When former President Bill Clinton signed the Electronic Signatures in Global and National Commerce Act in April 2000, there was wide speculation that e-signatures would transform not just financial services but e-commerce as well.
Now, two years later, expectations for digital signatures, like e-commerce itself, have been significantly scaled back, and what remains is something still useful but hardly what was originally envisioned.
"While e-signatures have been slower to catch on that people expected, it's not been so slow in the securities industry. Several online broker/dealers - such as Harrisdirect, E-Trade and Charles Schwab - allow you to open an account and begin trading," said Benham Dayanim, an attorney with Paul, Hastings, Janofsky & Walker of Washington, who lobbied for the bill's passage.
However, Dayanim continued, it's been harder to translate e-signatures to the mutual fund, mortgage and insurance industries, which were expected to be leaders in their usage because of the significant amount of paperwork and signatures involved in these types of financial transactions.
I Sign, You Sign, We All Sign
There are a number of reasons why e-signatures have not exactly taken According to Dennis Behrman, an analyst at Meridien Research of Newton, Mass., the law defines an e-signature as "any sound, symbol or process logically attributed to or associated with a given transaction" - which means there is no single e-signature standard. Typically, many firms hang back until a standard proves itself in the marketplace.
In fact, only a handful of mutual fund companies permit investors to open an account electronically, including Vanguard of Malvern, Pa. [see MFMN 1/29/01]. Invesco of Denver and Quant Funds of Lincoln, Mass. were two other early adopters [see MFMN 9/6/99, 5/8/00].
Pat Nunley, VP of enterprise infrastructure at Ameritrade of Omaha, Neb., makes a clear distinction between a digital signature and digital authentication, which allows a firm to be sure the person is who he or she says they are and hasn't just stolen the PIN.
Indeed, the issue of security is a thorny one.
While firms often require customers to provide personal information as an added security measure when making a transaction, there's still the chance that information has been stolen along with the PIN number.
"Digital signatures can be forged like a physical signature," Nunley said. As a remedy, he would like to see a physical key - like a smart card - in concert with some kind of biometric input, such as a fingerprint.
Unfortunately, the current tough economic environment hurts the development of such innovative security measures since nearly all IT budgets are being squeezed.
"What's required is a more secure online environment, where institutions can really identify who they are talking to," said Jean-Paul Carbonnier, an analyst at TowerGroup in Needham, Mass. "It's a matter of time." The mutual fund and brokerage businesses are "cyclical, and there's a lot of hunkering down, especially with new technologies where cost benefits are not clear."
Even if IT budgets were dedicated to such a solution, Nunley pointed out, the maintenance and storage of such keys would be a nightmare.
This might be a case where the government needs to step in and create some kind of entity to store and maintain those keys, he said. Leaving the creation of such a clearinghouse to the private sector might delay the adoption of electronic authentication indefinitely since various business interests might not be inclined to work together.
"I think it's going to be a while," Nunley said. Added to these security concerns are those stemming directly from 9/11 and the Patriot Act, which emphasizes a firm's need to screen customers and account activity (see related story, page 1).
This is not an environment ripe for experimental security measures.
But authentication technology is not all that is needed. Trey Robinson, marketing director at CyberTrader of Austin, Texas, said it's important that customers are able to fund an account in real time with an "electronic check" when they open it.
"That will be the real key," Robinson said. "That's the piece that has to fall into place. Without the digital funding part, the benefits of digital signatures are kind of limited."
But perhaps the greatest impediment to the adoption of e-signatures - regardless of the investment in technologies that would have to occur first to make them more secure - is quite elementary.
Digital signatures do not seem all that necessary.
"Frankly, e-signatures haven't proven themselves critical components in the industry. They're not a necessity, so people are not inclined to use them," said Meridien's Behrman.
Not on the Phantom Line
And, he continued, there are many people who have no intention of ever signing a document online.
"My grandparents aren't going to call a broker and tell him to send a check somewhere. It's just not going to happen," he said.
It's no coincidence that the first fund companies to embrace e-signatures specialized in Internet funds, and that the first securities firms to do so are e-brokers. Their customers are comfortable with the medium, and are logically inclined to use e-signatures.
For a non-Web-based company "that regularly deals with customers in person or on the phone, there is no clear benefit of having e-signature capabilities," Dayanim said.
Still, for those companies that have adopted e-signatures, there are real benefits. The first advantage is the cost saving by eliminating all that paper, particularly fund prospectuses and the additional proxy information that the SEC is proposing [see MFMN 10/7/02].
Then there's the speed of setup, i.e. allowing a client to open an account immediately. This is critical since people open accounts spurred by the desire to make a specific trade that day. For fund clients, a persuasive discussion with a customer service representative might save assets from walking out the door.
Not only would a lengthy application process potentially delay a new account, a prospective client might lose interest in opening the account at all.
"We give our clients the ability to trade that day," said Maryann Wasik, managing director at Harrisdirect of Jersey City, N.J.
She notes that the money transfer system at Harrisdirect, formerly CSFBdirect, is semi-automated, requiring the client to provide the bank routing number. However, Harrisdirect will credit a new account up to $65,000 immediately.
"It makes life better for the customer," Wasik said.
She also noted that the anthrax scare of last fall led even more customers to take advantage of e-signatures. "Everything is as self-contained as possible on the Web site, so you don't have to use the mail."
Wasik said Harrisdirect had a nearly paperless process before the e-signature legislation was signed, but e-signatures ere the "next step.
Like Ameritrade, Harrisdirect authenticates clients using the Equifax credit-reporting agency of Atlanta. Equifax crosschecks information and provides a high level of certainty that the bank knows its customer.
And like Nunley, she sees biometric technology as the next important step to increasing digital security.
Looking forward, Nunley would like to have the capability to re-present documents to customers if a change has been made to the account and a signature is required. "Things come up legally, such as changing the custodian on a product. If we or they need to make changes, we'd like to re-present."
If there's a killer application to spur the widespread adoption of e-signatures in the industry, it may be the convergence of the financial services sector and the drive by those merged entities to capitalize on their economies of scale and cross-sell products.
"E-signatures can be a good cross-selling tool as broker/dealers, insurance companies and banks converge," TowerGroup's Carbonnier said.
However, in order to use e-signatures seamlessly, a firm needs four components:
"Not many firms are offering end-to-end solutions," he said.