Treasury to Test Tech Consortium's E-Check System

By Marjanovic, Steven | American Banker, April 25, 1997 | Go to article overview

Treasury to Test Tech Consortium's E-Check System


Marjanovic, Steven, American Banker


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. …

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