Tips & Tricks: These topics are very important from the ICT exam point of view.

1.  Describe Automatic Teller Machine in banking application?

Automatic Teller Machines (ATMs) are places where customers can withdraw cash or can carry out certain other banking activities like order a statement, get a mini statement, change ATM Pin, etc) using their credit or debit cards.

The following series of steps shows how a typical ATM works:

Sequence for withdrawing cash What goes on behind the scenes
Customer inserts card into the ATM Contact made with bank’s computer system
PIN is entered using the keypad PIN is checked to see if it correct
A number of options are given:

  • change PIN
  • top up mobile phone
  • see account balance
    • on screen
    • printed out
  • pay in cheques
  • receipt required?
  • Get a mini statement (e.g., transactions over the last week)
  • pay a bill
  • make a money transfer
  • withdraw cash
The customer selects the cash option
A number of cash amounts are shown Card is checked to see if card expiration date is exceeded or card is reported stolen
The customer accepts one of the options or types in a different amount Customer’s account is accessed to see if sufficient is available
Check is made to see if daily limit has exceeded
The customer is then asked if they want a receipt
The card is returned Transaction is OK
Money is dispensed Customer’s account is debited

ATMs however have a few disadvantages:

  • they are often in places where theft can take place at night
  • ‘bogus’ ATMs can be set up to gather information about the card and retain the card
  • some banks charge customers for the use of ATMs
  • ATMs can be tempored with to get hold of customer’s card information and PIN.

2.  What is Internet Banking?

Internet banking should have good and property security from hackers, etc., as it allows transfer of sums of money between accounts, payment of bills, ordering of statements, etc. This is particularly beneficial to people who are unable to visit bank during their normal business hours or if they are suffering from disabilities which makes them travelling to the bank difficult. Thus, all the advantages of working from home are available with internet banking. However, there are disadvantages of using the internet for internet banking. As the amount of online shopping and banking increases, there is a significant impact on society.

Online shopping and banking means that more and more people are staying at home to buy goods and services, manage their bank accounts and book holidays, etc. This is all done using a computer which is connected to the internet and some form of electronic payment (usually a credit or debit card).

The following lines lists the advantages and disadvantages of online banking and online shopping using the internet

As there is considerable overlap between the advantages and disadvantages of online banking and online shopping, these are both considered together here.

Advantages of online shopping and banking

  • There is no longer a need to travel to the town centre thus reducing costs i.e., money for fuel, bus fares, etc., and wasting of time; it also helps to reduce congestion at town centre, banks and stores and also pollution.
  • Disabled and elderly people can now access any store or bank without leaving the comforts of their home, which is of great benefit to them; it help them to be part of the society since they can now do all the things which are taken for granted by able-bodied people.
  • As is online, banking and shopping can be done at any time on any day of the week (i.e. 24/7) – this is particularly helpful to the working class, as the shops/banks would normally be closed when they finish their work.
  • Users now have access to a worldwide market and can thus look for products that are cheaper; this is obviously less expensive and less time consuming than having to shop around by conventional methods; they also have access to a much wider choice of goods.
  • The banks and shops save money by not having as many staff working for them (which means reduced wage bill) or hiring of high street premises (resulting in reduction in rental costs) – these savings are often passed on to customer in the form of lower interest rates, cheaper goods or higher rates on interest for savers.
  • Many people find it less embarrassing to ask for a bank loan using the internet rather than enduring face-to-face discussion with bank staff.
  • Quite often there are long queues at the banks or checkout counters at the shops, so internet banking saves time.
  • People can spend more time doing other things e.g. going shopping to the supermarket probably took up a lot of their time; by doing this online (e.g. setting up repeat items), people are now free to do more leisure activities.

Disadvantages of online shopping and banking

  • It is easier to make errors with online banking and transfer money incorrectly to different accounts.
  • It is necessary to have a computer or a smart phone and pay for the internet to take part in online shopping and banking.
  • Security issues are a major concern (e.g., hacking, stealing of credit card details, etc) as are viruses and other malware (e.g. phishing, pharming, etc).
  • Accidentally using a fraudulent bank or shopping websites is always a risk and this is linked to security issues.
  • There is a possibility of isolation and lack of socialisation if people stay indoors to do all their shopping and banking.
  • There are possible health risks associated with online banking and shopping because of lack of exercise; if people physically go shopping then they are getting some exercise.
  • Unlike high street shopping, a shopper only gets to see a picture of the goods and not able to get the look and feel of the goods; which might not portray the exact size, colour, etc of the goods before buying them; you also have to wait for several days for the goods to arrive; returning goods is also expensive.
  • High street shops and banks are closing due to the increase in online shopping and banking, leading to ‘ghost towns’ forming.

Effects on companies due to the spread of online shopping and banking

Companies and other organisations have also got affected due to the growth of ICT and online shopping and banking.  A few of them have been given below:

  • as the internet is global, the potential customer base has increased
  • there will be some increased costs, because of the need to retrain existing staff and the need to employ more staff in dispatch departments
  • as there is very little or no customer-employee interaction, this could lead to a drop in customer loyalty which in turn could lead to loss of customers (this could also because of the lack of personal service associated with online shopping and banking)
  • banks also need to employ fewer security staff which has a cost benefit
  • robberies are less likely due to the decrease in the number of high street banks
  • there are also costs due to the setting up and maintaining of the websites to enable online shopping and banking.

3.  What is Telephone Banking?

Telephone banking is similar to internet banking with the main difference being that it uses the telephone instead of the computer.

With this system, the customer calls the bank using a telephone. The sequence of steps are as follows:

  • the customer keys in their account number
  • they are then requested to enter a four-digit PIN or selected numbers from their PIN
  • the customer will then hear various options, which might include:
    • press ‘1’ to pay a bill
    • press ‘2’ to carry out a money transfer
    • press ‘3’ for your account balance
    • press ‘4’ to talk to one of our representatives
  • the customer chooses one of the options (either by pressing the correct key, or some systems ask the customer to speak the number – this relies on voice recognition).

Just like internet balance, customers are able to:

  • check their balances anywhere in the world
  • pay bills or transfer money to another account
  • talk with a bank representative

The advantages of telphone banking are similar to internet banking but with this system there is not need to have a computer and it’s possible to talk to an actual human being. Many people find this a more attractive proposition.

However, compared to internet banking, it can be much slower (there may be a long queue before you can talk to somebody) and the options can be a little more complex to navigate. But it can also quicker if your computer isn’t switched on at the time and you only want a balance enquiry.

 4.  Describe Chip and PIN

Many credit and debit cards are equipped with a chip as well as magnetic stripe – this contains key information such as the PIN.

This system provides enhanced security since it is better than relying only on a signature. When paying for items using a chip and PIN card, a form of electronic funds transfer (EFT) takes place. Let’s say a customer goes to a store to buy groceries using a chip and PIN card:

  1. The PIN is entered using the keypad.
  2. The card is checked to see if it is valid (check on expiry date, whether a stolen card is being used, etc).
  3. The PIN is read from the chip on the card and is compared to the one just keyed in.
  4. If they match, the transaction can proceed. If this is the third attempt at entering PIN, then the transaction is terminated.
  5. The store’s bank contacts the customer’s bank.
  6. A check is made on whether they have enough funds.
  7. If the card is not valid or there aren’t enough funds available, then the transaction is terminated.
  8. If everything is found OK, then the transaction is authorised.
  9. An authorisation code is sent to the store.
  10. The price of the goods is then deducted from the customer’s account.
  11. The same amount of money is then added to the store’s bank account.
  12. A receipt is produced as proof of purchase.

5.  Describe how Clearing of Cheques works

Here you will see how banks clear cheques using a centralised clearing centre.

Let’s say Sam has an account with Great Bank and he issues a cheque for $100 to a company called ABC Ltd., who have account with Keith Bank. How is the ABC bank account credited with $100?

Well, first of all, the cheque is sent by ABC Bank to a centralised clearing centre. The cheque is processed by the clearing centre by first passing through a reader/sorter machine. The machine automatically reads:

  • the amount on the cheque
  • the code line containg the account number, sort code and cheque number.

All the cheques are then sorted using their sort codes (which is a unique six digit numbers that are used to identify each bank or building society), ready for sending to an exchange centre.

The data from the cheque which was read earlier is then converted into an encrypted file known as IBDE (Inter-Bank Data Exchange) file. Every IBDE is ‘signed’ with a digital signature so that the receiving bank is assured of the genuineness of the data and that it has not been tampered with.

Later Keith Bank delivers the cheque to an exchange centre. The exchange centre then passes the cheque back to the paying bank (Great Bank in this case) which then sends it to its own clearing centre.

At the paying bank’s clearing centre, the digital signature is first checked and then the cheque is passed through their own reader/sorter machine to make sure the data matches with that on the IBDE file. It also sorts the cheques into branch order (using the sort code).

Later on, Great Bank checks where there is sufficient balance in Sam’s account to cover the cheque amount, and also that it has been signed, dated and written correctly and is genuine. Based on this information, Great Bank decides whether to pay Sam’s cheque to ABC Ltd., or return it unpaid to the Keith Bank.

If Sam’s bank decides not to pay the cheque to ABC Ltd., his bank will send the unpaid cheque back to the Keith Bank by special courier.

The decision to return a cheque unpaid must be made on the morning of the day after exchange so that the cheque can be returned straightaway to Keith Bank if necessary. A cheque may be returned unpaid for various reasons, commonly being:

  • the customer has not got enough money in their account to pay the cheque
  • it has not been signed, dated or written correctly
  • it is fraudulent for some reason.

This whole process, which is known as ‘clearing a cheque’ takes three working days, so if you pay in a cheque on a Wednesday, Thursday or Friday, it will actually take five days to clear.

6.   Describe Electronic Funds Transfer

Electronic funds transfer (EFT) is a system which allows money transfer instructions to be sent directly to a bank’s computer system. There is no physical transfer of money; the whole system relies on electronic transfer of money between accounts. When an EFT instruction is received, the computer system automatically transfers the specified amount from account to another.

One of the most common use of EFT is the payment of salaries to the staff of a large company. On the day when the payment is made, the company instructs the bank to transfer money from their account into the bank’s accounts of their employees.

eft

Other examples of EFT include:  When a credit/debit card is used to pay for a purchase in a store, the payment is made using a system called Electronic Fund Transfer at the Point-of-Sale (EFTPOS).

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