Banks introduce electronic password gadget to beat rise in internet fraud

Barclays plans to introduce hand-held devices to its 1.6 million online banking customers next year which will read the chip on the customer's bank card and then provide a unique password needed to access the account on the bank's website. Every time the customer logs on they will need to get a new password using the calculator-sized device.

Barclays is one of several banks looking to introduce new technology in a bid to stay ahead of the increasingly sophisticated internet fraudsters.

Lloyds TSB is trialling key rings that generate random passwords for accounts. Alliance and Leicester has also introduced stringent authentication technology.

Many of Barclays Bank's business customers already have access to one-time password generating devices for bank accounts.

Barnaby Davis, director of online banking at Barclays, told Computing magazine: "We want to issue the card readers to all online banking customers and not just business customers.

"We have gone for this model because it resists all known methods of fraud."

Mr Davis said: "We are aware of other organisations that are planning something similar, but we believe this will become the industry standard."

It is thought identity fraud is now costing banks so much it is in their interests to invest in the technology.

Online banking fraud doubled in the UK to 23.2 million last year, according to payments group Apacs. Banks carry much of the liability for such fraud.

And analyst firm Forresters claims 600,000 of the UK's 15 million online banking customers have stopped using the internet because of fears over identity theft.

Graham Titterington, principal analyst at commercial technology advisers Ovum, said: "Online banking now has so much momentum behind it that if they don't provide this service someone else will.

"You have to compare the cost of issuing these readers with the cost of providing manual banking services, or indeed the cost of fraud."

Lloyds TSB has developed a key ring sized random password generator for customers. The password linked to a specific account changes every 30 to 60 seconds.

A Lloyds TSB spokeswoman said: "We have introduced a sort of internet keyring that adds an extra layer of security.

"It is something we are piloting along with various other ideas. We look at all kinds of measures all the time.

"Identity theft is a very important issue and one that quite rightly concerns customers."

HSBC has been testing similar devices in Hong Kong and Brazil.

German online banking customers have been using one-off password authentication for more than 10 years.

Rebecca Fearnley of consumer watchdog Which? welcomed Barclays move to step up online security for UK customers.

She said: "Online banking is fairly secure and customers' liability if someone does use their account is pretty limited.

"If someone is using your account when you are not present you are not liable as long as you took reasonable care and didn't give out your password.

"Although this will improve security and is to be welcomed, customers will still need to keep their PIN number secure and their liability will remain the same.

"There is a lot of card-not-present fraud out there and banks and customers have to combat it.

"As more people do their banking online you hear more about internet fraud.

"It is difficult to tell how bad the problem is, but anything to make it harder for people to get your money is welcome."

Despite the advance of technology, industry experts fear it will not be long before the criminals find a way of catching up. Critics believe online criminals will only develop new methods to hack into bank customers' details.