I know that this information has been posted but here is a bit different spin. Is this good or bad for CKFR?
Date: Friday, July 10, 1998
Source: BUSINESS LINE
--------------------------------------------------------------------------------
BUSINESS LINE via NewsEdge Corporation : ELECTRONIC Commerce over the Internet may be a boon for consumers and businesses, but bankers may beg to differ. Ever since the Internet went commercial some 3-4 years ago, a slew of electronic payment mechanisms has been proposed - often by start- up technology firms with no background in banking - to facilitate business transactions over the Net. Being in an industry which is expected to be conservative, it is understandable if bankers feel that things are moving too fast for their tastes. "A new electronic payment scheme emergers every few months, each of them claiming to be the 'ultimate solution'. Why cannot the IT industry people take something that has proven itself in the physical world and adapt it for the electronic age?" a banker might well ask. Well, that question - rather prayer - was answered in part last week with the introduction of the Electronic Check (E-Check) system in the US.
In the first transaction using e-checks, the US Treasury Department and a group of banking and technology firms announced on June 30 that the US Government had made its first payment over the Internet using an electronic cheque (e-check). The e-check is just what its name implies: an electronic substitute for the paper cheque. Like paper cheques, electronic cheques are legally binding promises to pay. The first e-check was issued as part of a pilot project by the US Treasury to an private firm, GTE Inc., as a payment for a government defense contract. Two banks, BankBoston and NationsBank, handled the payment, which will be processed through the Federal Reserve Bank of Boston. The transaction is the result of a three-year research initiative spearheaded by the Financial Services Technology Consortium (FSTC) - a grouping of financial institutions, technology providers, research groups, and government agencies - to use the Net to make cheque processing more efficient.
The most attractive feature of e-checks is that their issual (by the cheque writers) and their processing (by banks) is very similar to that of paper cheques. Therefore, it is easy for new users to understand the e-check system. Also, the e-check is designed to be issued from the same account that also issues paper cheques.
Why e-checks?
Though it may be one of the oldest payment instruments, the cheque is still remarkably vibrant. In the US, the largest user of the instrument, over 65 billion cheques are reportedly issued each year and that their number is growing by over 1 billion each year - 3-4 times the number of all other non- cash payment transactions combined, including credit cards, ATM/debit cards, and Electronic Funds Transfers (EFT). Also, cheques are the only instrument that can be used in all payment situations: between individuals, businesses of all sizes, schools, institutions and government agencies.
The e-check is designed to help ease the transition between paper cheque processing and electronic transactions.
The FSTC claims that its e-check is the first all- electronic payment instrument for all payment situations, by all bank customers. Further, the e-check is designed to support any currency, including the euro, so that it can be used for global electronic commerce.
How e-checks work
Like paper cheques, e-checks are signed by the payer and endorsed by the payee. However, e-checks use "digital signatures" instead of handwritten or machine stamped signatures. (A digital signature is a unique number, calculated using mathematical techniques, which can only have been produced by one person for the specific document being signed. While a digital signature can be verified by anyone, it can only be created by the individual authorised to use that signature.) According to its creators, the e-check is just a PC version of a paper cheque. "On the screen it looks just like a paper cheque and is filled out the same way," they say. The e-check is embedded in a secure electronic file that contains user-provided data regarding the purpose of the cheque. It also includes information found on a paper cheque such as payee name, payer account information, amount and date. Typically, e-checks will follow the same payment stream as their paper counterparts. A payer will prepare a cheque on a PC and secure it with a digital signature. The payer then sends the e-check in a file via e-mail directly to the payee. The payee retrieves the e-check from an e-mail box and endorses it with a digital signature. The payee then forwards the cheque, along with an electronic deposit slip, via e-mail or file transfer to its bank for deposit.
"This entire process will typically take place within two days, versus a week or more for traditional manual paper processes. The technology has the potential to reduce processing time to several hours," the FSTC says. Also, the combination of the security technologies employed in e-checks make it highly unlikely that they can be forged successfully. "The potential for fraud is expected to be much lower than for paper cheques," the FSTC says.
Relevance to India
The e-check system deserves a close look from the Indian government, especially as it is far less demanding on IT infrastructure when compared to other electronic payment systems. For instance, e-checks do not require online transaction authorisation or the use of online third party guarantee and verification services. The e-check system works on an overnight off-line model, where verification works without requiring an active third party. This model, which employs temperory connections, makes it especially relevant to developing countries like India where telecommunications infrastructure is both unreliable and expensive. Also, because e-checks leverage the cheque settlement structure already in place, banks will only need to make a modest investment to be able to offer this new technology.
For Indian businesses, a strong incentive to consider e-check is that system requires minimal investment in new technology. According to its creators, sending or receiving e- checks requires only three simple elements: An e-mail connection, the necessary security hardware (such as a chip card or PCMCIA card reader) and an account at a bank that offers electronic cheque books and services. Also, unlike other payment systems, the e-check system does not require users to employ intermediaries - like value-added networks (VANs) - to facilitate transactions. This feature will especially appeal to small and medium-sized firms which cannot afford the services of the intermediaries and prefer to handle their transactions directly. The e-check, being the electronic equivalent of the paper cheque, makes it possible for users to pay directly for goods and services. Cheque processing is a complicated process the world over. In our country, the problems are compounded by the lack of an adequate IT infrastructure. The introducting of e-checks would also eliminate the massive paper shuffling between banks and cut handling costs.
Of course, the fact that Indian laws do not provide for digital signatures will be a stumbling block in doing an e-check pilot in the country. However, the introduction of digital signatures is a part of the agenda of the recently set up National Task Force on IT Infrastrucrture. "Legislation focusing on electronic signature as a means of preventing electronic fraud and for protection of online commerce is essential. Such legislation could also stipulate the creation of a certification system for electronic transactions applicable to e-mail messages and banking operations, as well as shopping," says the background paper of the task force. If the task force does deliver on this promise, Indian banks will become ready for the introduction of e-checks. Adopting the usual "do nothing" option, will only allow other countries - "competitors" in today's globalised environment - to get ahead further. Singapore's government, for instance, has reportedly said it will conduct an e-check trial later this year. The IT Task Force would, therefore, do well to include an e-check pilot project as part of its agenda.
(The author, a freelance writer, can be reached at arun.natarajan@cheerful.com)
Copyright(C) 1998 BUSINESS LINE
|
