Despite law, few people use e-signatures

[R. A. Hettinga]

Despite law, few people use e-signatures
By Troy Wolverton
Staff Writer, CNET News.com
April 17, 2002, 4:00 AM PT
http://news.com.com/2100-1017-884544.html
Even in the Internet age, your John Hancock still matters.

Most people are still putting pen to paper these days, despite a law signed
by former President Clinton nearly two years ago that made electronic
signatures the legal equivalent of traditional signatures.

Electronic signatures were supposed to wipe out the need for time-consuming
and costly efforts to sign certain documents. Bank loans, refinancing
paperwork and legal documents were all targeted by backers of electronic
signatures, with the idea of eliminating the need for meetings, notary
publics or overnight deliveries to validate signatures.

The technology certainly exists, but the promise of e-signatures has
fizzled in the face of security concerns, competing e-signature standards
and the fact that, when it comes to big deals, people still like to handle
paper.

"I think a lot of people, even e-savvy people, are frankly more comfortable
in document-intensive transactions having a stack of paper to look at,
review and sign with someone present," said Ian Ballon, an attorney who
focuses on Internet and e-commerce law at Manatt, Phelp & Phillips, in Palo
Alto, Calif.

Proponents of the Electronic Signatures in Global and National Commerce
Act, which took effect in November 2000, thought the reality would be
somewhat different. Under the law, a simple click of a mouse could replace
a physical signature. Supporters of the law hoped it would revolutionize
e-commerce, decreasing paperwork, speeding transactions and allowing
consumers to buy cars or get mortgages completely online.

But people can already buy books, video games and Beanie Babies online
without signing their name and without the e-signature law. Meanwhile, most
high-end purchases, such as buying a car, and many financial transactions,
such as refinancing a home, still require consumers to put ink to paper.

"By and large, the e-sign law hasn't had much of an effect," said Chris
Musto, an analyst with Gomez. "It's hard for me to point to when it will."

To be sure, e-sign has led to some changes. Last summer, Wells Fargo began
allowing students to apply for U.S. government-backed loans entirely online
using a Department of Education-issued personal identification number.
Meanwhile brokerages such as E*Trade allow customers to sign up and fund
accounts completely online and have begun delivering account statements and
updates electronically.

The limitations of e-filing taxes
The recent tax season illustrates one of the highest-profile uses--and
problems--of e-signatures so far. The Internal Revenue Service has been
accepting electronically filed tax returns since 1997, but until last year,
it required most taxpayers who e-filed to mail in a signed form. The agency
now allows taxpayers to select their own PIN to use as an e-signature, once
they've been verified by giving their date of birth and their adjusted
gross income from their previous tax return.

But e-filing has been slow to take off, despite the push from the IRS, with
about two-thirds of taxpayers still mailing in paper returns with
traditional signatures.

Not helping matters, the IRS has restricted the types of forms that
taxpayers can file electronically, and its process for verifying e-filed
returns rejects about 10 percent of them because of birth dates, Social
Security numbers or other information that doesn't match numbers stored in
often outdated IRS databases. Security is also an issue: Last year, the
General Accounting Office issued a report that highlighted numerous
security vulnerabilities on the IRS's servers.

Another reason why the e-sign bill hasn't lived up to its hype is that
while the law said electronic signatures have the same validity as those
made on paper, it didn't specify what constituted an electronic signature.

Prior to the law, a consensus was building around recognizing digital
signatures--those based on public key infrastructure (PKI)--as a legal
standard for signing documents online. PKI uses encryption keys to lock and
unlock data. But because the e-sign law didn't recognize any particular
standard for electronic signatures, it threw the standards battle back up
for grabs, some analysts say.

"What e-sign really did was blow away PKI," said John Pescatore, research
director for Internet security at Gartner. "All that legal work went away."

In the absence of a standard, many companies have been reluctant to accept
electronic signatures because the law and electronic signatures haven't
been put to a court test yet. And with few companies accepting electronic
signatures, there's been little opportunity to test their validity in the
courts.

"You get into a chicken-and-egg situation," Pescatore said.

Plus there has been little consumer demand--which isn't that surprising at
a time when many customers are still uncomfortable using their credit cards
online, let alone making major, complicated purchases or agreements.

Little legal recourse
Customers may even be at a greater risk with e-signatures than they are
with credit cards online. With a credit card, customers generally have
complete protection for online purchases and aren't liable if the card is
stolen or used without their authorization.

The same isn't true of e-signatures, which are usually secured by giving a
customer a particular PIN to get access to a "signature page" on a Web
site. If someone were to fraudulently sign up for a mortgage or purchase a
car in another person's name via an electronic signature, the person who
had been defrauded would have little legal recourse.

"If I steal your electronic signature, I can order drugs, I can sell your
house," said Margot Saunders, a managing attorney at the National Consumer
Law Center. "People have not thought through the problem of replacing a
very simple signature that has so many implicit effects with an electronic
signature."

Businesses have also hesitated to fully embrace e-signatures. Texas
Instruments, for instance, has set up an extranet for communicating with
its suppliers and distributors. Through the network, TI's partners can
place and track orders.

Although the system relies on encrypted, digital signatures to verify TI's
partners, those electronic signatures don't replace the pen-on-paper kind.
TI provides access to the system only to companies that already have
existing relationships--and paper contracts--with the electronics giant.

"From a legal agreement standpoint, e-signatures is not the mechanism we
use today," John Jordan, IT security manager for TI. "I think there's still
a lot of apprehension" about using e-signatures.

Some are hoping the government will lead the way, particularly since
Congress has ordered federal agencies to reduce paperwork and do more
transactions electronically. The mandate has several federal agencies
turning to companies such as Entrust, an online security company.

Entrust has about 40 projects going on with the federal government and
recently helped set up a digital signatures program at the U.S. Patent and
Trademark Office that allows attorneys to electronically file patent
applications, according to Daniel Burton, vice president of government
affairs at Entrust.

"I think the government has taken some positive steps," Burton said. "Could
they do more? Absolutely."

Some say it will simply take more time.

Consumers will soon be able to buy term life insurance and auto insurance
online with e-signatures, said Behnam Dayanim, an attorney with Paul,
Hastings, Jenosky & Walker, in Washington, D.C., who lobbied for the e-sign
bill. But Dayanim noted that businesses are increasingly relying on
electronic transactions to speed deals within their companies or among
their established business partners. Such transactions might not be true
e-signatures since they usually rely on paper signatures on file, but they
are a sign of progress, he said.

"When you look globally, it's had a really pervasive but subtle effect on
how people do business," Dayanim said. "There's more and more transactions
where the parties effectuate the transactions online. I think that's in
part attributable to e-sign."


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-- 
-----------------
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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