Defense and Treasury run e-check pilot

The Treasury and Defense departments have launched a one-year, $1 million-a-day pilot
to test a new medium of financial exchange: the electronic check.

On June 30, Treasury’s Financial Management Service cut its first electronic
check, for $32,153, to GTE Internetworking of Cambridge, Mass. The check was
electronically delivered, endorsed and deposited within minutes in the company’s
BankBoston and NationsBank accounts.

The trial is part of FMS’ initiative to automate the nearly 500 million paper
checks it issues each year, said Gary Grippo, program manager for Treasury’s
electronic money program.

The electronic check is the brainchild of the Financial Services Technology Consortium,
a nonprofit group of banks, technology providers, research laboratories, universities and
government agencies. The e-check mimics a paper check but is digitally signed and
delivered by e-mail.

The consortium hopes e-checks will become as ubiquitous as paper checks. They are
one-to-one maps of their paper cousins but need no value-added network and no business
process re-engineering by payer, payee or bank.

“The only thing we did was unplug the printer and substitute an e-check-writing
server,” Grippo said.

But careful groundwork that began last October is the reason for the successful
kickoff, Grippo said.

“We have been in innumerable rounds of testing,” he said.

“A lot of things have to work,” said Chuck Wade, principal electronic
commerce consultant for GTE Internetworking. “There are a million places where it can
go wrong.”

The consortium started work three years ago on the e-check’s Financial Services
Markup Language, which is set for publication next month so that developers can write
applications.

An e-check that piggybacked on existing financial systems was attractive, Grippo said,
because paper checks are the most common and widely accepted payment form.

FMS expects to make about 1 billion payments this year, half by paper check, and it is
under pressure from the administration to replace the checks with some form of electronic
payment by 2001.

When FMS cut the first e-check, the process worked like this: GTE Internetworking
submitted a paper invoice to the Defense Finance and Accounting Service in Columbus, Ohio,
for a $647 million Air Force contract.

DFAS prepared a payment instruction file as usual, and the file went to a secure PC
with a dual log-in control.

A security officer and a disbursing officer each had to sign the file digitally, using
a certificate of authority issued by Treasury and GTE’s CyberTrust SafeKeyper signing
engine.

The signed payment instruction file then was e-mailed by a SafeNet encryption modem
from Information Resource Engineering Inc. of Baltimore.

“In effect, we had a virtual private network between DFAS and Treasury,”
Grippo said.

A Treasury server verified the digital signatures and performed a data integrity check.
A Treasury clerk then downloaded the payment instruction file to a disk and physically
walked to the electronic check writer server.

That step represented what Grippo called an air gap for extra security. The server
wrote a digital check to the payee, and the check was digitally signed using a Treasury
certificate and the SafeKeyper signature box.

The Treasury clerk then carried a disk storing the e-check to a mail server. Before
Treasury could release the check, the department had to transmit an item-issued file to
the Federal Reserve Bank of Boston, which clears Treasury checks.

The electronic check, encrypted via the federal Data Encryption Standard and
elliptic-curve public-key cryptography, then went by e-mail to GTE.

At GTE, the e-mail arrived at a PC running software from RDM Corp. of Waterloo,
Ontario, which decrypted the message and verified the digital signatures. It put the
e-check into a check register and displayed the payment advice on the monitor.

The payment advice could have traveled either in hard copy or electronically to a
payee’s financial system.

A GTE official endorsed the check with a digital signature, then sent it in encrypted
e-mail to BankBoston, where it was received by an IBM Corp. gateway server that passed it
on to the bank’s IBM check-processing system. From that point, the bank system could
not distinguish between the e-check and a paper check, Wade said.

After bank processing, the check again went electronically to the paying bank—in
this case, the Federal Reserve Bank of Boston. There the bank checked it overnight against
the item-issued files received from Treasury and then released the funds.

The process was essentially the same as for a paper check, except that nothing had to
be printed, mailed, opened or manually registered. Elapsed time from e-mailing the
e-check until funds are available will average a little more than 15 hours, including
about 30 minutes of actual processing work, according to the consortium.