This could explain why the banks are dragging their feet....
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Date: Tuesday, July 21, 1998
Source: ComputerWorld
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ComputerWorld via NewsEdge Corporation : Banks try out 'E-checking'By Bill Densmore
in a couple of years, when you tell a business partner the "E-check" is in the E-mail, some members of the banking industry want to be sure the payment's intermediate stops are U.S. Federal Reserve banks -- not competitors.
In a nutshell, that is the impetus behind a $10 million, three-year pilot project of the Chicago-based bank association called the Financial Services Technology Consortium (FSTC). The initiative bore fruit on June 30 with the pilot E-mail transfer of a $32,000 payment from the U.S. Department of Defense to GTE Internetworking.
In backing the electronic-check initiative, BankBoston Corp., NationsBank Corp., IBM, GTE Internetworking and several software partners set themselves on a potential collision course with the likes of Microsoft Corp., First Data Corp., CheckFree Corp., Intuit Corp. and others that are trying to make names for themselves in the bill payment/presentment world.
"E-check is the banking industry's attempt to retain control of the payment system and new revenue streams," said Avivah Litan, research director for interactive financial services at Gartner Group, Inc. in Stamford, Conn. "And that's exactly why the banks that are backing this are backing it."
COMPLICATIONS
But it isn't that simple. NationsBank and IBM are part of the Integrion Financial Network of 18 banks and Visa International Service Corp. And Integrion and CheckFree are developing a compet-ing Internet-based electronic check ser- vice. Both camps said they won't really be revving up the market until 2000 or later.
Whatever the outcome, at stake for IBM is control of about 80% of the paper check, back-shop processing market. CheckFree, Visa, Intuit and Microsoft, on the other hand, have no vested interest in perpetuating the current system.
Paper checks are the backbone of the U.S. payments industry. Of $87.5 billion in payments exchanged last year by check, credit, debit, wire and the Automated Clearing House network, a whopping 74%, or $64.7 billion, was in paper form. And paper check volume continues to grow, although at a much slower clip than plastic. For banks, the opportunity to squeeze cost out of check processing is compelling.
The electronic check is initially aimed at the business-to-business market and was designed to leverage the ubiquity of Internet connectivity. In theory, all a business will need to prepare and send electronic checks is an Internet E-mail connection; about $50 worth of hardware, including a smart card and smart-card reader; and software that either connects to its legacy accounting system or presents a browser-like forms interface to the desktop for filling in the usual check information.
To make the transaction secure, the customer and the recipient are each issued smart cards that contain unique digital identification certificates. The certificate is used to "sign" an outgoing E-mail message containing check information. The message goes to the E-mail address of the recipient, who can open it and verify the sender's digital signature. The recipient can record the payment in the usual fashion, then forward the E-mail to the bank for "deposit." The bank would then accept the deposit and E-mail the payer's bank for clearance and debiting against his corporate account.
SIGNED AND DELIVERED
In the trial, the government agency took less than five minutes to create and send the electronic check, said Frank Jaffe, director of applied technology at BankBoston and an FSTC vice president.
In principle, only latency of Internet connections might prevent the transaction from occurring in real time, Jaffe said. But architects of the electronic check deliberately designed the system to operate in "batch" mode for now so that it mirrors the risks and responsibilities of traditional check processing. For example, they want to be sure the originating payee's bank has the opportunity to bounce the check because of insufficient funds.
Banks should like electronic checks because they can eliminate human error and the need to truck or ship canceled checks around the world.
Jaffe said he sees companies that write hundreds of checks as the biggest early beneficiaries of electronic checks because they can eliminate costly paperwork.
Also, Jaffe said, an electronic check message can be sent with additional information about the purpose of the payment -- invoice numbers, explanations and the like -- unlike payment by ACH or procurement cards.
But Jaffe is careful not to tout actual figures. Estimates of the processing costs of physical checks vary from 50 cents to $3 per check. That variation makes it hard to predict how much electronic checks will save and who will save the most, he said.
Moreover, electronic checks will require maturation of the Internet's public- key infrastructure before the digital certificates it relies on can be widely used. Savings won't come quickly, he acknowledged.
"The numbers are very difficult from a credibility standpoint, in part because it is really an unknown how much the ongoing maintenance and support costs for a system like Echeck are around public-key infrastructure," he explained. "Part of the cost-savings argument revolves around whether you can reuse those systems for other purposes. We argue the banks are going to be in the business of issuing certificates anyway, so that whole management structure will be used for many things."P
Densmore is a freelance writer in Williamstown, Mass.
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