talking ATMs available to their customers. By 2005 there were approximately
30,000 Talking ATMs in the United States. .
Debit card
A debit card is an ISO 7810 card which physically resembles a credit card, and, like a
credit card, is used as an alternative to cash when making purchases. However, when
purchases are made with a debit card, the funds are withdrawn directly from the
purchaser's current/checking or savings account at a bank or credit union.
Types of debit card
Although many debit cards are of the Visa or MasterCard brand, there are many other
types of debit card, each accepted only within a particular country or region, for example
Switch (now: Maestro) and Solo in the United Kingdom, Carte Bleue in France, Laser in
Ireland, and "EC electronic cash" (formerly Eurocheque) in Germany. The need for
cross-border compatibility and the advent of the euro recently led to many of these card

33
networks (such as Switzerland's "EC direkt", Austria's "Bankomatkasse" and Switch in
the United Kingdom) being rebranded with the internationally recognised Maestro logo,
which is part of the MasterCard brand. Some debit cards are dual branded with the logo
of the (former) national card as well as Maestro (e.g. EC cards in Germany, Laser cards
in Ireland, Switch and Solo in the UK, Pinpas cards in the Netherlands, Bancontact cards
in Belgium...).
Banks in France charge annual fees for debit cards (despite card payments being very
cost efficient for the banks), yet they do not charge personal customers for chequebooks
or processing cheques (despite cheques being very costly for the banks). This imbalance
most probably dates from the unilateral introduction in France of Chip and PIN debit
cards in the early 1990s, when the cost of this technology was much higher than it is now.
Credit cards of the type found in the United Kingdom and United States are unusual in
France and the closest equivalent is the deferred debit card, which operates like a normal
debit card, except that all purchase transactions are postponed until the end of the month,
thereby giving the customer between 1 and 31 days of interest-free credit. The annual fee
for a deferred debit card is around €10 more than for one with immediate debit. Most
French debit cards are branded with the Carte Bleue logo, which assures acceptance
throughout France. Most card holders choose to pay around €5 more in their annual fee to
additionally have a Visa logo on their Carte Bleue, so that the card is accepted
internationally. A Carte Bleue without a Visa logo is often known as a "Carte Bleue
Nationale" and a Carte Bleue with a Visa logo is often known as a "Carte Bleue
Internationale". Many smaller merchants in France refuse to accept debit cards for
transactions under €15.25 (equivalent to 100 French Francs) because of the minimum fee
charged by merchants' banks per transaction. Merchants in France do not differentiate
between debit and credit cards, and so both have equal acceptance.
In the United Kingdom, banks started to issue debit cards in the late 1980s in a bid to
reduce the number of cheques being used at the point of sale, which are costly for the
banks to process. As in most countries, fees paid by merchants in the United Kingdom to
accept credit cards are a percentage of the transaction amount, which funds card holders'
interest-free credit periods as well as incentive schemes such as points, airmiles or
cashback. On the contrary, debit cards do not usually have these characteristics, and so
the fee for merchants to accept debit cards is a low fixed amount, regardless of
transaction amount. This means it is cheaper for a merchant to accept a debit card for a
large amount and to accept a credit card for a small amount. Although merchants won the
right through The Credit Cards (Price Discrimination) Order 1990 to charge customers
different prices according to the payment method, few merchants in the UK charge less
for payment by debit card than by credit card, the most notable exceptions being budget
airlines, travel agents and IKEA. Debit cards in the UK lack the advantages offered to
holders of UK-issued credit cards, such as free incentives (points, airmiles, cashback etc),
interest-free credit and protection against defaulting merchants under Section 75 of the
Consumer Credit Act 1974. Despite these disadvantages of debit cards over credit cards,
many people in the UK prefer paying with debit cards rather than credit cards, often
because they fear that using credit cards will result in accumulation of unmanageable
debts. All establishments in the United Kingdom that accept credit cards also accept debit
cards (although not always Solo and Visa Electron), but a minority of merchants, for cost
reasons, accept debit cards and not credit cards (for example the Post Office).

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In Germany and Belgium, many merchants, including most supermarkets, do not accept
credit cards because of the higher fees charged by their banks. However, most merchants
usually accept debit cards, because the fees for accepting them are much lower, for
example in Germany 0.3% with a minimum of €0.08.
Online and offline debit cards
There are currently two ways that debit card transactions are processed: online debit
cards and offline debit cards. Online debit cards are essentially enhanced automatic teller
machine (ATM) cards, as they use the same personal identification number (PIN)
authentication system and debits are reflected in the user’s account immediately. The PIN
authentication is much more secure than the alternative signature (used in offline debit
cards). One difficulty in using online debit cards is the necessity of a separate keypad at
the point of sale (POS) to enter the PIN, although this is becoming commonplace for all
card transactions in many countries. Overall, the online debit card is generally viewed as
superior to the offline debit card because of its more secure authentication system and
live status, which alleviates problems with processing lag on transactions that may have
been forgotten or not authorized by the owner of the card. Banks in some countries, such
as Canada, only issue online debit cards.
Offline debit cards have the logos of major credit cards (e.g. Visa or Master Card) or
major debit cards (e.g. Maestro) and are used at point of sale like a credit card. This type
of debit card may be subject to a daily limit, as well as a maximum limit equal to the
amount currently deposited in the current/checking account from which it draws funds.
Offline debit cards in some countries are not compatible with the PIN system, in which
case they can be used with a forged signature, since users are rarely required to present
identification. Transactions conducted with offline debit cards usually require 2-3 days to
be reflected on users’ account balances. This type of debit card is similar to a secured
credit card.
"Credit" and "debit" purchases
In some countries (e.g. the United States), terminals allow the user of a Visa or
MasterCard debit card to choose whether the purchase is a "credit" or "debit" purchase. In
a "credit" purchase, the user signs a charge slip (as in a traditional credit card purchase);
in a "debit" purchase, the user enters a PIN. In either case, the user's bank account is
debited.
In some countries and with some merchant service organisations (as of this writing), a
"credit" transaction is without cost to the purchaser beyond the face value of the
transaction, while a small fee may be charged for "debit" transactions (although it is often
absorbed by the retailer.) Other differences are that "debit" purchasers may opt to
withdraw cash in addition to the amount of the debit purchase (if the merchant supports
that functionality); also, from the merchant's standpoint, the merchant pays lower fees on
a "debit" transaction as compared to "credit" transactions.
The fees charged to merchants on "credit" debit card purchases -- and the lack of fees
charged merchants for processing "debit" debit card purchases and paper checks -- have
prompted some major merchants to file lawsuits against debit-card transaction processors
such as Visa and MasterCard. Visa and MasterCard recently agreed to settle the largest of
these lawsuits and agreed to settlements of billions of dollars.

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Many consumers prefer "credit" transactions because of the lack of a fee charged to the
consumer/purchaser -- and many terminals at PIN-accepting merchant locations now
make the "credit" function more difficult to access.
To the consumer, a debit transaction is real-time; i.e. the money is withdrawn from their
account immediately following the authorization request from the merchant. This is in
contrast to a typical credit card or charge card transaction which can have a lag time of a
few days before the transaction is posted to the account, and many days to a month or
more before the consumer makes repayment with actual money.
Chip and PIN
In many countries, the use of PIN validated transactions with smartcard chip readers is
being strongly encouraged by the banks as a method of reducing cloned-card fraud; to the
extent that cardholder-present transactions will soon not be possible in these countries
without knowledge of a PIN, and the POS terminal reading the smart card chip on the
card.
Popularity
Debit cards and secured credit cards are popular among college students who have not yet
established a credit history. There are also forms of debit cards (e.g. Visa Buxx) that are
purchased by parents for teenagers as young as 13. The parent retains a great deal of
control over the child's use of the cards.
Debit cards are also similar to stored-value cards in that they represent a finite amount of
money owed by the card issuer to the holder. They are different in that stored-value cards
are generally anonymous, while debit cards are generally associated with an individual's
bank account. Debit cards usually offer some protection against loss, theft, or
unauthorized use while stored-value cards usually do not.
Safe deposit box
A safe deposit box (sometimes called a safety deposit box) is a type of safe usually
located in groups inside a bank vault or in the back of a bank or post office. It usually
holds things such as valuable gemstones, precious metals, currency, or important
documents such as wills or property deeds that a person might feel afraid to leave at
home due to fear of theft, fire, or flood. In the typical arrangement, a renter pays the bank
a fee for the use of the box, which can be opened only with production of the assigned
key, the bank's master key, the proper signature, or perhaps a code of some sort.
Additionally, some banks are using biometric security to complement the already
increased security procedures.
Safe deposit boxes serve as plot devices in works of fiction, particularly thrillers. For
example, in The Da Vinci Code and The Bourne Identity, sections of the storyline revolve
around control of a safe deposit box.
Overdraft
An overdraft occurs when withdrawals from a bank account exceed the available
balance; i.e. over-drawings. This gives the account a negative balance and in effective
means the account provider is offering credit.
If there is a prior agreement with the account provider for an overdraft facility, and the
amount overdrawn is within this authorised overdraft, then interest is normally charged
at the agreed rate. If the balance exceeds the agreed facility then fees may be charged and
higher interest rate might apply.

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