More than a year after announcing it would test an Internet-based substitute for checks, and seven months behind its original schedule, the Treasury Department has transmitted the first two E-checks.
The demo last week went off well. A $32,000 government payment was sent to GTE Corp.'s Internetworking unit, which deposited it at BankBoston Corp. Treasury's Financial Management Service then sent a second check, its amount not disclosed, to GTE, which deposited it virtually in NationsBank Corp.
It was a long-awaited triumph for the Financial Services Technology Consortium, the coalition of major banking companies that has championed the idea of converting conventional checking practices to the Internet. But to some payment system experts, the longer-term implications are not clear.
Some wonder whether there is sufficient infrastructure to support E- checks, and others in the cash management business say they could emerge as a competitive threat.
Some knowledge is sure to be gleaned during the 12-month pilot now under way. The government will pay about 50 Defense Department contractors with E-checks. BankBoston, NationsBank, and the Federal Reserve Bank of Boston are participating, and other trials are being planned.
The current pilot is expected to involve 1,000 E-check payments worth a total of $1 million a day, said Frank Jaffe, Financial Services Technology Consortium vice president and applied technology director at BankBoston, the project coordinator.
The FSTC expects E-checks to be fully available to businesses and consumers by 2000, though Mr. Jaffe said security requirements may be too costly for the retail market.
Bankers see E-checks as a potential low-cost alternative for business and retail customers. E-checks can provide a new source of check fees for banks, which can harness part of their existing infrastructure to process them.
"It extends the functionality and reach of the existing product," said Susan M. Landry, electronic commerce director at BankBoston.
Mr. Jaffe said it is crucial that E-checks "are very similar to the paper checks businesses are issuing today. Customers receive the benefits of electronic commerce with the comfort of knowing that the E-checks they are issuing are built on existing banking infrastructures and practices."
Banks, however, would have to spend several hundred thousand dollars to set up the technology to handle the virtual checks, according to vendors. A business would need to spend several thousands for the necessary software.
"The idea is nice, but I believe full implementation will be difficult because the infrastructure has to be built to support it," said George Thomas, senior vice president of the New York Clearing House Association. "It's going to take time."
Some observers say it is unnecessary to reinvent the check-processing wheel and want to see the conventional check's ubiquity and ease of use replicated in cyberspace-a stated aim of the FSTC that may be hard to execute.
William Nelson, executive vice president of the National Automated Clearing House Association, Herndon, Va., said he supports E-check but hopes it ultimately relies on his favorite network-the ACH-for settlement.
"From a corporate perspective, we want universality," said David Smay, general credit manager and treasurer of Chevron Corp.'s domestic operations.
Mr. Smay, also chairman of the Treasury Management Association payments advisory group, said E-check can help convert midsize companies to electronic payments. Large corporations probably will continue using the ACH, he said, but smaller businesses may not be able to afford the technology.
Mr. Jaffe of BankBoston acknowledged that most banks cannot currently accommodate E-checks and will have to install a system to process them. A bank could arrange with another bank or with a third-party processor to handle the payments, said Mr. Jaffe, who views the concept as a complement to the ACH.
E-check also can allow companies to expand their electronic commerce relationships, particularly with smaller businesses, FSTC officials said.
E-checks rely on data encryption and digital signature technology to complete transactions over the Internet.
In the demonstration, Treasury sent the E-check using standard e-mail. After the receiving government contractor viewed the check and verified Treasury's digital signature for authenticity, it endorsed the payment and sent it to its bank, also by e-mail.
The bank verified both signatures and entered the E-check into the clearing and settlement system. It went to the Boston Fed to be paid. That bank debited Treasury's account and sent the credit to the contractor.
Treasury's support stems from the federal government's general interest in streamlining payments, said Financial Management Service Commissioner Richard L. Gregg.
"We have found that electronic funds transfer is the best way to deliver (vendor) payments reliably, accurately, and on time," he said. "The electronic check pilot is one of many electronic money tests Treasury is conducting to determine the viability of emerging payment technologies."
Many technology companies are involved in the pilot. International Business Machines Corp. provided the E-check server systems at BankBoston and NationsBank. Sun Microsystems Inc. created the E-check server at the Boston Fed.
Intranet Inc. developed the software for BankBoston and NationsBank to convert E-checks into the standard electronic cash letter format for presentment to the Boston Fed.
GTE Internetworking, which includes the former BBN Corp. that GTE Corp. acquired last year, developed the public key infrastructure to issue the digital certificate.
Information Resource Engineering Inc. delivered the smart cards used in endorsing checks and signing payment files. RDM Corp. provided the software to process payment instructions and issue E-checks at Treasury. Software from Certicom Corp. encrypts the electronic messages carrying the E-checks.
Credit cards have been the dominant payment choice in the initial stages of on-line commerce, but E-check supporters said their process has several advantages.
For one, the system is designed for the existing check system. Thus financial institutions and businesses do not have to invest a lot in the technology, Mr. Jaffe said. They can start with a small volume and grow with it over time.
Also, with E-checks, the parties involved in a transaction retain control of the payment and related information. They can send the E-check directly to one another, and they decide when and where to deposit it.
"It's a significant step forward in terms of creating a usable business- to-business solution that's safe to use over the Internet," Mr. Jaffe said.
