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ATM: How Automated Teller Machines Work and How to Use Them

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ATM: How Automated Teller Machines Work and How to Use Them

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What Is an Automated Teller Machine (ATM)?

An automated teller machine (ATM) is an electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller. Anyone with a credit card or debit card can access cash at most ATMs, either in the USA or abroad.

ATMs are convenient, allowing consumers to perform quick self-service transactions such as deposits, cash withdrawals, bill payments, and transfers between accounts. Fees are commonly charged for cash withdrawals by the bank where the account is located, by the operator of the ATM, or by both. Some or all of these fees can be avoided by using an ATM operated directly by the bank that holds the account. Using an ATM abroad can cost more than using one in the USA.

ATMs are known in different parts of the world as automated bank machines (ABMs) or cash machines.

Key Takeaways

  • Automated teller machines (ATMs) are electronic banking outlets that allow people to complete transactions without going into a branch of their bank.
  • Some ATMs are simple cash dispensers, while others allow a variety of transactions such as check deposits, balance transfers, and bill payments.
  • The first ATMs appeared in the mid- to late 1960s and have grown in number to more than 2 million worldwide.
  • Today’s ATMs are technological marvels, many capable of accepting deposits as well as several other banking services.
  • To keep ATM fees down, use an ATM branded by your own bank as often as possible.

Click Play to Learn How ATMs Work

Understanding Automated Teller Machines (ATMs)

The first ATM appeared at a branch of Barclays Bank in London in 1967, though there are reports of a cash dispenser in use in Japan in the mid-1960s. The interbank communications networks that allowed a consumer to use one bank’s card at another bank’s ATM followed in the 1970s.

Within a few years, ATMs had spread around the globe, securing a presence in every major country. They now can be found even in tiny island nations such as Kiribati and the Federated States of Micronesia.

More than 2.2 million

ATMs in use around the world

Types of ATMs

There are two primary types of ATMs. Basic units only allow customers to withdraw cash and receive updated account balances. The more complex machines accept deposits, facilitate line of credit payments and transfers, and access account information.

To access the advanced features of the complex units, a user often must be an account holder at the bank that operates the machine.

Analysts anticipate ATMs will become even more popular and forecast an increase in the number of ATM withdrawals. ATMs of the future are likely to be full-service terminals instead of or in addition to traditional bank tellers.

Cryptocurrency enthusiasts can now buy and sell Bitcoin and other crypto tokens via Bitcoin ATMs, which are internet-connected terminals that will dispense cash in return for crypto or accept cash or credit card to purchase. There are now nearly 40,000 Bitcoin ATMs located around the world.

ATM Design Elements

Although the design of each ATM is different, they all contain the same basic parts:

  • Card reader: This part reads the chip on the front of the card or the magnetic stripe on the back of the card.
  • Keypad: The keypad is used by the customer to input information, including personal identification number (PIN), the type of transaction required, and the amount of the transaction.
  • Cash dispenser: Bills are dispensed through a slot in the machine, which is connected to a safe at the bottom of the machine.
  • Printer: If required, consumers can request receipts that are printed out of the ATM. The receipt records the type of transaction, the amount, and the account balance.
  • Screen: The ATM issues prompts that guide the consumer through the process of executing the transaction. Information is also transmitted on the screen, such as account information and balances.

Full-service machines now often have slots for depositing paper checks or cash.

How to Use an ATM

Banks place ATMs inside and outside of their branches. Other ATMs are located in high-traffic areas such as shopping centers, grocery stores, convenience stores, airports, bus and railway stations, gas stations, casinos, restaurants, and other locations. Most ATMs that are found in banks are multifunctional, while others that are off-site tend to be primarily or entirely designed for cash withdrawals.

ATMs require consumers to use a plastic card—either a bank debit card or a credit card—to complete a transaction. Consumers are authenticated by a PIN before any transaction can be made.

Many cards come with a chip, which transmits data from the card to the machine. These work in the same fashion as a bar code that is scanned by a code reader.

$60

Average amount of cash withdrawn from an ATM per transaction

ATM Fees

Account holders can use their bank’s ATMs at no charge, but accessing funds through a unit owned by a competing bank usually incurs a fee. According to MoneyRates.com, the average total fees to withdraw cash from an out-of-network ATM was $4.55 as of 2022.

Some banks will reimburse their customers for the fee, especially if there is no corresponding ATM available in the area.

So, if you’re one of those people who draws weekly spending money from an ATM, using the wrong machine could cost you nearly $240 a year.

ATM Ownership

In many cases, banks and credit unions own ATMs. However, individuals and businesses may also buy or lease ATMs on their own or through an ATM franchise. When individuals or small businesses such as restaurants or gas stations own ATMs, the profit model is based on charging fees to the machine’s users.

Banks also own ATMs with this intent. They use the convenience of an ATM to attract clients. ATMs also take some of the customer service burdens from bank tellers, saving banks money in payroll costs.

Using ATMs Abroad

ATMs make it simple for travelers to access their checking or savings accounts from almost anywhere in the world.

Travel experts advise consumers to use foreign ATMs as a source of cash abroad, as they generally receive a more favorable exchange rate than they would at most currency exchange offices.

However, the account holder’s bank may charge a transaction fee or a percentage of the amount exchanged. Most ATMs do not list the exchange rate on the receipt, making it difficult to track spending.

How much can you withdraw from an automated teller machine (ATM)?

The amount that you can withdraw from an automated teller machine (ATM) per day, per week, or per month will vary based on your bank and account status at that bank. For most account holders, for instance, Capital One imposes a $1,000 daily ATM withdrawal limit and Well Fargo just $300. You may be able to get around these limits by calling your bank to request permission or upgrading your banking status by depositing more funds.

How do you make a deposit at an ATM?

If you are a bank’s customer, you may be able to deposit cash or checks via one of their ATMs. To do this, you may simply need to insert the checks or cash directly into the machine. Other machines may require you to fill out a deposit slip and put the money into an envelope before inserting it into the machine. For a check, be sure to endorse the back of your check and note “For Deposit Only” to be safe.

Which bank installed the first ATM in the United States?

The first ATM in the United States was installed by Chemical Bank in Rockville Center (Long Island), N.Y., in 1969 (two years after Barclays installed the first ATM in the United Kingdom). By the end of 1971, more than 1,000 ATMs were installed worldwide.

The Bottom Line

ATM stands for automated teller machine. These are electronic banking outlets that allow people to complete transactions without going into a branch of their bank. Some ATMs are simple cash dispensers, while others allow a variety of transactions such as check deposits, balance transfers, and bill payments. The first ATMs appeared in the mid- to late 1960s and have grown in number to more than 2 million worldwide.

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What is a 2-1 Buydown Loan and How do They Work

Written by admin. Posted in #, Financial Terms Dictionary

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A 2-1 buydown is a mortgage agreement that provides for a low interest rate for the first year of the loan, a somewhat higher rate for the second year, and then the full rate for the third and later years.

Key Takeaways

  • A 2-1 buydown is a type of financing that lowers the interest rate on a mortgage for the first two years before it rises to the regular, permanent rate.
  • The rate is typically two percentage points lower during the first year and one percentage point lower in the second year.
  • Sellers, including home builders, may offer a 2-1 buydown to make a property more attractive to buyers.
  • 2-1 buydowns can be a good deal for homebuyers, provided that they will be able to afford the higher monthly payments once those begin.

How 2-1 Buydowns Work

A buydown is a real estate financing technique that makes it easier for a borrower to qualify for a mortgage with a lower interest rate. That lower rate can last for the duration of the mortgage (as is often the case when borrowers pay extra points up front to the lender) or for a particular period of time. A 2-1 buydown is one kind of temporary buydown, in this case lasting for two years.

In a 2-1 buydown, the interest rate will increase from one year to the next until it settles into its permanent rate in year three. To make up for the interest that they won’t be receiving in those early years, lenders will charge an additional fee.

Either a homebuyer or a home seller can pay for a buydown. That payment may be in the form of mortgage points or a lump sum deposited in an escrow account with the lender and used to subsidize the borrower’s reduced monthly payments.

Sellers, including home builders, often use 2-1 buydowns as an incentive for potential purchasers.

Example of a 2-1 Buydown Mortgage

Suppose a real estate developer is offering a 2-1 buydown on its new homes. If the prevailing interest rate on 30-year mortgages is 5%, a homebuyer could get a mortgage that charged just 3% in the first year, then 4% in the second year, and 5% after that.

If the homebuyer took out a $200,000, 30-year mortgage, for example, then their monthly payments during the first year would be $843. In the second year, they would pay $995. After the end of the second year, their monthly payment would rise to $1,074, where it would stay for the remainder of the mortgage.

2-1 Buydown Pros and Cons

For home sellers, a 2-1 buydown can help them by making it easier and sometimes faster for them to sell their homes for a good price. The downside, of course, is that it comes at a cost, which ultimately reduces how much they will net from the sale.

For homebuyers, a 2-1 buydown has several potential benefits. For one thing, it can help them afford a larger mortgage and a more expensive home than they might otherwise qualify for. For another, it buys them some time before their mortgage payments rise to the full amount, which can be helpful if their income is also rising from year to year.

The downside for homebuyers is the risk that their income won’t keep pace with those increasing mortgage payments. In that case, they might find themselves stretched too thin and even have to sell the home.

When to Use a 2-1 Buydown

Home sellers may want to consider offering (and paying for) a 2-1 buydown if they’re having difficulty selling and need to provide an incentive to find a buyer.

Borrowers may benefit from a buydown if it allows them to buy the home they want at a price they can afford. However, they will also want to consider what would happen if their income doesn’t rise fast enough to keep up with their future monthly payments.

Buyers should also make sure that they are getting a fair deal on the home in the first place. That’s because some sellers might increase the home’s price to make up for the cost of the 2-1 buydown.

Note that buydowns may not be available under some state and federal mortgage programs or from all lenders. A 2-1 buydown is available on fixed-rate Federal Housing Administration (FHA) loans, but only for new mortgages and not for refinancing. Terms can also vary from lender to lender.

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3-2-1 Buydown Mortgage

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A 3-2-1 buydown mortgage is a type of loan that starts out with a low interest rate and rises over the next several years until it reaches its permanent rate.

Here is how 3-2-1 buydown mortgages work and how to decide if one is right for you.

Key Takeaways

  • With a 3-2-1 buydown mortgage, the borrower pays a lower interest rate over the first three years in return for an up-front payment to the lender.
  • The interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year. For example, a 5% mortgage would charge just 2% in year one.
  • After the buydown period ends, the lender will charge the full interest rate for the remainder of the mortgage.
  • Buydowns are often used by sellers, including home builders, as an incentive to help buyers afford a property.

How 3-2-1 Buydown Mortgages Work

A buydown is a mortgage-financing technique that allows a homebuyer to obtain a lower interest rate for at least the first few years of the loan, or possibly its entire life, in return for an extra up-front payment. It is similar to the practice of buying discount points on a mortgage in return for a lower interest rate.

Either the homebuyer/borrower or the home seller may cover the costs of the buydown.

In general, 3-2-1 buydown loans are available only for primary and secondary homes, not for investment properties. The 3-2-1 buydown is also not available as part of an adjustable-rate mortgage (ARM) with an initial period of fewer than five years.

In a 3-2-1 buydown mortgage, the loan’s interest rate is lowered by 3% in the first year, 2% in the second year, and 1% in the third year. The permanent interest rate then kicks in for the remaining term of the loan. In a 2-1 buydown, by contrast, the rate is lowered by 2% during the first year, 1% in the second year, and then goes to the permanent rate after the buydown period ends.

Pros and Cons of a 3-2-1 Buydown Mortgage

A 3-2-1 buydown mortgage can be an attractive option for homebuyers who have some extra cash available at the outset of the loan, as well as for home sellers who need to offer an incentive to facilitate the sale of their homes.

It also can be advantageous for borrowers who expect to have a higher income in future years. Over the first three years of lower monthly payments, the borrower can also set aside cash for other expenses, such as home repairs or remodeling.

When the loan finally resets to its permanent interest rate, borrowers have the certainty of knowing what their payments will be for years to come, which can be useful for budgeting. A fixed-rate 3-2-1 buydown mortgage is less risky than the above-mentioned ARM or a variable-rate mortgage, where rising interest rates could mean higher monthly payments in the future.

A potential downside of a 3-2-1 buydown mortgage is that it may lull the borrower into buying a more expensive home than they will be able to afford once their loan reaches its full interest rate. Borrowers who assume that their income will rise in line with future payments could find themselves in too deep if their income fails to keep pace.

Examples of Subsidized 3-2-1 Buydown Mortgages

In many situations, the up-front costs of a 3-2-1 buydown will be covered by someone other than the homebuyer. For example, a seller might be willing to pay for one to seal the deal. In other cases, a company moving an employee to a new city might cover the buydown cost to ease the expense of relocation. More commonly, real estate developers will offer buydowns as incentives to potential buyers of newly built homes.

Is a 3-2-1 Buydown Mortgage Right for Me?

If you will need to pay for the buydown on your own, then the key question to ask yourself is whether paying the cash up front is worth the several years of lower payments that you’ll receive in return. You might, for example, have other uses for that money, such as investing it or using it to pay off other debts with higher interest rates, like credit cards or car loans. If you have the cash to spare and don’t need it for anything else, then a 3-2-1 buydown mortgage could make sense.

As mentioned earlier, however, it can be risky to go with a 3-2-1 buydown mortgage on the assumption that your income will rise sufficiently over the next three years so that you’ll be able to afford the mortgage payments when they reach their maximum. For that reason, you’ll also want to consider how secure your job is and whether unforeseen circumstances could come along that would make those payments unmanageable.

The question is easier to answer when someone else is footing the bill for the buydown. In that case, you’ll still want to ask yourself whether those maximum monthly payments will be affordable when the time comes—or whether the enticingly low initial rates could be leading you to buy a more expensive home and take on a bigger mortgage than makes sense financially. You’ll also want to make sure that the home is fairly priced in the first place and that the seller isn’t padding the price to cover its buydown costs.

These are questions that only you can answer, but you may find this Investopedia article on How Much Mortgage Can You Afford? helpful.

FAQs

What Is a 3-2-1 Buydown Mortgage?

A 3-2-1 buydown mortgage is a type of loan that charges lower interest rates for the first three years. In the first year, the interest rate is 3% less; in the second year, it’s 2% less; and in the third year, it’s 1% less. After that, the borrower pays the full interest rate for the remainder of the mortgage. For example, with a 5%, 30-year mortgage, the interest rate would be 2% in year one, 3% in year two, 4% in year three, and 5% for the remaining 27 years.

What Does a 3-2-1 Buydown Mortgage Cost?

The cost of a 3-2-1 buydown mortgage can vary from lender to lender. Generally, the lender will at least want the cost to cover the income that it is forgoing by not charging the borrower the full interest rate from the start.

Who Pays for a 3-2-1 Buydown Mortgage?

Either the buyer/borrower or the home seller can pay for a buydown mortgage. In the case of a 3-2-1 buydown mortgage, it is often a seller, such as a home builder, who will cover the cost as an incentive to potential buyers. Employers will sometimes pay for a buydown if they are relocating an employee to another area and want to ease the financial burden.

Is a 3-2-1 Buydown Mortgage a Good Deal?

A 3-2-1 buydown mortgage can be a good deal for the homebuyer, particularly if someone else, such as the seller, is paying for it. However, buyers need to be reasonably certain that they’ll be able to afford their mortgage payments once the full interest rate kicks in. Otherwise, they could find themselves stretched too thin—and, in a worst-case scenario, even lose their homes.

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Average Collection Period Formula, How It Works, Example

Written by admin. Posted in A, Financial Terms Dictionary

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What Is an Average Collection Period?

Average collection period refers to the amount of time it takes for a business to receive payments owed by its clients in terms of accounts receivable (AR). Companies use the average collection period to make sure they have enough cash on hand to meet their financial obligations. The average collection period is an indicator of the effectiveness of a firm’s AR management practices and is an important metric for companies that rely heavily on receivables for their cash flows.

Key Takeaways

  • The average collection period refers to the length of time a business needs to collect its accounts receivables.
  • Companies calculate the average collection period to ensure they have enough cash on hand to meet their financial obligations.
  • The average collection period is determined by dividing the average AR balance by the total net credit sales and multiplying that figure by the number of days in the period.
  • This period indicates the effectiveness of a company’s AR management practices.
  • A low average collection period indicates that an organization collects payments faster.

How Average Collection Periods Work

Accounts receivable is a business term used to describe money that entities owe to a company when they purchase goods and/or services. Companies normally make these sales to their customers on credit. AR is listed on corporations’ balance sheets as current assets and measures their liquidity. As such, they indicate their ability to pay off their short-term debts without the need to rely on additional cash flows.

The average collection period is an accounting metric used to represent the average number of days between a credit sale date and the date when the purchaser remits payment. A company’s average collection period is indicative of the effectiveness of its AR management practices. Businesses must be able to manage their average collection period to operate smoothly.

A lower average collection period is generally more favorable than a higher one. A low average collection period indicates that the organization collects payments faster. However, this may mean that the company’s credit terms are too strict. Customers who don’t find their creditors’ terms very friendly may choose to seek suppliers or service providers with more lenient payment terms.

Formula for Average Collection Period

Average collection period is calculated by dividing a company’s average accounts receivable balance by its net credit sales for a specific period, then multiplying the quotient by 365 days.

Average Collection Period = 365 Days * (Average Accounts Receivables / Net Credit Sales)

Alternatively and more commonly, the average collection period is denoted as the number of days of a period divided by the receivables turnover ratio. The formula below is also used referred to as the days sales receivable ratio.

Average Collection Period = 365 Days / Receivables Turnover Ratio

The average receivables turnover is simply the average accounts receivable balance divided by net credit sales; the formula below is simply a more concise way of writing the formula.

Average Accounts Receivables

For the formulas above, average accounts receivable is calculated by taking the average of the beginning and ending balances of a given period. More sophisticated accounting reporting tools may be able to automate a company’s average accounts receivable over a given period by factoring in daily ending balances.

When analyzing average collection period, be mindful of the seasonality of the accounts receivable balances. For example, analyzing a peak month to a slow month by result in a very inconsistent average accounts receivable balance that may skew the calculated amount.

Net Credit Sales

Average collection period also relies on net credit sales for a period. This metric should exclude cash sales (as those are not made on credit and therefore do not have a collection period).

In addition to being limited to only credit sales, net credit sales exclude residual transactions that impact and often reduce sales amounts. This includes any discounts awarded to customers, product recalls or returns, or items re-issued under warranty.

When calculating average collection period, ensure the same timeframe is being used for both net credit sales and average receivables. For example, if analyzing a company’s full year income statement, the beginning and ending receivable balances pulled from the balance sheet must match the same period.

Importance of Average Collection Period

Average collection period boils down to a single number; however, it has many different uses and communicates a variety of important information.

  • It tells how efficiently debts are collected. This is important because a credit sale is not fully completed until the company has been paid. Until cash has been collected, a company is yet to reap the full benefit of the transaction.
  • It tells how strict credit terms are. This is important as strict credit terms may scare clients away; on the other hand, credit terms that are too loose may attract customers looking to take advantage of lenient payment terms.
  • It tells how competitors are performing. This is important because all figures needed to calculate the average collection period are available for public companies. This gives deeper insight into what other companies are doing and how a company’s operations compare.
  • It tells early signals of bad allowances. This is important because as the average collection period increases, more clients are taking longer to pay. This metric can be used to signal to management to review its outstanding receivables at risk of being uncollected to ensure clients are being monitored and communicated with.
  • It tells of a company’s short-term financial health. This is important because without cash collections, a company will go insolvent and lack the liquidity to pay its short-term bills.

How to Use Average Collection Period

The average collection period does not hold much value as a stand-alone figure. Instead, you can get more out of its value by using it as a comparative tool.

The best way that a company can benefit is by consistently calculating its average collection period and using it over time to search for trends within its own business. The average collection period may also be used to compare one company with its competitors, either individually or grouped together. Similar companies should produce similar financial metrics, so the average collection period can be used as a benchmark against another company’s performance.

Companies may also compare the average collection period with the credit terms extended to customers. For example, an average collection period of 25 days isn’t as concerning if invoices are issued with a net 30 due date. However, an ongoing evaluation of the outstanding collection period directly affects the organization’s cash flows.

The average collection period is often not an externally required figure to be reported. It is also generally not included as a financial covenant. The usefulness of average collection period is to inform management of its operations.

Example of Average Collection Period

As noted above, the average collection period is calculated by dividing the average balance of AR by total net credit sales for the period, then multiplying the quotient by the number of days in the period.

Let’s say a company has an average AR balance for the year of $10,000. The total net sales that the company recorded during this period was $100,000. We would use the following average collection period formula to calculate the period:

($10,000 ÷ $100,000) × 365 = Average Collection Period

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The average collection period, therefore, would be 36.5 days. This is not a bad figure, considering most companies collect within 30 days. Collecting its receivables in a relatively short and reasonable period of time gives the company time to pay off its obligations.

If this company’s average collection period was longer—say, more than 60 days— then it would need to adopt a more aggressive collection policy to shorten that time frame. Otherwise, it may find itself falling short when it comes to paying its own debts.

Accounts Receivable (AR) Turnover

The average collection period is closely related to the accounts turnover ratio, which is calculated by dividing total net sales by the average AR balance.

Using the previous example, the AR turnover is 10 ($100,000 ÷ $10,000). The average collection period can also be calculated by dividing the number of days in the period by the AR turnover. In this example, the average collection period is the same as before: 36.5 days.

365 days ÷ 10 = Average Collection Period

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Collections by Industries

Not all businesses deal with credit and cash in the same way. Although cash on hand is important to every business, some rely more on their cash flow than others.

For example, the banking sector relies heavily on receivables because of the loans and mortgages that it offers to consumers. As it relies on income generated from these products, banks must have a short turnaround time for receivables. If they have lax collection procedures and policies in place, then income would drop, causing financial harm.

Real estate and construction companies also rely on steady cash flows to pay for labor, services, and supplies. These industries don’t necessarily generate income as readily as banks, so it’s important that those working in these industries bill at appropriate intervals, as sales and construction take time and may be subject to delays.

Why Is the Average Collection Period Important?

The average collection period indicates the effectiveness of a firm’s accounts receivable management practices. It is very important for companies that heavily rely on their receivables when it comes to their cash flows. Businesses must manage their average collection period if they want to have enough cash on hand to fulfill their financial obligations.

How Is the Average Collection Period Calculated?

In order to calculate the average collection period, divide the average balance of accounts receivable by the total net credit sales for the period. Then multiply the quotient by the total number of days during that specific period.

So if a company has an average accounts receivable balance for the year of $10,000 and total net sales of $100,000, then the average collection period would be (($10,000 ÷ $100,000) × 365), or 36.5 days.

Why Is a Lower Average Collection Period Better?

Companies prefer a lower average collection period over a higher one as it indicates that a business can efficiently collect its receivables.

The drawback to this is that it may indicate the company’s credit terms are too strict. Stricter terms may result in a loss of customers to competitors with more lenient payment terms.

How Can a Company Improve its Average Collection Period?

A company can improve its average collection period in a few ways. It can set stricter credit terms limiting the number of days an invoice is allowed to be outstanding. This may also include limiting the number of clients it offers credit to in an effort to increase cash sales. It can also offer pricing discounts for earlier payment (i.e. 2% discount if paid in 10 days).

The Bottom Line

The average collection period is the average number of days it takes for a credit sale to be collected. During this period, the company is awarding its customer a very short-term “loan”; the sooner the client can collect the loan, the earlier it will have the capital to use to grow its company or pay its invoices. While a shorter average collection period is often better, too strict of credit terms may scare customers away.

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