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ERMA and MICR, the Origin of Electronic Banking
SRI See the entire 'Timeline of Innovations' at SRI.


In 1950 the Bank of America asked SRI to assess the possibility of developing electronic computers that could take over the labor-intensive banking tasks of handling checks and balancing accounts. The creation of branch offices and the rapidly increasing number of checks being used by a growing clientele threatened to overwhelm the existing manual processing and record keeping. At that time no large-scale electronic machine for any bank was under development. Existing computers were used mostly for scientific calculations. They were unreliable, and had extremely limited input and output capability. In spite of these facts, SRI's feasibility study, issued in May 1951, was sufficiently encouraging for the Bank of America to authorize a major multi-year development effort.


We now take for granted the many ways that computers assist individuals and businesses. The forty-year-old project briefly described here, provided a vision of what business could expect from the application of data-processing machines, and illustrates how and why some of the key capabilities were invented, including bookkeeping, optical character recognition (OCR or scanning), and robotic document sorting. The automated teller machine (ATM) is the natural descendant of this work, and illustrates the progression away from paper checks toward all electronic banking.


The Banking Problems
The problem posed by the bank for solution by machine included all accounting that normally attends many thousand commercial checking accounts of a bank. Such a machine must be able to keep record of deposits and withdrawals for each client, make current-balance information available at an instant's notice, watch for overdrafts, stop payments, and held funds. It must be able to provide, on a strict schedule, periodic statements of the account along with the accumulated checks. The machine must not only handle all necessary arithmetic but also handle the paper documents in whatever physical condition they exist after passage through many hands. All machine operations must, furthermore, be as exact as banking accounting calls for and be in constant step with hourly, daily, and monthly routines of the banking system.


Vacuum Tubes vs. Transistors
In the early 1950s transistors were beginning to replace vacuum tubes in electronics applications. The urge to use transistors to achieve a design requiring less power, generating less heat, and with the obvious advantage of smaller volume, was nearly irresistible. In fact, only after parallel developments using transistors and tubes had been carried for several months did circuit designers reluctantly admit that the state of the art in production of transistors left little hope that a sufficient number of reliable units would be available as needed. Transistors would have to wait until the commercial unit, called Mark II.


MICR -- Magnetic Ink Character Reading
The most difficult challenge to be solved was enabling the machine to read the necessary information from checks, deposit slips, and other routine documents. Techniques involving photo-electric scanning of characters and codes printed in a variety of colors and fluorescent inks were examined. All displayed a common fault. Such schemes were successful when tested in the laboratory under controlled conditions. However, when required to scan material on which the characters were overprinted with cancellation stamps, endorsements, and the like, the error and reject rates rose to prohibitive levels.


Breakthrough on this problem came with the development of techniques for reading magnetically characters printed in a black ink containing particles of a magnetizable oxide. Because the reading element is sensitive only the magnetized ink, subsequent overprinting or visual obliteration has no effect on the machine's ability to read. The magnetic technique has the additional advantage that if two checks go through together--for example, if they are stapled, the magnetic head, by reading through the top check, senses the second check. The machine thus rejects such a "double."


The techniques of machine reading of characters printed in magnetic ink--both in a code of bars and Arabic numbers--were demonstrated in July 1956, to the Bank Management Committee of the American Bankers' Association. The recommendation of that committee led to the adoption of the principle of magnetic-ink character reading or MICR as a standard for all member banks. You can find the strange looking MICR numbers at the bottom of your checks today.


Handling Paper at High Speed
Another challenge was the necessity of physically handling thousands of pieces of paper daily in normal routine work. Any real solution to the general problem of better handling of the Bank's commercial checking accounts would have to begin with the (then) "impossible" assignment of providing fully automatic equipment than can pick up, transport, read, and sort a wide variety of sizes and thicknesses of paper checks at high speed. Nor could it choke on checks creased, torn, or stapled.


Development of apparatus for handling paper accurately and at high speed proceeded in parallel with that for character reading. An electro-pneumatic machine was designed, built, and tested. Stacks of checks were fed to the machine, which removed one check at a time, read a number, and transported it to the appropriate bin according to the digit read. Very reliable sorting speeds of 600 per minute were achieved and laboratory devices handled checks at rates of over 3000 per minute.


ERMA Makes its Debut
In September 1955, SRI gave a public and press demonstration of the prototype electronic accounting machine, by then designated ERMA (for Electronic Recording Method of Accounting). Its performance proved the soundness of the concepts and workability of the electrical and mechanical elements.


The true test of ERMA began in the Fall of 1956. This was to process the accounts of a branch bank in the same manner--and the same pace--that would be required if it were in use as a central accounting facility serving that branch and others. These day-by-day three-month-long tests proved ERMA's ability to perform all accounting routines, and in synchronism with the records kept by the bank.


ERMA is Commercialized
In April 1956, the Bank of America announced that General Electric Corporation had been selected to manufacture production models. ERMA Mark II was designed around solid-state logic elements (i.e. transistors) and magnetic core memory. Numeric data input was read automatically from the original documents using the MICR method. SRI contributed to General Electric's development effort with consultation on character reading and paper-handling techniques and assistance with the detailed programming of the operational steps to be followed by the new equipment.


In 1959, General Electric delivered the first 32 ERMA computing systems to the Bank of America. ERMA served as the Bank's accounting computer and check handling system until 1970.

Console of General Electric's commercial ERMA.
Console of General Electric's commercial ERMA.



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