9.3 Electronic checks

Since the use of checks is widely deployed in the real world (at least in the United States), electronic checks may also provide an interesting payment scheme for e-commerce applications. A payment system for electronic checks includes the following parties:

A customer and a customer s bank;
A merchant and a merchant s bank;
A clearinghouse to process checks among different banks.

From a technical point of view, electronic checks are rather simple. An electronic check may simply consist of a document that is digitally signed with the customer s private key. The receiver (the merchant or the merchant s bank) uses the customer s public key to verify the digital signature accordingly . More specifically , an electronic check transaction is executed in three phases:

In the first phase, the customer purchases some goods or services and sends a corresponding electronic check to the merchant. The merchant, in turn , validates the check with his or her bank for proper payment authorization. If the check is valid, the merchant accomplishes the transaction with the customer (and delivers the goods or services).
In the second phase, the merchant forwards the electronic check to his or her bank for deposit. This action may take place at the discretion of the merchant.
In the third phase, the merchant s bank forwards the electronic check to the clearinghouse for cashing it. The clearinghouse, in turn, cooperates with the customer s bank, clears the check, and transfers the money to the merchant s bank, which updates the merchant s account accordingly. The customer s bank also updates the customer with the corresponding withdrawal information.

Compared with paper checks and some other real-world payment systems, electronic checks provide several advantages. For example, electronic checks can be issued without needing to fill out, mail, or deliver checks. They also save time in processing the checks. With paper checks, the merchant typically collects all the checks and collectively deposits them at the bank. With electronic checks, the merchant can instantly forward the checks to the bank and get them credited to his or her account. As such, electronic checks can greatly reduce the time from the moment a customer writes a check to the time when the merchant receives the deposit. In addition, electronic check systems can be designed in such a way that the merchant gets proper authorization from the customer s bank before accepting a check. This is very similar to the concept of a cashier s check.

In the past, the research community has formulated some electronic check systems for the Internet. Examples include NetBill developed at Carnegie Mellon University [10, 11] and NetCheque, developed at the University of Southern California [12, 13]. ^[10] More importantly, however, the Financial Services Technology Consortium (FSTC ^[11] ) has developed an eCheck system ^[12] that makes use of a financial services markup language (FSML). Most parts of the system are covered by U.S. patents that have been granted to the FSTC. ^[13] It is possible and very likely that the FSTC eCheck system will be the electronic check system of choice for all financial institutions working in this area.

You may refer to Chapter 5 of [1] for further information regarding NetBill, NetCheque, and the FSTC eCheck system.

^[10] http://www.isi.edu/gost/ info /NetCheque

^[11] The FSTC is a group of American banks, research agencies, and government organizations that have come together to assist in enhancing the competitiveness of the U.S. financial services industry. Further information about the FSTC can be found at http://www.fstc.org.

^[12] The FSTC eCheck system is described in a white paper that is electronically available at http://www.echeck.org/library/wp/ArchitectualOverview.pdf.

^[13] The relevant patents are U.S. 5677955 entitled ˜ ˜Electronic Funds Transfer Instruments, U.S. 6021202 entitled ˜ ˜Method and System for Processing Electronic Documents, and U.S. 6209095 entitled ˜ ˜Method and System for Processing Electronic Documents.