All-Digital Checks Get a Boost from an ‘Outsider’ Technology Startup

The concept of an all-digital check, which surfaced in a paper published in November by the Federal Reserve Bank of Chicago, could move from theory to reality in a matter of months now that a technology startup in Atlanta has won a pair of patents covering applications of the idea. Four-year-old Global Standard Financial Inc., run by a former Microsoft Corp. executive, is testing its technology with an unnamed bank and is in talks with other financial institutions. Since the company announced its patents earlier this month, it has received inquiries from around the world, says Clark Gilder, GSF's chief executive and founder. “As many internationally as domestically,” he tells Digital Transactions News. Of the two patents, No.7539646 was actually awarded by the U.S. Patent and Trademark Office nearly a year ago, but Gilder says GSF held off on its announcement because of the unfolding banking crisis. The appearance of the Fed paper on so-called electronic payment orders (Digital Transactions News, Jan. 7), spurred Gilder to release his news. “The Fed EPO white paper made me realize banks are ready to listen to this [idea],” he says. The second patent, No. 7620603, was granted in November. GSF's opening strategy is to market the technology primarily to small businesses, Gilder says. These businesses still generate large quantities of paper checks every year. “That's the sweet spot,” he notes. “It's a natural market for a digital check.” Without getting specific about pricing, he says GSF will levy fees that will be tied to the value of the application. For online bill pay, he says, pricing will be on a par with automated clearing house costs. Pricing would be higher, however, for a solution that integrates with accounting software, such as Intuit Inc.'s widely used QuickBooks product. Nor do the company's ambitions stop with paperless checks. Gilder says it is working on applications, for example, that will apply the concept to a form of debit card for point-of-sale transactions. The card would bear a second magnetic stripe encoded with payor data, such as name and checking-account number, that would be captured by POS terminals and would allow banks to create digital checks. The advantage over conventional debit cards, Gilder argues, is that the transactions would carry more information and would return check images to consumers in their bank statements, all without the consumer having to do more than swipe a card. David Walker, president and chief executive of the Dallas-based Electronic Check Clearing House Organization and a co-author of the Fed paper, says developments such as GSF's technology advance the concept he has advocated for about a decade. “The activities of Global Standard Financial, MyEcheck [a company that lets online shoppers make purchases with electronic checks], and others provide indications of growing interest in the next step in the evolution of check payments,” he tells Digital Transactions News by e-mail. With an electronic payment order, or a digitally originated check, as Gilder calls it, a consumer can enter payment information on a PC or handset. Special software would create a check image from the data and send it to the payee, who would then deposit the image electronically with his bank. The image can then be processed under Check 21 rules. The key to the transaction is that it completely eliminates paper. Image exchange, as it has developed since the 2004 advent of Check 21, does away with paper from the point of deposit, but still derives from a paper original. “You can take that information and dynamically generate an image in a format specified by the [Check 21] standard, a form the banking industry wants to consume on the back end,” says Gilder. GSF's patents cover certain technical processes surrounding all-digital checks, including the extension of legal protections to payees and payors and the application of special encryption technology that allows for secure transactions. Gilder says he has spent much of the past four years working on both. The security technology, known as public-key infrastructure encryption, helps ensure that payors can't claim they didn't “write” the check and payees can't claim they weren't paid, he notes. Now Gilder, who spent 12 years at Microsoft before returning to Georgia in 2003, hopes banks and their trade organizations will adopt technology coming from an entity he himself calls an outsider. “I come at this from a Silicon Valley point of view,” he says. “I don't come from the banking industry. I don't have the 'we've done that for 20 years' mindset.”