In the name of protecting against phishing, identity theft, and other forms of fraud, federal regulators handed banks and consumers an enormous job recently. The work required will make online transactions a great deal more expensive for banks, which will no doubt pass the expense on to customers. The requirement will make online transactions far less convenient for consumers. And it'll be, at best, partially effective.

As reported in a story by my colleague Steven Marlin, the Federal Financial Institutions Examination Council is giving banks until the end of next year to implement two-factor authentication for online transactions. Right now, banks only use one-factor authentication: You go to the bank's Web site, enter in a logon and password, and you're in your account.

With two-factor authentication, you'll need something else in addition to your password to get in. Generally speaking, that something else is a hardware token, such as a smart card or a gadget the size of a key fob that generates one-time passwords. (For a photo of one of those gadgets, follow the link in the previous story.) Some banks distribute a list of one-time passwords on a scratch-off card.

Implementing support for two-factor authentication is going to be a huge expense for banks.

Moreover, for consumers, it's one more thing to worry about, remember, and eventually lose and have to go to the trouble of replacing.

But it'll be worth it if it wipes out online bank fraud, right?

One problem: It won't.

Steve's article points out that crooks will simply trick consumers into giving up their one-time passwords; this has already happened at a Scandinavian bank that implemented two-factor authentication.

For more on the pitfalls of the two-factor authentication requirement, and to leave your 2 cents, see my blog entry on this subject.

Mitch Wagner is editor of Security Pipeline and a senior editor for the TechWeb Pipelines.