The Check Clearing for the 21st Century Act went into effect in October, and while it is generally being hailed as a positive step that allows the industry to develop technologies to digitize checks, there is no question that these emerging technologies will have to address some significant issues.
Tops on the list will be security. In 2002, the banking industry lost more than $700 million to check fraud, even with the 20 or more features on the physical check, such as watermarks, that help authenticate checks. Since most of these security features are lost once the check is digitized, effective substitute security features must be found, ones that survive the conversion from paper.
Among the toughest nuts to crack is the signature, especially given the sheer volume of checks written. To tackle this issue, John H. Harland Co. is about to launch a pilot program involving a solution that Robert Hunt, senior analyst at TowerGroup, describes as a "very exciting new technology. This will really help us." Rollout is possible by the second half of 2005.
What's especially noteworthy about the Harland technology, he says, is that while Unisys and Fiserv have solutions that focus on business checks, the Harland technology might be used for small denomination consumer checks at the point of sale. "Check fraud is one of the key issues banks want to know about," Hunt says. "Every time we get one step ahead of the crooks, they get another step ahead of us."
Geared specifically for a Check 21 environment, Harland's solution uses image processing, data encoding and encryption, digital printing and statistical validation software to allow banks and merchants to validate the authenticity of the maker's signature. The key is that the check can be securely authenticated at any time, at any place, with no on-line connection required to the paying financial institution; it's "untethered", says Scott Hansen, a vp at Harland.
Historically, the validity of the account holder's signature on a check has been difficult to verify for the vast majority of checks written. There are two reasons for this. First, due to the sheer volume of items processed, the financial institution has not had the resources to compare the signature on each check. Second, only the consumer's institution knows what the valid signature looks like.
Most banks have a set of procedures for verifying static signatures on checks, according to Ariana-Michele Moore, an analyst at Celent Communi-cations. ("Static" refers to the aesthetic characteristics of one's handwriting.) Some will spot-check them by hand, while others may use an automated signature system. Today, many of the automated solutions can take a signature off an image and compare it to an existing signature card file.
There is also dynamic signature capture. These solutions take signature fluctuation into account, explains Moore, by recording how a signature is written. The concept is that while signatures can be duplicated, it is harder to duplicate how a signature is written. The solutions record writing characteristics, such as the pressure and speed of the pen. Capturing these characteristics creates a biometric map of one's signature.
By comparison, the Harland solution intends to create an authentication that can survive in a fully digitized world and travel wherever the check goes without having to refer back to another document or institution. If Harland can accomplish this, it is no small feat. Hansen adds that another key attribute of Harland's solution is that the digitized signature cannot be "reverse engineered", which would allow a fraudster to see the original signature.
Harland has teamed with Mitek Systems, Inc., a check imaging, character recognition and signature validation technology vendor. Earlier this year, Harland acquired selected assets associated with Mitek's item processing and document imaging solutions.
