Between 1952 and 2002 a quiet revolution took place in the banking industry. Traditionally people deposited their monies into banks, where they were kept in safes and accessed through bank drafts, or checks. All cash and bank drafts were backed by a finite supply of gold. Today trillions of banking transactions fly through secured cyberspace with dizzying speed, leaving us to wonder how a system could change so radically and quickly.
In 1952 the banking industry was drowning in paper and rapidly losing functionality. Forty-seven million accounts generated 8 billion checks that year. Each one was manually processed and physically touched 2.3 banks on average. The Technical Committee on Mechanization of Check Handling was formed by the American Bankers Association and charged with creating an automated system for processing checks. Their solution was to encode checks with magnetic ink in a language that could be read by machines, known as magnetic ink character recognition (MICR). Machine makers, the print industry and the Federal Reserve adopted the committee's solution, and it is has been in use for well over half a century.
The patent for asynchronous transfer mode (ATM) went to Docutel, for its Docuteller machine, first installed in Chemical Bank. The bank ran an ad saying, "On September 3, 1969, our branch will open its doors at 9:00 a.m. and we'll never close again!" Twenty-four hour banking was born on that September morning.
In 1970 the Federal Reserve acquired the necessary computer processors and established the Clearing House Interbank Payments System to process automated international banking transactions. The federal government and large businesses quickly saw the merit of the new technology. They negotiated agreements to use the equipment, facilities and staff of the Federal Reserve to process high-volume recurring payments like Social Security checks and government payrolls. By 1978 a nationwide Automated Clearing House (ACH) network was in place and direct deposit payroll checks were rapidly becoming commonplace.
ACH capabilities, the emergence of strong security systems and the prevalence of home computers, combined with a busy society hungry for conveniences, created ideal circumstances for online banking to flourish. Banks began offering online banking in the 1990s, allowing customers to view their accounts in real time, pay bills without writing checks and schedule recurring transactions.
While checks could be quickly processed using MICR encoding, the paper still had to be physically presented to each bank. This involved planes, trains, couriers and even snail mail, and it cost valuable time. The passage of the Check Clearing for the 21st Century Act (Check 21) in 2004 made transmitted images of checks legal in all aspects, as if the images were the actual checks. This stopped the paper flow, allowing debits and credits to clear accounts more quickly and efficiently than ever before.