Bank Web sites are expected to adopt some form of "two-factor" authentication by the end of 2006, regulators with the Federal Financial Institutions Examination Council said in a letter to banks last week.
In two-factor authentication, customers must confirm their identities not only through something they know, like a PIN or password, but also with something they physically have, like a hardware token with numeric access codes that change every minute.
Other types of two-factor authentication include costlier hardware involving biometrics or "smart" cards that would be inserted into designated readers on a user's computer.
Banks might also issue one-time passwords on scratch-off cards or require "secret questions" about a customer's account, such as the amount of the last deposit or mortgage payment.
The council also suggested that banks explore technology that can estimate a Web user's physical location and compare it to the address on file.
The most common way of stealing consumers' personal identity data and financial account credentials online, known as phishing, typically involves sending e-mails that direct unwitting users to phony Web sites. Data harvested at such sites is then used fraudulently.
The Anti-Phishing Working group, an industry association, reported 13,776 unique types of phishing attacks in August.
While some financial institutions have given their customers electronic password tokens, those have tended to be optional. Other banks have instituted password entry through mouse clicks instead of typing, a protection against keystroke-snooping programs.
But in general, the industry can do more to stop account fraud and identity theft, according to the financial institutions council which includes the Federal Reserve; the Federal Deposit Insurance Corp.; the U.S. Comptroller; the Office of Thrift Supervision and the National Credit Union Administration.
"The agencies consider single-factor authentication, as the only control mechanism, to be inadequate for high-risk transactions involving access to customer information or the movement of information to other parties," the council wrote. "Account fraud and identity theft are frequently the result of single-factor ... authentication exploitation."
FDIC spokesman David Barr said the rules will serve as standards that will be checked when banks' practices are audited.
Although the requirements apply just to financial services companies, the policy could stimulate wider use of two-factor authentication by other merchants that are willing to "federate" their Web sites with banks, said Michael Aisenberg, director of government relations for Internet services provider VeriSign Inc.
VeriSign is a member of the Liberty Alliance, a group that is working to develop standards for federated authentication.
In a federated system, a two-factor login at one site would be recognized by another, so a travel agency associated with your bank would automatically grant you access if you came straight from the financial institution's Web site.
At the very least, Aisenberg said, "The securities industry is going to have to go along and other regulated sectors will no doubt follow along as well."
By Brian Bergstein