The Financial Services Technology Consortium has proposed a technical standard that any institution could use to verify the authenticity of check images' security features.
"We were allowed to take and really reinvent how we want to detect check fraud in the future," said Rick Pickens, a senior vice president for liability risk management at Bank of America Corp.
D. Blake Prichard, an executive vice president at the Federal Reserve Bank of Philadelphia, said the idea is to let businesses verify checks the same way they do card payments. "Credit cards interoperate no matter who's using them where," he said.
Frank Jaffe, a project manager for the consortium, said several security and authentication vendors have started to implement the system. Most of the changes are made in the software that verifies the security features.
A "trivial" change must be made to the features themselves - the addition of a small identifier to make them recognizable by the system, said Mr. Jaffe, who is also the president of MorSecure in Falmouth, Maine.
Otherwise, Mr. Jaffe said, "the standard is feature-agnostic" and works with seals, barcodes, and cryptographic features. It would be employed mostly in high-volume environments such as lockbox operations to identify high-risk transactions, he said.
"Today, without the standard, the paying bank or the account-holding bank is the only bank that can verify the security feature," he said.
Once the system identifies the security feature in its catalogue, it verifies that the feature is intact.
Mr. Prichard said this means that in the future, the technology could "protect consumer checks in the course of commerce," and merchants would not lose money to checks they could not verify.
The project is now moving into the proof-of-concept stage, Mr. Jaffe said. He would not name the participants.
The development of the standard is the latest phase of a project to use technology to control check fraud.
A phase completed in 2004 catalogued a range of vendor-developed security features that could survive imaging. Last September 10 banking companies and nine vendors met to discuss the standard.
Mr. Jaffe said the consortium excluded security features that disappear when checks are scanned because "we want it to work in the Check 21 world, so image survivability is a key component of what we're looking for."
The Check Clearing for the 21st Century Act, which took effect in October 2004, allows banks to use printouts of check images in place of physical checks. These printouts, called image replacement documents, cannot reproduce the security features - such as watermarks in the paper - that are lost when checks are imaged.
Ariana-Michele Moore, an analyst at Celent Communications LLC in Boston, said "the hurdle with the emergence of check imaging is, How do you verify the authenticity of a check when at least half of the fraud features are going to be invalidated by the imaging machine?"
Though more modern crimes such as phishing and data theft have received a lot of attention, "many of the top banks out there are most concerned with check fraud," Ms. Moore said. "Anything that can help standardize the process so that banks can communicate with each other across the check system is critical," she said.
As more banks exchange check images, practices such as examining paper on which a check was printed will become less useful. The remaining features will be more effective "so long as all the systems can communicate," Ms. Moore said.
