Despite law, few people use e-signatures

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 a legal equivalent.

6 min read
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."