The Treasury Department has breathed new life into the idea of an electronic check for Internet payments.
The government plans to pilot the Financial Services Technology Consortium's E-check system, which had generated limited enthusiasm despite public demonstrations of its viability.
James Hagedorn, a spokesman at the Treasury's Financial Management Service, said the test is scheduled to begin in November and would involve paying as many as 50 contractors of the Department of Defense.
Officials said the pilot would generate several hundred electronic checks a day, adding up to almost $1 million.
That would be a small fraction of the billion payments that the Financial Management Service, or FMS, disburses annually on behalf of government agencies. But for E-check it could be a strong start.
"We view this technology as potentially being the low-cost payment mechanism," said Gary Grippo, program manager of electronic money at FMS.
He said the government was attracted to the security of E-check and its ability to deliver payment and remittance details. What's more, the Internet-based system can accommodate additional volume at costs that are trivial compared to those of paper checks, in which "postage alone is a costly endeavor."
Mr. Grippo said the government approached the Financial Services Technology Consortium, which includes most of the country's top 10 banks, last year to express interest in E-check.
The government has a mandate to make virtually all its payments electronically by January 1999, and is therefore exploring various technology alternatives.
The mandate, signed into law by President Clinton a year ago, is expected to save the government as much as $500 million over five years.
Half of all federal payments are currently electronic.
Officials said the participating institutions in the E-check pilot would be Bank of Boston Corp., NationsBank Corp., Huntington Bancshares, and the Federal Reserve Bank of Boston.
The consortium, organized by Citicorp in 1993, set a goal to explore and promote leading-edge technologies that could benefit the banking industry.
In 1995 it held a public demonstration of E-check, which uses data encryption and secure electronic mail techniques for the delivery, endorsement, and settlement of on-line payments in ways analogous to paper- check procedures.
Frank Jaffe, manager of E-check at the consortium and senior systems consultant at Bank of Boston, said the government pilot will last about a year before a decision is made on extending the use of E-check.
He said a government endorsement would boost the system's commercial prospects, perhaps ultimately enlisting businesses and consumers in the campaign to whittle away at an ever-growing mountain of paper checks, now approaching 65 billion written annually.
"We believe the technical, legal, and regulatory issues are pretty much ironed out," Mr. Jaffe said.
When E-check was first demonstrated-in the purchase of a teddy bear as a gift to Vice President Gore-funds and remittance details were processed over the automated clearing house network.
The Treasury wanted instead to base its pilot on the well-understood laws and regulations that govern paper checks. Also, as a matter of policy, the Treasury does not allow direct debits to its general fund, which is how ACH transactions would work.
Late last year the Electronic Check Clearing House Organization, a Dallas-based rulemaking body for electronic presentments of paper checks, developed a set of rules to specifically support the E-check.
David Walker, managing director of Eccho, said, "We think that's a tremendous benefit because there is such a huge body of check law."
In the planned pilot, the Financial Management Service would cut an electronic check from a virtual checkbook in an electronic storage medium. The latter might be a smart card, a piece of software, or a PCMCIA card like those common on laptop computers.
The government also would attach any associated remittance detail, which could include scanned document images or electronic data interchange-EDI- messages. The government would then electronically "mail" the entire transaction directly to its contractor, using cryptography techniques.
The recipient would strip off the remittance information, electronically endorse the check, and deposit it.
The bank of deposit would electronically present the payment to the paying institution-most likely the Federal Reserve Bank of Boston-employing traditional clearing and settlement procedures.
Although government and bank officials were enthusiastic about the plan, some grumbling could already be heard from banks that provide corporate cash management services and perceive a competitive threat in the making.
Many bank officials increasingly view financial EDI, the computer-based exchange of remittance detail in standard formats, as an important add-on to their electronic payment services. The E-check pilot could cut cash management banks out of the payment chain.
"We think the ACH is the best model, because it preserves the banking industry's franchise," said William Nelson, executive vice president of the National Automated Clearing House Association, Herndon, Va.
"Cash management is an $8 billion business, and information reporting is a key part," he said.
Bank observers said other consortium members, including BankAmerica Corp., Banc One Corp., and Chase Manhattan Corp., had considered participating in the federal E-check test but opted not to.
A spokesman at BankAmerica said officials there reviewed the upcoming pilot program only to determine that E-check "does not fit into our current business plan or strategy."
Daniel Schutzer, vice president of Citicorp and president of the consortium, acknowledged the criticisms but expressed hope that the new technology would inspire creativity among bankers.
"I think most intelligent banks and cash management companies are coming to the view that this is the way the world is moving," he said. "You and I can only begin to speculate as to all the ways this could be developed."
William Randle, senior vice president of Huntington Bancshares in Columbus, Ohio, said the banking industry is in a good position to offer E- check if it proves popular among businesses and consumers.
"I think it's premature to address what I would call the business-case issues of E-check," he said, but it is "incumbent upon the banking industry to get really savvy about how fast the world is changing."