E-Signatures Wait to Make Their Mark

While now legally binding, the ability to register your John Hancock online has yet to deliver on its promise to transform Internet commerce -- particularly for small businesses

When he signed the first federal e-signature law last June, Bill Clinton hailed it as a cornerstone of online commerce. Giving digital signatures the same legal weight as the pen-and-ink variety, he said, would prove a boon to consumers and companies alike. Individuals would save time by finalizing mortgages, opening brokerage accounts, and signing insurance documents -- all with the click of a mouse or the swipe of a thumbprint. Businesses would save on fewer overnight shipments, log faster transactions, and shuffle a whole lot less documents. "Eventually," Clinton promised, "vast warehouses of paper will be replaced by servers about the size of VCRs."

In the end, the Electronic Signatures in Global & National Commerce Act, which took effect Oct. 1, will probably do all of that. For the moment, however, a number of obstacles remain.

While some of the largest financial institutions in the U.S. have already begun using or testing digital signatures, widespread adoption -- especially by small businesses -- remains at least two or three years away. Before that happens, questions of cost, complexity, and compatibility must be resolved.


  Even then, it's unlikely that e-signatures will be embraced by everyone. While the efficiency of digital signatures is expected to appeal to paper-intensive businesses such as law firms, brokerages, and real estate companies, others will need to take a harder look at whether the costs outweigh the benefits. Indeed, Keith Styles, an attorney who specializes in technology law, predicts there will be a "niche market for people who do things the old-fashioned way, who say, 'We'll send you an invoice, you mail us a check.'"

One of the first hurdles for small businesses embracing e-signatures will be simply letting their customers know what's involved. Aside from securing a buyer's permission, the law requires companies to spell out in detail whether such consent applies to just one transaction or a series of them. Moreover, companies must verify that their customers have the hardware and software to support digital signatures. And they must be ready to provide a paper copy of any digitally signed document when asked. Those requirements -- matters of record-keeping, really -- are fairly straightforward when viewed individually. "But all of them," says Styles, "require people and time -- the two things that small businesses have the least of."

A lack of high-speed Internet access may prove another stumbling block for small businesses seeking to enter the e-signing age. While entrepreneurs in urban areas continue to embrace high-speed DSL lines, their counterparts in more rural areas often have difficulty getting reliable service, says Mary Ellen Bahret, who tracks technology and health-care issues for the National Federation of Independent Business (NFIB). "You've heard of this thing called the digital divide? Well, small business is directly impacted by this," she says, noting that a 1999 survey of NFIB's 600,000 members found that 62% used the Internet, though only 41% conducted business online.


  Even for tech-savvy companies, there may be other technology barriers. While small and midsize companies will likely receive digital-signature capabilities from application-service providers, their equipment may need costly upgrades to be compatible with the new software. "This is fairly complicated stuff to deploy," warns Eric Hemmendinger, a research director with the Aberdeen Group, a consulting firm based in Boston. One factor that should help ease adoption: Architecture to support the technology behind digital signatures -- called public key infrastructure (PKI) -- has been incorporated into Microsoft's Windows 2000 operating system.

So how do digital signatures work? While PKI is complex in practice, the concept is rather simple. The first step requires an individual to register and verify his identity with a company that issues "digital certificates." The certificate can then be used to "sign" documents, a process that uses encryption to rule out tampering and subsequent alteration. Finally, the receiver electronically checks back with the issuer of the certificate to verify the sender's identity. Digital signatures also can take the form of thumbprints, retinal scans, even digital images of actual signatures like those recorded on the electronic pads now used to register credit-card charges in some stores.

In the absence of specific federal standards detailing the type of technology to be used, it's unclear which methods will dominate. The industry remains fragmented, with more than a dozen companies competing to issue digital certificates and hundreds of others working furiously to develop specific applications. It is a sign of the industry's infancy that issuers of digital certificates reported combined revenues of less than $1 billion in 2000, says Hemmendinger. That figure, however, is expected to grow by at least 30% to 40% annually over the next few years as major corporations increasingly embrace e-signatures.


  "When large companies decide it's viable and makes sense to do, and consumers are comfortable with it, they're going to drive demand," says Styles, adding that early adopters, such as large financial institutions, will push down the cost.

Ultimately, persuading consumers may prove the toughest trick of all. Groups concerned about security and privacy on the Net already have sounded alarms about the possibility of "identity theft" and fraud. While experts insist digital signatures can offer a higher level of security than signing documents the old-fashioned way, the public has yet to be convinced.

For all the unanswered questions, proponents insist digital signatures will live up to their promise of lowering costs and speeding transactions. "Over the course of time, and that may be a series of years, there won't be any other way to do business," says Doug Naidus, CEO of New York-based, which has invested $1 million building a document-management system with e-signature capabilities. "You're going to say, 'Click it to me.' " Just don't expect to click on the dotted line for another few years.

By Julie Fields in New York

Edited by Robin J. Phillips

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE