E-Signatures Become Valid

By JOHN SCHWARTZ
October 2, 2000

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Law on Electronic Signatures Is Seen as a Boon to E-Business

Customers who walk into the Charles Schwab brokerage office in Penn Plaza in Midtown Manhattan will see, tucked out of the way on brokers' desks, a small, mauve pad linked to a desktop PC that accepts electronic versions of a signature.

The system, which Schwab plans to begin using at an undisclosed date, is one of the seemingly humble ways that consumers and businesses will begin a new era in the transition from old-fashioned pen-on- paper signatures to those that can be electronically created and stored.

A bill signed by President Clinton on June 30 that granted e-signatures the same legal standing as traditional "wet" ones went into effect yesterday.

The effect, businesses pledge, is a new world of e-commerce that is faster, cheaper and less vulnerable to fraud.

"It's truly a watershed event," said Guido DiGregorio, president and chief executive of the Communication Intelligence Corporation of Redwood Shores, Calif., which developed the system for Schwab. "I can do transactions at the speed of the Internet, cut costs 50 percent - and I'm more secure than I was before."

The Electronic Signatures in Global Commerce Act did not dictate that any particular technology be used, leaving those choices to the marketplace. That means consumers can expect a proliferation of competing mechanisms for bringing signatures into the digital age, from encryption-based "digital signature" systems - essentially software that uses scrambled numbers to identify a particular person - from companies like Entrust Technologies Inc. and VeriSign Inc., to the simple signing mechanism at Schwab, which updates ancient and familiar practices.

Bryan Keene, an analyst at Prudential Securities, estimates that electronic and digital signatures will lead to 80 percent of all financial transactions being completely automated the next five years.

Unlike the electronic scribbles consumers leave on specialized devices connected to cash registers when they use credit cards, which merely confirm an earlier pen-on-paper signature used to open the account, the e-signatures stand on their own and can be used to open brokerage firm accounts, buy insurance or even buy a home.

More than 40 states had already officially recognized some form of electronic signatures before Congress passed legislation in June, but the federal imprimatur is expected to give the technologies the boost they have needed to make them part of the way consumers do business.

Typically, consumers and businesses wait days or even weeks for documents to wend their way through the process of being composed, mailed, signed and rushed back via expensive overnight delivery services. Many of those tasks and added costs can be eliminated when documents exist in electronic form from start to finish.

More than 140 documents are commonly produced as part of a house closing, said Michael H. Jordan, chairman of eOriginal Inc., a company in Baltimore that has already completed 25 mortgages electronically in Broward County, Fla., where such technology is already recognized. Mr. Jordan, the former chairman and chief executive officer of the CBS Corporation, said his company expected the federal law to greatly expand opportunities for business.

At Schwab, for customers who sign on the dotted line, the ePad will capture the image, and even data on the speed and curves of the signing, to create a record that the device's manufacturer, Interlink Electronics, and Communication Intelligence say will provide more secure verification than a conventional scrawl.

Mr. DiGregorio says the pad-based electronic signatures are only the beginning. The company has already developed software that will allow users of Palm hand-held organizers and new organizer-equipped wireless phones to turn the devices into signature pads - enabling a user, for example, to lock in a mortgage rate from home at 3 a.m., or while commuting.

The CyberSafe Corporation is developing another form of electronic signatures, one that uses a "smart card," essentially a credit card-sized device that can be embedded with a user's unique code and other data and then can be plugged into specially equipped computers to establish identity. James Cannavino, the chief executive of CyberSafe, has estimated that the current $500 that an online brokerage firm he is working with spends in processing the paperwork for a new customer can be reduced to $50 or less with electronic signatures. Mr. Cannavino, who has served as a top officer at I.B.M. and Perot Systems, told a trade show audience this week that his company was working with an airline to assemble a smart-card system that would allow frequent business flyers to pay for a ticket, establish their identity and log frequent flier mileage with the swipe of a card.

Many companies will not go that far. DLJdirect, an online brokerage firm owned by Donaldson, Lufkin & Jenrette, has long allowed new customers to open accounts entirely online, but it follows up with paper forms to be signed and returned. Now, under the new legislation, the company will need no paper version, said Michael Hogan, the company's general counsel.

Mr. Hogan said his company would not go so far as to require an encrypted digital signature, because "consumers hate it," and would not even require an electronically captured signature, which he said is "probably overkill." Instead, DLJdirect would rely on information supplied by the customer and confirmed by an outside credit reporting agency: ultimately, Mr. Hogan said, the deal will be sealed with the simple click of a mouse.

Although the new technologies have been given greater legal weight under the new federal law, consumers need not play the e-signatures game. Under the terms of the legislation, consumers have a choice as to whether to sign their contracts with a pen or a click.

"If you're not comfortable with closing a deal online, don't do it," advised Frank Torres, the legislative counsel at Consumers Union, the advocacy organization that publishes Consumer Reports. Torres urged prospective electronic signers to use common sense and to read the fine print, which in digital documents might be hidden behind several clicks of a mouse instead of in the tiny type of paper contracts.

Mr. Torres said electronic signatures could mean cost savings and convenience for consumers, but warned that questions about security and liability for fraud have yet to be worked out.