Plastic and Electronic Banking 137 6 Plastic and Electronic Banking Objectives By the end of this chapter, you should be able to: Outline the functions of online and telephone banking. Describe what is meant by electronic transfer of funds at the point of sale and how this process works. Explain electronic funds transfer. Describe the use of plastic cards in banking.
138 Banking Operations Introduction If you have been working in banking for any length of time, you will be aware that the ways in which customers carry out their financial affairs and communicate with their bank has altered significantly, especially over the past decade. We are now going to consider how technology has enabled the range of bank services and money transmission methods to be extended, particularly online and telephone banking, and how funds can be transferred electronically. We will also look at the increasing use of plastic cards, especially credit and debit cards, in banking and money transmission. Describe what you understand by direct banking. Telephone and online banking Most banks now offer customers some form of direct banking facility indeed, some of the newer players in the market operate solely as direct banks. With direct banking, the customer has access to their account 24 hours a day, 7 days a week, by telephone or internet, identifying themselves by a security password. What are the advantages to a bank of offering direct banking? The main advantages of offering direct banking are that: routine enquires can be dealt with directly, thus removing the need for branch staff to deal with these enquiries and allowing them to concentrate on those tasks that can only be dealt with in the branch the organisation can provide a better service to customers through the use of specialist staff and software new players can enter the market at a much lower cost; in the past, the financing costs of setting up a bank with a branch network were significant; direct banking with the provision of telephone and internet banking represents an entry route to the market at a much lower cost.
Plastic and Electronic Banking 139 Telephone banking Some organisations operate solely as telephone banks, whilst other financial services organisations offer telephone banking as part of a wider range of options available to their customers. When using a telephone banking service the customer will usually have the option of using either an Automated Telephone Service or of speaking to an adviser. What do you understand by an Automated Telephone Service? If a customer uses an automated telephone service, when they telephone the organisation they are greeted by a recorded message that will offer them some service options, such as press 1 for balance enquiries, press 2 for recent transactions etc. The call will then be dealt with automatically, for example, under option 1, the system will advise the customer of the relevant balance without the need for an adviser to intervene. This is called Interactive Voice Response, which we will consider in more detail shortly. Alternatively, the customer may prefer to speak to an adviser, perhaps because the subject of their call is more complex. Before looking at some of the services that a customer can access through telephone banking, we ll consider some of the systems which underpin telephone banking. Automatic Call Distribution Calls coming into a call centre do not appear in an orderly fashion but arrive randomly. There is a telephone system that handles incoming calls in a consistent and controlled manner Automatic Call Distribution, abbreviated to ACD. The ACD acts as a gatekeeper to the call centre which means that all the incoming calls are directed to it before they are distributed to the advisers. If a customer phones the call centre, they will go first through their telecommunications provider who in turn will send the call on to the call centre. The ACD will accept the call and consult with a set of rules that have been programmed into it, to decide where in the centre the call should go. Some of the features of an ACD include the ability to: place incoming calls in a queuing system and make sure that they are answered in the correct order manage the queue of calls direct calls to the right staff allow messaging systems to take details from customers if no advisers are available to take the call within a specified period of time allow Integrated Voice Response (IVR).
140 Banking Operations Following on from the final point, most if not all financial services call centres offer an IVR service. This means that the customer can request information or even carry out a transaction without having to speak to an adviser. When the call arrives at the centre, the customer has the option of either talking to an adviser or using the IVR service. The customer communicates their choice by using the keypad on their phone. If the customer chooses to use the IVR service, their call is forwarded to the computer system. At this point the customer hears an automated, recorded voice which asks the customer what service(s) they wish to use. In response to these questions, the customer presses keys on their telephone which transmit a signal to the computer. However, not all the services on offer are available through IVR. Some of the more sensitive requests are available solely by the customer talking to an adviser. An additional factor affecting the availability of IVR for particular transactions is the level of security required by the organisation. At the moment, most IVR services rely on tones generated from the customer s phone which means that the security needs to be numeric. Therefore, those services which need an alphabetic security password require to be put through to an adviser. What services can a customer access when using telephone banking? When using telephone banking, a customer can access the following services: obtaining a balance enquiry identifying recent transactions transferring funds between accounts paying a bill standing orders amending/cancelling a direct debit share dealing arranging an overdraft third party payments. We have already looked at some of these services earlier in the course, so we ll examine some of the others in more detail now. Obtaining a balance enquiry/identifying recent transactions To access this service, the customer first has to prove to the bank that they are indeed the customer they say they are by using a security code or answering some questions to verify their identity. They will then be able to access the information requested either from an adviser or through IVR.
Plastic and Electronic Banking 141 Transferring funds As you already know, if a customer wishes to transfer the same amount of funds between two of their accounts on the same date each month, they should set up a monthly standing order. However, if the amount and date of transfer is variable, they have the option of giving this instruction to the call centre which can then make the transfer for them. There is usually also the option of having the transfer carried out immediately or diarised for some future date. Paying a bill Most call centres provide customers with a facility whereby they can instruct bills to be paid over the phone. All that the customer needs to do is give the centre information about the bill payment and the adviser processes the transaction through the account. Share dealing The call centre also allows banks to offer the service of receiving telephone instructions from customers to buy and sell stocks and shares. In the past, only written instructions were accepted from customers who wished to buy or sell on the stock market, but now, provided that the customer has completed the appropriate level of security, the call will normally be passed through to a stockbroker who will attend to the purchase or sale on behalf of the customer. What is a third party payment? Third party payments A third party payment is a payment made by a customer through their financial services provider to another person. It has been possible to make this type of payment for many years by using a bank giro credit at a bank branch. Normally the funds are debited from the customer s account on the date requested and sent through the clearing system to reach the beneficiary s account in two to three working days. What are the two types of internet banks?
142 Banking Operations Online banking Most if not all banks now have their own websites which allow customers to obtain information on the products and services offered. What are the benefits of internet banking? There are two types of internet banks: stand alone internet banks offering competitive interest rates and service charges due to having lower overheads than their high street competitors (the cost of an average payment transaction on the internet is 7.5p or less, compared to 27p for a telephone banking service and 54p for a transaction in a branch) traditional banks providing branch, telephone and internet banking facilities (sometimes referred to as clicks and mortar banks). The advantages of internet banking are that: services are available 24 hours a day, 7 days a week the time and effort involved in visiting branches are removed and customers can transact their banking from home, office or any site where they have access to a personal computer, telephone line and modem fees are often lower than traditional banking fees despite concerns about security, the technology used ensures the privacy and safety of the customers financial information customers can check the balances of their accounts, transfer funds between accounts and make electronic bill payments. An internet banking service normally provides customers with the following services: current balances and recent transactions copy statements, say for the past six months information on automated payments the ability to cancel and/or amend standing orders and direct debits application for various money transmission, savings and lending products. In addition, there will normally be information about the organisation, such as a history and current structure, information on current corporate social responsibility programmes, environmental initiatives being undertaken, contact information, etc.
Plastic and Electronic Banking 143 Electronic Funds Transfer at Point Of Sale (EFTPOS) When the use of cheques and credit cards increased, it was thought that we were heading for the cashless society, but increased use of technology in money transmission means that we could be heading towards the chequeless society. This can be evidenced with the number of large retailers, such as petrol stations and supermarkets, who will no longer accept cheques as a means of payment. EFTPOS stands for Electronic Transfer of Funds at Point Of Sale and involves the transfer of funds from the account of a customer directly into the bank account of the retailer at the time a sale is made. There is no need for the customer to write a cheque and the retailer will not have to wait for the funds to clear. How does EFTPOS operate in practice? The procedure for making payment is very safe and convenient. The customer has a debit card which bears their signature. In most cases banks issue a single card which combines the features of a cheque guarantee card, a card for withdrawing cash via an ATM and a debit card. Since the introduction of chip and PIN, either the retailer swipes or the customer inserts the card in a terminal and the customer enters a Personal Identification Number (PIN) into a keypad to authorise the transaction. Before the advent of chip and PIN, the retailer s till would print a sales slip to be signed by the customer to authenticate the transaction. The retailer would compare the signature on the sales slip with the customer s specimen signature on the debit card before completing the transaction. This will still be the case in some instances, for example where there are temporary technological problems. The major banks are either members of Switch or Visa which operate EFTPOS systems in the UK. These systems are paperless in so far as debiting the customer s account and transferring funds to the retailer s account are concerned. The debit appears on the statement of the cardholder a few days after the transaction is completed. What does the acronym CHAPS stand for?
144 Banking Operations Electronic funds transfer CHAPS CHAPS stands for Clearing House Automated Payment System which is operated by The CHAPS and Town Clearing Company Limited. This company and CHAPS is owned and run by 14 UK banks, including The Royal Bank of Scotland plc, Bank of Scotland, Clydesdale Bank PLC and Lloyds TSB. CHAPS is an electronic credit transfer system for sending same day value sterling payments from one member bank (a settlement bank) to another. The payments are same day value as it is not necessary to wait for funds credited to an account to clear. Every CHAPS payment is unconditional, guaranteed and cannot be recalled once sent. CHAPS started in 1984 and operates over the whole of the UK. There is no centralised computer centre for CHAPS, but each settlement bank must use standardised pieces of software through which all inward and outward payment messages pass the CHAPS gateway. Settlement of transactions takes place shortly after 3.00 pm each day. The CHAPS gateway of each settlement bank sends a message to the Bank of England s gateway with details of the transaction totals it has recorded through the day between itself and each of the other member banks. The net transaction figures are reconciled by the Bank of England and the relative amounts are debited or credited to the Bank of England accounts of the individual settlement banks. Given the number and value of payments handled by CHAPS, the system has a very high level of built-in security measures to prevent unauthorised or fraudulent transfers being initiated. The settling of obligations and other related transactions by participants in the various financial markets of the City of London account for approximately 90% of CHAPS activity by value and about 60% by volume. The system is also used for settling house purchase transactions and for making payments between companies in settlement of debts due. In 2007 almost 70 trillion was processed through the CHAPS system. What are the essential features of a credit card? Credit cards Credit cards have been in use in this country since the early 1970s although their use and the spread of ownership increased during the 1980s and they are now a very widely used method of making payments and for obtaining credit facilities. A credit card is a plastic card which can be used by the cardholder to purchase goods and services which are paid for at a later date.
Plastic and Electronic Banking 145 There are currently two dominant groups who operate international networks Visa and MasterCard. All the main banks, building societies and other organisations offer their own versions of either or both of these cards. You should familiarise yourself with the type(s) of card(s) that are offered by your own organisation. The essential features of a credit card are: the purchase of goods and services on credit subject to an agreed overall limit the issue of regular statements by the credit card company the option for the customer of either paying all of the sums due to the credit card company or electing to pay off only a portion of the sums due (minimum amount or 3-5% whichever is the greater) and paying interest on the remainder. Application procedure A credit card account operates independently of a customer s other accounts with the bank, and the relationship between the bank and the cardholder differs from the traditional banker/customer relationship. It is not necessary for a person to maintain an account with the bank before they can be issued with a credit card. It is initiated by a separate agreement between the bank and its customer regulating the issue of the credit card and the debtor/creditor relationship that exists between the parties. In addition, due to the element of credit involved, the bank will have to be satisfied that the customer can be considered creditworthy for the amount of their limit. The customer completes an application form as the basis of the agreement between them and the bank. The application form also provides the bank with a great deal of information about the customer, such as employer, salary, house owner or tenant, marital status, number of children, etc. Normally the creditworthiness of the applicant is screened by a statistical method called credit scoring which is basically a system that allocates points according to the data requested on the application form; for example, persons who own their homes will score more points than those who rent. The process determines the statistical probability that the credit will be repaid. As you will discover when we look at lending, there is no universal system of credit scoring nor is any system perfect. Use of the credit card Provided that the issuer is satisfied with the creditworthiness of the customer, a card and PIN will be issued and the customer will be granted a credit limit. The customer can then use the card to make purchases up to the amount of the limit on the account. The cardholder presents the card to the retailer and the transaction is completed by the card being swiped through the retailer s terminal and the customer inputing their PIN number on a keypad. A credit card can also be used for postal, internet and telephone transactions; the card number being quoted over the phone, input to a screen or noted on an order form sent in the post. Cash can be withdrawn via ATMs using the credit card by the cardholder inputing a PIN notified to them at the time the card was issued. This withdrawal will be treated by the credit card company as a cash advance and so interest will accrue from the date of the transaction.
146 Banking Operations Joint credit cards are not offered, but the customer has the option of applying for other persons to be issued with cards on the account. For example, a husband and wife may both have credit cards and the same account will be debited regardless of whose card is used, but only one person will be liable for repayment of the debt. What information is shown on the monthly statement sent to credit card holders? Every month, the cardholder receives a statement showing: their limit the transactions that have been made with the card(s) any payments that have been received any interest that has been debited to the account the current balance the amount of available credit remaining an estimate of the interest which will appear on the next statement based on the current balance. The cardholder is not required to make any payment to the issuer of the credit card until 21 days after the date of the statement. The latest date for receipt of a payment is shown on the statement. Depending on when a purchase is made, credit cards can provide a period of up to 56 days of interest-free credit. On receipt of a statement a cardholder has the option of: repaying the whole balance by the due date shown on the statement, or repaying a minimum amount or 3-5% (whichever is the greater) of the balance by the due date (provided that the balance is more than 5, otherwise the whole amount due must be repaid). Should the cardholder elect not to clear the balance due, interest will be charged monthly from the statement date on any outstanding balance not repaid. It is now normal for credit card companies to periodically send cardholders blank cheques which they may draw against the account. Again, this type of transaction will be treated by the credit card company as a cash advance and so interest will accrue immediately.
Plastic and Electronic Banking 147 Company credit cards Companies can make use of credit card facilities to help them control business expenses and manage cash flow and at the same time provide their staff who incur regular expenses with a simple and convenient payment method, in the UK or abroad. An overall limit is agreed between the company and the bank and designated members of company staff are given a credit card with set limits within the overall agreed limit. Each card issued normally bears the name of the company and of the cardholder. Statements are usually produced in respect of each cardholder with an additional summary statement showing the total amount due for payment from all cardholders. Settlement of the sum due is normally effected by direct debit from the company s bank account. Charge cards Charge cards are similar to credit cards in that a customer is allocated a limit and receives a monthly statement, but the important difference is that the statement balances require to be settled in full each month. For customers in higher income brackets, banks offer Gold Cards or Premier Cards which combine a charge card with a cheque guarantee card, and in both cases the limits tend to be higher than usual. Automatic overdraft facilities are also included. Store credit/charge cards Many department stores and other retailers have introduced their own cards which operate in direct competition to credit cards issued by banks. The main advantage for retailers, apart from the interest they receive, is that the ready availability of credit should lead to increased sales. Retailers will also be hoping that customers will buy goods from their stores using the store card rather than make purchases from a competitor where such credit is not available. Most stores which offer their own store cards also accept other credit cards issued under the auspices of MasterCard or Visa. Store cards operate in the same way as credit cards in that a monthly statement is provided and the customers have the option of paying off all that is outstanding or paying only a portion of the outstanding debt and paying interest on the remainder.
148 Banking Operations Question time 6 1 What is the difference between a credit card and a charge card? 2 Explain how a credit card can provide the holder with interest-free credit. 3 Explain briefly how Switch works. 4 What is CHAPS? Check your answers at the back of the book.
Plastic and Electronic Banking 149 Review Now consider the main learning points which were introduced in this chapter. Go through them and tick each one when you are happy that you fully understand each point. Then check back to the objectives at the beginning of the chapter and match them to the learning points. Reread any section you are unsure of before moving on. With direct banking, the customer has access to their account 24 hours a day, 7 days a week, either by telephone or internet. Automatic Call Distribution acts as a gatekeeper to a call centre. When using telephone banking, a customer can obtain a balance enquiry, identify recent transactions, transfer funds between accounts, pay a bill, obtain information on standing orders, amend/cancel a direct debit, give share dealing instructions, arrange an overdraft, or make third party payments. An internet banking service normally provides customers with the following services: current balances and recent transactions, copy statements, information on automated payments, cancel/amend standing orders and direct debits, apply for certain products. EFTPOS facilitates the transfer of funds from the account of a customer directly into the bank account of the retailer at the time a sale is made. CHAPS is an electronic credit transfer system for sending same day value sterling payments from one member bank to another. A credit card can be used by the cardholder to purchase goods and services which are paid for at a later date.
150 Banking Operations Key words in this chapter are given below. There is space to write your own revision notes and to add any other words or phrases that you want to remember. direct banking telephone banking Automated Telephone Service Automatic Call Distribution Interactive Voice Response EFTPOS CHAPS settlement bank same day value CHAPS Gateway
Plastic and Electronic Banking 151 Multiple choice questions 6 Try these self-test questions to assess your understanding of what you have read in this chapter. The answers are at the back of the book. 1 Which one of the following money transmission media is most suitable for same day, large value transactions? A B C D cheques and credit clearing bank giro credit BACS CHAPS 2 Which one of the following institutions reconciles the transactions of the banks through the CHAPS system? A B C D CREST Bank of England individual settlement banks Town Clearing 3 Which one of the following will not normally be included on a credit card statement? A B C D credit limit card expiry date interest debited this month applicable interest rate 4 William has a Visa credit card. What are the maximum days of interest-free credit normally available to him when using the card? A B C D 14 days 28 days 30 days 56 days
152 Banking Operations