Banks are evaluating ways to verify a check's authenticity after it is converted to an image, but one issue they are facing is interoperability.
With image exchange networks becoming common, receiving banks are hoping to send check images to paying banks for authorization before they are sent for payment.
A few banks are already using things such as bar codes or special graphics to verify a check's payee or amount, but those features are useful only to the paying bank, and only when it receives the check or an image back. Other security features commonly used to ensure that a check is legitimate, such as watermarks or erasable inks, will not work if the paying bank has access only to an image.
Ten banking companies and nine technology vendors and federal agencies met last week at the Federal Reserve Bank of Philadelphia to discuss developing an image-based check-verification system that could be used in the back office, at a branch, at a lockbox, or by merchants to convert checks into images and validate them immediately.
In theory, this process could eventually happen while the customer is still at a teller window or the point of sale and could prevent falsified checks from entering the payment stream.
"I believe this is a landmark project," said Shirley W. Inscoe, a senior vice president in the loss management unit of Wachovia Corp., who participated in the meeting. "This is vital to the success of image exchange."
D. Blake Prichard, an executive vice president and the head of retail payments, customer service, and business development at the Philadelphia Fed, said an early version of the system could be in place by the start of next year.
The meeting was coordinated by the Financial Services Technology Consortium, an industry-backed research organization in New York. It sponsored a study, completed last year, that identified several security features that would survive the imaging process.
The FSTC study on "image-survivable security features" found 50 such products on the market. Many of them were not practical for widespread use, the group said in a report. Some worked only on gray-scale images, rather than the black-and-white ones that have become the industry's de facto standard; other features worked only on high-resolution images or low-speed processing equipment.
However, the study found five products that would work more than 90% of the time on a variety of equipment and conditions. Though the report did not name the products, it said they all used one of three basic approaches: bar codes, proprietary symbols, or design features of the check's typefaces, background patterns, and borders.
Mr. Prichard said the Federal Reserve System is already using a special graphic to encode the check numbers, account numbers, amounts, payees' names, and other details on 90% of the 250 million checks it issues each year. When the checks are returned for payment, the encoded data is checked, and if the system finds alterations, "we bounce those back to the bank of first deposit."
The new system would be designed to find ways "to interoperate with other banks and with merchants who may accept checks," he said.
The Fed has no plans to impose any type of security standards, Mr. Prichard said. Instead, it wants be a customer of the security technology market and encourage it to mature, so prices will stay competitive while products continue to improve.
"We want to be there as a participant, to be sure this market develops," he said.
Because there are no industry standards, a bank that depends on bar codes, for example, to verify a check's payee or amount may not be able to verify a check issued by a bank that embeds the data in a proprietary graphic.
Frank Jaffe, a participant in the meeting and the president of the Falmouth, Maine, technology security management firm MorSecure, said an interoperable system would let one institution query another, even if they do not use the same technology, or even if one does not know what the other is using.
"There are a lot of ways you can do it." Mr. Jaffe said. "Our goal is to make it so that new features would plug into it."
Diana Knox, a vice president in Wachovia's strategic business initiatives unit, compared the image-security market to the automated teller machine market of the past.
"Just like the banks didn't choose all the same ATM vendors or the same software programs, they will not choose the same security features," said Ms. Knox, who also participated in last week's meeting. "I want to be able to rely on the security features that are selected by other financial institutions in the same way that they can rely on mine."
Wachovia has not chosen an image-security system, she said. "We don't want to make a decision that will lock us into a technology that will not be valuable to us in the future."
Mr. Prichard said the slow adoption of image exchange will "give all the more impetus to close the loop" on developing the new system.
"This is a practical necessity," he said. "Traditional check fraud protections can no longer be comprehensively relied on by a paying bank. There will be a new hazard out there if this new protection doesn't come along."
