In the depths of the Great Depression, Thomas J. Watson Sr. concluded that governmental activism and technological advancements were laying the foundation for check writing to emerge as a big business for banks. In reaction, he poured funding into check-processing technologies and, in 1934, introduced the IBM 801 Bank Proof machine. It was the first in a series of innovations that would not only transform finance but also ultimately enable electronic banking and online transactions.
From magnetic tape on debit and credit cards to automated payments processing, the ATM and touch screen kiosks, IBM has invented, or collaborated to invent, many of the innovations that support nearly frictionless commerce and serve as the architecture of today’s financial services industry. It all started with the 801.
Watson Sr. lured a self-taught engineer named Frederick Lincoln Fuller out of retirement in 1927 to work on projects that would lead to the 801. It wasn’t long after the machine’s 1934 release that IBM began to transform banking. The machine greatly improved the highly manual check-clearing process by automating the process of listing, separating and endorsing checks; banks immediately grasped its potential. Within four years, IBM had installed nearly 500 systems for 140 clients, and the growth in check writing that Watson anticipated soon followed. In the ensuing decade, check writing doubled in the US.
The IBM 801 spawned a long line of systems designed to unlock new efficiencies in front-and back-office banking processes. Clients flocked to the IBM 1400 mainframe series, introduced in 1959. It offered a suite of peripheral utilities, including punched card reading, high-speed printing, and magnetic tape storage. When the Pacific National Bank of Seattle installed one of the first 1401 systems in 1961, check-processing speeds increased from three to 75 checks per minute. System/360, unveiled in 1964, greatly increased data access and retrieval times. Its high-speed printing capabilities saved hours for workers and customers and helped drive IBM’s growth in banking in South America and Asia, stemming from System/360’s first Japanese installation at the Tokai Bank of Nagoya.
Such efficiency improvements began altering cultures and operations, opening new opportunities for growth and breaking down traditional barriers across finance. Savings and loans enterprises entered the mortgage business. Commercial banks started offering checking accounts.
The most obvious impact of IBM’s innovations on modern finance and commerce stems from the company’s work developing magnetic stripe technology. In the early 1970s, transactions were still slow, insecure and error-prone. A decade earlier, IBM engineer Forrest Parry had begun to lay the groundwork for the technology that would streamline this highly manual process. His foundational contributions to mag stripe technology led to the mechanisms that are now commonplace on ID cards, driver’s licenses and ATM cards.
Working with banking and airline clients, the company helped develop a mag tape standard to spur adoption across industries. “We decided not to patent the stripe or the stripe production technologies,” said Jerome Svigals, IBM’s stripe project manager at the time. Still, the indirect benefits were huge. “For every buck spent on developing the mag stripe, we got back USD 1,500 in computer sales.” This was a powerful combination for both IBM and the banking industry. The broad adoption of processing systems slashed both labor and financial administration costs, and enabled banks to reduce the time required to return and process a check, known in industry parlance as the float.
James Galvin, then-assistant vice president and manager of the proof and transit department at Hartford National Bank, explained the implications in a 1976 issue of Think magazine. “A few years ago,” he said, “60% of the checks were cleared in one day. Today, 80% of the checks are cleared in one day. The longer it takes to clear a check, the less money a bank has at its disposal. And the more money it has on hand at any given time, the stronger its financial position.”
Banks initially balked at the cost of implementing mag stripe readers, and CEO Thomas J. Watson Jr. nearly scuttled the initiative because, as he said, “Mom doesn’t like credit cards.” But the company dove in anyway, and banks embraced the technology as economies of scale reduced implementation costs. Before long, mag stripe technology — in combination with point-of-sale devices, data networks and transaction-processing computers — gave rise to the global credit card industry.
Until the late 1960s, workers would often be seen rushing to financial institutions on their lunch hour or on Saturday morning to cash checks or make deposits — because that’s when banks were open. But so-called bankers’ hours held less significance once the first cash-dispensing machine arrived in 1967. It was soon followed by the automated teller machine (ATM), which could perform electronic deposits and withdrawals at any time.
The IBM 3600 finance communication system, introduced in 1973, was an early example of an integrated network of devices. It included an ATM and allowed tellers at any branch to update, retrieve and quickly enter records. It dramatically increased the efficiency for financial institutions and was followed in 1981 by the IBM 4700 Financial Control System, which was even faster and included more workstations.
Over the ensuing decades, such systems streamlined banking operations and consumers became increasingly comfortable conducting paperless transactions at all hours without the presence of a human teller. This behavioral shift ultimately opened the door to debit card spending, online banking and e-commerce. IBM was instrumental in this transition, offering increasingly sophisticated data management, processing and security systems to help reduce clearing costs while increasing efficiencies and customer comfort and safety. The company’s systems enabled the meteoric rise of online shopping, and its marketing initiatives ushered in the era of e-business, where corporations re-envisioned themselves for success in an always-on world.
One solution automatically correlated incoming information from emails and phone calls with existing business intelligence, improving banks’ real-time customer service. All of this came under the auspices of the company’s Smarter Planet initiative, which sought to interconnect and instrument the world’s systems — energy, transportation, agriculture, et cetera — to make them both greener and more efficient.
Today, card issuers are increasingly replacing mag stripes with embedded microchips. More broadly, the ubiquity of automated payment systems at most retail operations is making cash an endangered species. But a suite of IBM innovations was indispensable to the evolution of global commerce and solidified the company’s relationship with financial institutions that continues to this day.
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