Chemical Bank and First National Bank of Boston said that within two months they will demonstrate an "electronic check" that could become widely available for payments between computer users on the Internet.
Modeled after the familiar paper check and utilizing an existing method of settlement, the electronic transaction would be one of the first fruits of the Financial Services Technology Consortium, which Citicorp organized almost two years ago to encourage explorations of leading-edge technologies.
The consortium officially embarked on its electronic check project in early June and is moving rapidly toward a public demonstration by October, officials of the two pioneering banks said.
Participating in the electronic check group, along with the principal subsidiaries of Chemical Banking Corp. and Bank of Boston Corp., are Bank of America, Bank of Montreal, Citibank, Wells Fargo Bank, and Bank One of Columbus, Ohio .
They are relying for technology support on a wide range of vendors and consultants, including International Business Machines, National Semiconductor, Sun Microsystems, Bellcore, and the Oak Ridge and Sandia national laboratories.
They also have as advisory members the Electronic Check Clearing House Organization and the National Automated Clearing House Association, two groups intent on automating if not eliminating large portions of the check processing infrastructure.
"This project directly addresses the problem of 60 billion checks that our industry has to process," said John Doggett, director of applied technology at Bank of Boston and the technology consortium's electronic check project director.
The electronic check "is one of the first such mechanisms - if not the first - that is supported by such a large number of banks and technology companies," Mr. Doggett said as the consortium went public with its plan this week.
The concept differs from electronic check presentment, which some banks use to process payments electronically before the paper checks are actually delivered. And because the electronic check involves no paper document, the idea of check truncation - the holding of the paper item at a point of payment or deposit - does not come into play.
The Financial Services Technology Consortium has a separate project, interbank check image exchange, that addresses presentment and truncation opportunities.
The electronic check has more in common with some of the payment systems created for the World Wide Web of the Internet by companies such as Cybercash Inc. and First Virtual Holdings Inc., which are associate members of the bank-run technology consortium.
Though the fledgling payment mechanisms handle "digital cash" or provide for secure transmissions of credit card data between buyers and sellers, the consortium's plan is to replicate the check, albeit with similar security techniques.
"We didn't necessarily have to go this way, but 'electronic checkbook' and 'electronic check' are models that people understand," Mr. Doggett said.
The checks will be created on computer screens and be sent through cyberspace. The "checkbooks" will be the standard PCMCIA (Personal Computer Memory Card International Association) cards, which are highly portable and common in laptop computers.
With expected advances in integrated circuit memories, electronic checkbooks could someday be incorporated in the plastic smart cards that banks and card associations are beginning to adopt, Mr. Doggett said.
For their test, Chemical and Bank of Boston plan to exchange live payments over the Internet, using available Web browser technology enhanced with cryptography and digital signature techniques for a highly reliable level of security and authentication.
Like Cybercash and other innovators, the banks are taking on the challenge of a network easily accessible to millions of personal computers and known to be vulnerable to fraud.
"We built our system to travel over the roughest - meaning the least secure - road, the Internet," Mr. Doggett said.
"People can potentially look at (a transmitted check), but they can't alter it" without the tampering being detected, said Adam Backenroth, a Chemical Bank vice president.
Once a transaction was complete, interbank accounts would be settled using the automated clearing house TRX format, which was designed for truncation of low-value rebate checks.
The ACH was viewed as a convenient and available settlement system, and consumers may feel right at home with the day or two of float inherent in it. But the "open architecture" of the electronic check will allow it to use other funds transfer systems, Mr. Backenroth said.
Though the technology generates its initial excitement, some minds are turning to the fact that the electronic check falls between some regulatory cracks.
Thomas Greco, associate general counsel of the American Bankers Association, a consortium advisory member, said the transactions "by default" will more often than not fall under Regulation E, the consumer protection rules for electronic funds transfers.
But he said several gray areas must be resolved, as the electronic check straddles the differently regulated realms of checks, wire transfers, and consumer-intiated electronic payments.
Robert Ballen, an attorney with Schwartz & Ballen and counsel to the Electronic Check Clearing House Organization, said, "We are really just starting to look at the interplay between the product and the applicable legal issues. Reg E is the first stop.
"It's an open question as to the extent, if any, the paper-based check laws apply to this product."
