The ATM Just Turned 50, and the “Death of Cash” Now Threatens This Great Financial Innovation

The “death of cash” is like the 1970s theory that computers would replace paper entirely: “Look around your office — has it gone paperless?”

In a 2009 interview, former Federal Reserve chairman Paul Volcker named the ATM (automated teller machine) the greatest financial innovation he had seen in the previous 20 years:

“Tell me, what [financial] innovation has meant as much to the individual as the ATM — and in fact, it's less a financial innovation than a mechanical one, isn't it?”

On June 27, 1967, Barclays installed the world's first ATM at its branch in Enfield, England, the moment now treated as the ATM's birth. Last week it turned 50.

To mark the anniversary, on June 27 this year Barclays gold-plated one of the ATMs at its Enfield branch, fixed a commemorative plaque to its left, and rolled out a red carpet in front of the golden machine.

But 50 years on, the ATM is far less glamorous than it once was. The machine that solved the problem of letting people withdraw cash anytime, anywhere is losing both its importance and its presence, as cash use declines and mobile payments make life easier.

Volcker was right: the ATM really was a great financial innovation. But newer innovations are now overturning it.

“There should be a way for me to get my own money, whether I'm in the UK or anywhere else in the world”

John Shepherd-Barron, who created the ATM that Barclays installed, once described the invention in dramatic terms in an interview. He was then working at the equipment maker De La Rue Instruments, and one Saturday he could not get cash because the bank was closed. That was when the idea of a fully automatic cash machine struck him: “There should be a way for me to get my own money, whether I'm in the UK or anywhere else in the world.”

Once the working week came around, Shepherd-Barron ran into Harold Darvill, Barclays' general manager, and pitched him the idea. He compared the cash machine to a chocolate vending machine, except that what came out was money. Two days later, Barclays' CEO had settled the details with De La Rue and signed a contract for six prototypes.

Shepherd-Barron's story sounds like the origin of an invention that transformed banking — except it is probably not true. British banks stayed open on Saturday mornings until 1971, and at the time Barclays' leadership was mostly preoccupied with a new thing called the credit card; the ATM does not appear in their meeting minutes until after the first machine went into service in 1967.

In fact, while Shepherd-Barron was designing his ATM, other people who also wanted cash to be easier to get were building similar devices. The British engineering firm Chubb & Son's Lock and Safe Co. (Chubb), for one, built a cash machine that used a PIN code. Chubb's ATM went into service at National Westminster Bank in July 1967, only a month after De La Rue's.

Still, the weekend-closure problem Shepherd-Barron described really was one of the reasons the ATM appeared.

After the Second World War, British trade unions grew stronger, and the bank employees' union had been pressing since 1964 for banks to stop opening on Saturdays and give staff more time off. But workers paid by the week needed to cash their paychecks at the weekend, or else take time off during the week to visit the bank — so every Saturday morning, lines formed at bank branches.

Computers, which banks had begun using in the late 1950s, made the ATM possible. Between 1968 and 1980, banks became the biggest customers of both the software and the hardware industries. With inflation and labor costs rising, they were always looking for new ways to cut costs — replacing paper records inside the bank with computers, for instance — and replacing tellers with computers looked like a good idea too.

What's more, just as “big data” and “artificial intelligence” are today's buzzwords, “automation” was the buzzword of that era, and one of the arguments used to talk consumers into trying something new. This was even more true of the American market at the time.

Don Wetzel, who invented another version of the ATM in the United States in 1970, had sold financial equipment at IBM and believed there was a large market for machines that could take over counter work. After becoming vice president of the automation equipment company Docutel, Wetzel ran a market survey around 1968 to find out whether consumers would use such a machine, “because up to that point, people had never had direct contact with a computerized device, especially one handling their money.”

The results showed that most consumers were willing to try the new device, young people especially, and Wetzel began leading his company's team in developing the ATM.

For the American banking industry, this was exactly what it needed. Many banks were shifting their focus from corporate customers to individuals, and they wanted to attract more retail consumers, especially young people who had just started working. To do that, banks realized they “had to offer some services we hadn't offered before”, to give young people a reason to open an account, so the banks could then do more business with them.

Once the ATM was finished, Wetzel began selling it to banks. Chemical Bank of New York liked the concept and decided to put its first ATM in a wall facing the street outside one of its branches.

Rain, snowstorms, and other weather knocked Docutel's ATM out several times, but most of the time it worked well. As word spread, Docutel's ATM sales climbed, and it became one of the best-known ATM makers.

The ATMs of that era, it should be said, looked and worked quite differently from the ones we are used to today. Every manufacturer tried to solve the problems of account authentication and security its own way.

In 1967, for example, if you wanted to use the De La Rue machine Barclays had installed, you first had to go to a Barclays counter and apply for a special check containing carbon-14. The check carried a handwritten signature and was valid for six months. You then took it to the ATM, followed the printed instructions to insert it into the machine, and entered a four-digit identification code on the number pad. If both your signature and your code matched, you could withdraw cash — no more than £10 at a time.

Chubb's ATM, which launched at almost the same time, worked with plastic bank cards issued by National Westminster Bank. The cards had holes punched in them; customers got their cash after inserting the card and entering a four-digit code. But the ATM did not return the card afterward — it kept it, and the bank mailed it back to the customer later.

The card that went with Docutel's ATM went a step further: it carried an encrypted magnetic stripe holding the account number, branch code, and other data tied to the card. Docutel also built a printer into the ATM, which produced the transaction receipt we know today for the customer and kept a copy inside the machine for the bank to check.

In the 1970s, banks raced one another on ATM equipment. Then IBM put ATMs online, and the modern ATM arrived

“On September 2, our bank will open at 9 o'clock — and from then on, it will never close.”

That was the advertisement Chemical Bank ran after installing its ATM. In theory the ATM would make a bank far more efficient, and it let customers withdraw cash at any hour, weekends or three in the morning — enough to make it an edge in the fight for retail customers.

Once banks saw that the ATM really worked, they all started buying. In 1968 Japan's Omron installed an ATM for Sumitomo Mitsui Banking Corporation (SMBC), and by the end of that year the Royal Bank of Scotland had ATMs at 25 branches.

To hold on to that edge, banks also had to keep upgrading their machines.

IBM's 1972 partnership with Lloyds Bank was one of the milestones in ATM history.

The system IBM built put bank cards truly “on line.” With it, an ATM could talk to the bank in real time: once a customer inserted a card or entered an account number some other way, the ATM could immediately sync any change in the account with the bank's system and confirm the account's current details — that the customer really did have money to withdraw, for instance.

Before this, with no network connection, a bank could never confirm who was actually using a given credential. IBM's system solved that. It also meant customers could check their accounts in real time.

To run the new system, Lloyds Bank spent £25 million on computers and another £35 million on 500 IBM ATMs.

According to Bernardo Batiz-Lazo, a professor at Bangor University, the biggest difference between the IBM machine and the early cash dispensers was not that it did more than dispense cash, but that it was wired to the bank's central computer. In a sense, the ATM that came out of this partnership was the first truly modern one, no longer just a cash dispenser.

Barclays, the first bank to use ATMs, immediately began working out how to answer the new system. Its research showed that its original De La Rue equipment could do very little — the special checks it required had gone out to only 116,000 customers in the end.

Barclays finally dropped the old De La Rue machines and took a series of steps to overhaul its ATM business: a new computer center, new ATM terminals, centralized accounting data. In 1974 it budgeted £83.4 million for all this, then added more, ending at £93.2 million.

As part of the overhaul, Barclays bought 100 NCR 770 self-service financial terminals in 1974. By 1977 it had 100 NCR-770s and 406 Chubb MD2 and MD4 machines, and had issued 75,000 matching bank cards to customers.

The market did reward the banks that moved first. Because it was an early adopter, Citibank's market share in New York City grew from 4% in 1977 to 13.4% in 1988.

The ATM's golden age came in the 1980s. Then banks formed “alliances,” and it stopped counting as an edge

The ATM's golden age came in the 1980s. Between 1984 and 1989 the number of ATMs in Britain doubled, from 6,106 to 12,253.

ATM makers' stocks kept climbing. Diebold, which had gone public in 1964 (and has since merged with Wincor Nixdorf to form Diebold Nixdorf), saw its share price rise 47.56%, 51.26%, and 45.31% in 1981, 1982, and 1983.

This growth came because financial deregulation in Britain and the United States in the 1980s sped up the growth of retail banking, and because many people's wages stopped arriving as cash and went straight into a bank account, which directly expanded retail banking business. In the 1960s, 30% of Americans had no dealings with a bank at all: their weekly pay was small, and the checks their employers handed out could be cashed at a department store, so there was no need to open an account or do anything else.

On top of that, banks and ATM makers were each pushing consumers toward ATMs in their own way.

For ordinary consumers, the ATM was the first time, after computers were commercialized, that they got something out of one as individuals. Yet many of them did not much like ATMs, for a simple reason: the machines were hard to use.

Color screens, voice prompts, touchscreens — the things we take for granted now — were almost entirely absent from 1970s ATMs. At a time when computers were still rare, using an unfamiliar machine that offered almost no guidance was not a pleasant experience, so few people used them.

Banks tried a number of ways to make consumers comfortable with ATMs. According to a 1977 report in The New York Times, Citibank had ordinary tellers stand by to help customers work the ATM, while the First National Bank of Atlanta hired an actress to play the ATM, presenting it as a lively, smiling character.

The machines themselves were getting easier to use. In the early years ATMs broke down constantly, swallowed cards often, and a single heavy rain could kill a street-side machine. As manufacturing improved, these problems grew rarer.

Makers also kept adding features. NCR, which had been collecting feedback from consumers and banks all along, began putting screens on its ATMs in the late 1970s to walk users through a transaction. It also changed the cash slot from a narrow edge to a wide one, so bills were less likely to jam inside the machine.

In this period the shape of the ATM industry changed fast, and makers that failed to update their machines as demand shifted watched their business sink. In 1980 Chubb lost $4.7 million on its ATM business and announced two years later that it was leaving the market. In 1990 Burroughs, De La Rue, and Docutel made the same decision, and IBM, which was moving toward software, gave up ATM manufacturing altogether.

It was also in 1990 that NCR built its 10,000th ATM; it and Diebold became the industry's number one and number two.

The banks' ATM business changed completely at the same time, turning into what we see today.

In 1982, with too little money to install ATMs in bulk, John Hardy, head of strategic planning at the British public financial institution Girobank, decided to join forces with other financial institutions and set up the LINK alliance, under which any member bank's customers could use any other member's ATMs.

The benefit was obvious: the alliance's large pool of machines instantly multiplied the ATMs available to each bank's customers, which suited existing customers and made new ones easier to win.

Other banks soon built similar alliances — Midland Bank, National Westminster Bank, and TSB Group in 1983; Lloyds Bank, Barclays, and the Royal Bank of Scotland in 1987. As the alliances grew and their memberships overlapped, the ATM was no longer talked up as a competitive edge.

Beyond that, just as computers had done in the 1950s, the spread of Windows in the 1990s and the arrival of digital telephones in place of analog ones freed the ATM, which until then needed a dedicated bank telephone line to work. ATMs no longer had to sit in bank branches and busy locations; they could go anywhere a bank saw a need. Wells Fargo, for instance, installed two ATMs at McMurdo Station in Antarctica in 1998, for the people living at the research center.

Cash use keeps falling, and an ATM that can do 95% of a human teller's job cannot turn that around

The number of ATMs is still growing. According to data from the market research firm Retail Banking Research, there were 3 million ATMs worldwide at the end of 2014, and the figure is forecast to reach 4 million by 2020. China's count is rising too: a report the People's Bank of China released in March shows the country added 57,500 ATMs in 2016, for a total of 924,200.

Still, the voices writing off the ATM have never stopped, especially as mobile payments spread. In many countries the volume of cash transactions is falling or growing more slowly, and since withdrawing cash has always been the ATM's most important function, its use has dropped too.

Last year the number and value of mobile payments in China rose 85.82% and 45.59% year on year. In Sweden, card transactions increased tenfold in 2016, and by value only a fifth of the country's transactions are now done in cash. A report by the market research firm Accenture shows the share of American consumers who use cash every week fell from 67% in 2015 to 60% in 2016.

Consumers in some countries still love cash, of course. Data from the Bank for International Settlements (BIS) shows that in 2015 the ratio of cash held by Japanese households (including in bank accounts) to GDP was 19.4%, the highest of the 24 countries BIS surveyed. Boston Consulting Group figures show that more than three-quarters of transactions in Germany in 2015 were still made in cash.

But the prospect of shrinking cash transactions keeps pushing the ATM to change. Since 2000, ATMs in many countries have been able to do more and more: order flowers and chocolates, pay taxes, buy lottery tickets, open accounts, buy stamps. Some offer more than 200 functions. As Diebold Nixdorf CEO Andy Mattes put it: “A new ATM can do 95% of what a human teller does.”

To keep up with a fast-moving market, the biggest companies in the industry keep adjusting their businesses and shipping products faster. An ATM product's life cycle is expected to shrink from the old 7 to 10 years to 24 to 36 months.

Last year Diebold, then second by market share, bought Wincor Nixdorf, the third, for $1.8 billion. The combined company, Diebold Nixdorf, passed NCR to become the world's largest ATM maker.

Diebold Nixdorf has already built several machines that look nothing like a traditional ATM. The “headless” ATM, for instance, has no screen, touchpad, or card reader — none of the upper half of an ordinary machine. Every transaction happens on the customer's own phone.

Diebold Nixdorf is not the only company trying to get rid of the bank card and improve how an ATM feels to use. Wells Fargo, Bank of America, and other banks are using NFC to move ATM transactions onto phones, which can cut a withdrawal from the old 30 seconds to 10.

NCR, meanwhile, sold 17% of the company to the private equity firm Blackstone in 2015 and said it would turn itself into a software and services company. Its app recently added a feature that tells customers when there is an ATM nearby. Over the past few years it has bought several small companies that supply technology and software to retailers, and besides being the world's second-largest ATM maker, NCR has become a big player in self-checkout.

For the ATM industry, the question now is whether 50 years is a milestone or the approach of the end.

Andy Mattes, who runs the world's largest ATM maker, answers that the “death of cash” is like the 1970s theory that computers would replace paper entirely: “Look around your office — has it gone paperless?”

Cover image: Flickr, Tax Credits, Barclays