US federal regulators want banks to adopt two-factor authentication as a means to combat the growing problem of online account fraud. Bank Web sites are expected to introduce systems that move beyond basic password access to accounts by the end of 2006, according to guidance issued by the Federal Financial Institutions Examination Council (FFIEC), AP reports.

"The (FFIEC) 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 funds to other parties. Account fraud and identity theft are frequently the result of single-factor (eg ID/password) authentication exploitation," FFIEC said in a report (PDF) on Authentication in an Internet Banking Environment.

"Where risk assessments indicate that the use of single-factor authentication is inadequate, financial institutions should implement multifactor authentication, layered security, or other controls reasonably calculated to mitigate those risks," it added.

Two-factor authentication involves the use of password-generating device along with the funny list of codes you have on a Post-It note. That means a thief must know more than just a password to gain access to a user's account. Banks in the Netherlands and Scandinavia have been using the technology for years and it's generally credited with helping to make account fraud more difficult. However, security experts have pointed to man in the middle-style attacks that undermine the extra security layer offered by two-factor authentication; so although the technology helps guard against fraud, it would be rash to view it as a "silver bullet" solution. ®