Pilot to test government digital-check transactions

The Financial Management Service the Defense Department and a consortium of banks and technology companies are preparing to test the feasibility of using electronic checks to automate transactions between the government and vendors or individuals.

The digital-check program would be the first major test of an Internet-based system by the Financial Services Technology Consortium (FSTC) a banking-industry group formed in 1993 to explore electronic commerce applications. For FMS the experiment is part of its plan to carry out a law passed last year that requires the government to make all federal payments electronically by 1999.

If it works the system could enable FMS to eliminate 15 million paper checks it now writes every year to its suppliers among other transactions. Although paper checks are only a fraction of the 851 million payments the Treasury Department makes annually they make up 84 percent of vendor transactions."We view it as filling all transaction situations - payment and collection - between consumers businesses and government " said Gary Grippo the project manager for electronic money with FMS. DOD which funded some early research into the technology plans to begin the pilot in November with about 50 small- and medium-size federal contractors which have yet to be selected.

The proposed system would not change how agencies request payments currently done electronically from FMS. But agencies FMS and check recipients would deploy new software along with secure hardware tokens that would be used to write sign and deposit digital checks.

The pilot involves using smart cards or PC Cards as a virtual "checkbook" that would keep track of all transactions and permit check writers and recipients to sign and endorse payments using digital signatures. The checks would be delivered to recipients and sent on to banks using electronic mail.

David Saffren senior development manager at Sun Microsystems Inc. who is working on the project for FSTC said the card-based security technology was chosen to address security concerns about e-mail transactions.

"The most important element of that is nonrepudiation " Saffren said. "When someone signs a check we know they're in possession of the device."

Susan Landry senior product manager for emerging payment technologies at BankBoston the Massachusetts-based bank that runs the project for FSTC said the group is interested mainly in finding out whether the public will accept the technology.

"We are not at the point of introducing a real and viable product " she said. "We have the product concept we have the underlying technical and legal framework in place but we're really at the stage of gathering market research."

If the pilot is successful Grippo said FMS would integrate the electronic-check application into its legacy systems so that it would "probably appear seamless to agencies." Agencies would have to deploy the software on their end as well but the change would be all but invisible to the end user.

Electronic-check recipients would need to purchase an Internet connection and have card readers installed on their computers Grippo said. They would obtain their software and their hardware tokens from their banks. Saffren said Sun is also developing a version of the system software in the Java programming language so users could obtain the application over the Internet when they make their transactions rather than having to maintain it on their own computers.

A DOD official involved with the project said she was not authorized to comment on it. BankBoston's Landry said DOD was chosen for the pilot mainly because it does business with many vendors to which Treasury wants to market the technology.

Grippo said the government envisions electronic checks that eventually would be used whenever other digital transactions such as direct deposit or electronic benefits transfer would not be appropriate. He said that although FMS has not specifically estimated how much it might save with digital checks "the marginal cost of issuing an electronic check is next to nothing it's the cost of creating and issuing a secure e-mail."