Secure banking

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.