Two banks and the U.S. Department of the Treasury, along with several technology providers, tomorrow will announce a pilot project that uses electronic checks to pay contractors to the Department of Defense.
The Echeck trial, due to launch by year's end, culminates two-plus years of work in the Financial Services Technology Consortium (FSTC), an industry group comprised of financial institutions, technology providers, research groups, and government agencies. FSTC, which has developed a protocol for e-checks, is managing the trial.
BankBoston (BKB) will be the first commercial bank in the Echeck pilot. Using IBM (IBM) software, BankBoston plans to deposit electronic checks into existing checking accounts and clear them electronically through the Federal Reserve Bank. NationsBank plans to join the pilot next spring.
The system will use smart cards--essentially credit cards with a chip on them--for security purposes. Set to run for a year, the market trial hopes to handle 1,000 electronic checks per day when it is fully operational, said Frank Jaffe, BankBoston's project director for the Echeck trial.
"FSTC started the project on e-checks to see if it is technically feasible and viable to create electronic checks," Jaffe said. "New technologies like digital certificates and public key cryptography for the first time give us the capability to create electronic checks."
After more than two years creating a protocol and working on banking infrastructure issues, the organization is ready to see whether its system satisfies customers.
"Some preliminary market research shows a high level of interest, but we want to do real-life tests to understand customer reaction," Jaffe said. In this trial, e-checks will be issued to defense contractors that have recurring business with the Defense Department and also have accounts with BankBoston or, later, NationsBank.
The new e-check system is bank-centric, allowing a new form of online payments to plug into the existing financial system, and that approach has drawn some criticism.
"FSTC has created a solution that matches the complexity of the offline world," said Scott Smith, an e-commerce analyst with Current Analysis. "They've been messing with that project for ages. Their attitude seems to be: Don't do the simple thing, do the thing that protects our investment."
"The project has been running for little over two years, and to a lot of people that seems unbelievably slow," Jaffe responded. "To most banks, that seems unbelievably fast."
Several other e-check systems are in place, including offerings from CyberCash and CheckFree, although those systems sometimes involve the vendor writing paper checks to pay a bill, or generally don't have much flexibility.
IBM's e-check server, developed with Agorics, accepts electronic checks via email over the Internet. It allows e-checks to be processed through the bank's existing systems. The software, not yet available commercially, will be integrated into IBM's CommercePoint family of e-commerce offerings.