Contributed by Bill Narin, Global Business Development, IEEE-ISTO
We owe the convenience most of us take for granted when we use automated teller machines to a half century of technology innovations and to the efforts of the many banking industry alliances that formed to promote adoption of those innovations.
When it comes to the creation and evolution of the ATM itself, several figures stand out.
- Scotsman John Shepherd-Barron installed the first ATM at Barclays in London in 1967. There were no mag stripe cards yet, so customers had to order special checks inked with trace amounts of Carbon 14, which sensors in the machine could read. Upon feeding one of these checks into the machine along with a voucher card, a bound stack of one-pound notes would be returned. Interestingly, Shepherd-Barron adopted a trade secret approach to protecting his invention, so the device was never patented.
- Another Scotsman, Jim Goodfellow, began with a detailed study of vending machines. His idea was to build a vending machine to dispense cash instead of candy. It featured an encrypted card that would be returned as part of the transaction, along with a breakthrough idea, the Personal Identification Number, patented in 1966. He also invented the three try algorithm for successful PIN entry before the machine would keep the card.
- Credit for the free-standing ATM we know today probably belongs to John D. White, who worked for Docutel. The first installation of his machine was in 1973 at the Chemical Bank branch in Rockville Center, NY.
- The Diebold 550, invented by Jairus Larson, was the first ATM designed for online connection to back-end computers. Earlier machines were not electronically linked to back-end systems, nor did they interoperate on shared networks.
In the 1980s, national branch banking was permitted in every developed country — except for the US, where legacy federal banking laws allowed each state to define its own interstate banking regulations. Only a dozen states allowed de novo entry. In sixteen states no interstate banking was permitted at all. The remaining states had a hodgepodge of reciprocal agreements.
However, ATM networks offered a deft workaround to these interstate banking restrictions. The industry alliances that created these networks gave banks the operating flexibility to innovate and add value across state lines while waiting for formal regulations to catch up.
In unit banking states only a single branch per bank was allowed. Growing banks sometimes had to adopt creative strategies to overcome size or other limitations of a single facility. One example is the pedestrian walkway built between two towers of Chicago’s Wrigley Building. The newly unified facilities on the 14th floor of each tower qualified as one branch. It’s easy to appreciate the operating flexibility and value ATM networks offered banks and consumers in these states.
In New York City, Citibank’s early entry into the ATM space is credited with growing their market share by more than 3x – from 4% in 1977 to 13.4% in 1988. Alarmed, in 1985 eight NYC banks set aside their competitive differences to form an alliance called New York Cash Exchange. Forty other banks soon joined. Participating banks became known as NYCE banks. New Yorkers were delighted and first year transactions volume exceeded forecast by 40%.
The 1970s saw the arrival of ATMs in the US. But it was the groundswell of regional, national and international banking industry alliances that established the standards, best practices, and formal agreements that allowed ATMs to become ubiquitous, driven by their routine ability to operate across multiple networks, including internationally. This disruption brought unprecedented convenience and delight to bank customers and had far reaching implications for the industry.
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