How the ATM Revolutionized the Banking Business
Most adults living in urban areas around the world have come in contact with an automated teller machine. For many, it represents their “bank” far more than rows of tellers standing behind tall counters.
The story of the ATM’s rapid rise to ubiquity is also one of a revolution in retail banking.
It begins with the embrace of automation that characterized the mid-century economy and gave rise to vending machines, self-service gas stations and other innovations. In the case of the ATM, much of the initial impetus began with European bankers concerned about increasing unionization and rising labor costs. To economize, they solicited engineers to develop a solution for after-hours cash distribution.
In 1967, two British banks installed prototypes of today’s ATM. The same year, Swedish savings banks unveiled a similar invention called the Bankomat. By 1971, manufacturers were mushrooming and building ATMs around the world, including in the U.S. and Japan.
These early devices were all stand-alone, clunky, unfriendly and inflexible. They could do one thing only: dispense cash when activated by a token. Some banks would keep the token in the machine and return it to the customer (by post) once the account was debited. Many machines proved unreliable: Rarely had electronic equipment been put to the test by weather in such a way. Security was also a problem, as there was no easy way to make sure that whoever deposited a token was indeed the owner of the bank account.
Chubb, the British lock maker, pioneered the use of a personal identification number. Chubb (along with several other companies) also introduced card-like plastic tokens with a magnetic strip. Yet this wasn’t enough to reassure bankers.
For these reasons, the development of online communication with a central computer became an overriding concern. International Business Machines Corp. (IBM) was a pioneer in this regard. IBM started the first online trials in Sweden and followed up with an online device in the U.K. for Lloyds Bank in 1972. For most of the 1970s, IBM engineers worked to develop the rails, pipes and standards on which other elements of the payments ecosystem -- such as credit cards and point-of-sale terminals -- would eventually depend.
By the early 1980s, however, ATM manufacturers such as Chubb, De La Rue Plc and Docutel Corp. had failed to keep up with developments in computing and electronics. Others hadn’t yet achieved a critical market share. Citibank had effectively abandoned a plan to commercialize devices of its own patented design. Even IBM, which had the marketing muscle, engineering expertise and business contacts to take over the market, decided against further investment in payment technology.
Around this time, two Ohio-based companies, NCR Corp. (NCR) and Diebold Inc. (DBD), were working on technology that would enable them to effectively dominate the world’s supply of ATMs for the next two decades.
Capitalizing on deregulation and the banking industry’s growth across retail markets, NCR and Diebold were instrumental in turning the dinosaur cash dispenser into today’s sleek, multi-function ATM. The companies’ innovations included new, customer-friendly video-display units; programmable buttons alongside the screen; a shift toward dispensing cash horizontally, which reduced jams; and a growing menu of options, including money transfers and balance inquiries.
These advances soon freed staff at retail-banking branches to engage customers in higher-value services, such as insurance, mortgages and stock-market trading. ATMs thus proved to banks that there were alternative distribution channels to brick and mortar branches; became the backbone of the payments system; and opened the door to telephone and Internet banking. In this sense, ATMs enabled the explosive growth of retail finance during the last decades of the 20th century.
ATMs, however, remained expensive to operate. The need for dedicated phone lines still limited them largely to bank branches or high-traffic locations such as train stations and airports. Operating systems and microprocessors had to be custom-made. All this changed with the advent of digital telephony and personal computers, and the introduction of Microsoft Corp. (MSFT) software as the core operating system. The ATM then effectively became a terminal of banks’ central computers, enabling online verification at the point of transaction.
In the mid-1990s, Triton Systems Inc. and Tidel Engineering LP introduced lighter and cheaper machines that used dial-up communications. Unlike ATMs attached to a bank, these new cash dispensers could send and receive encrypted data over regular phone lines. As a consequence, new organizations called independent ATM deployers (better known as IADs) began installing stand-alone ATMs in grocery stores, bars, universities and casinos that dispensed cash for a fee.
The IADs also introduced the practice of self- replenishment: The owner of a bar, for example, could deposit cash received from customers directly into the ATM, increasing sales while reducing the need to transport cash to and from the bank.
More recently, in what is perhaps the dawn of another new era, some banks have explored the possibility of connecting ATMs to mobile-telephone networks. This level of sophistication isn’t bad for a machine that had decidedly humble beginnings almost 50 years ago.
But the ATM has always been more than a convenient way to get cash. It revolutionized the way banks think about customers, the way the financial world thinks about technology, and the way we pay for almost everything we buy.
(Bernardo Batiz-Lazo is a professor of business history and bank management at Bangor University in Wales and the author, with Tom Harper, of “Cash Box: The Invention and Globalization of the ATM.” The opinions expressed are his own.)
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