KPMG Analysis: E-Sign: A New Technology For Consumers, A New Business For Banks

By Bruce Shenitz, Senior Editor, Banking Insider

The Electronic Signatures in Global and National Commerce Act, nicknamed e-Sign, went
into effect Oct. 1, ushering in an opportunity for banks, which can parlay their reputations as “trusted
servants” into big business by providing e-signature technology and verification. But that’s if they
can overcome wary customers, legal hurdles and competitive threats from other financial services companies.

“The digital signature law allows the bank to really [become]
the trusted agent within e-commerce,” says Steve Schutze, director of eStrategies for the American
Bankers Association. “The term that’s used is ‘the banks own the last mile of the authentication
business.'” Will State Legal Hassles Stymie E-signatures?

When President Bill Clinton signed the e-signatures law earlier this year, many assumed
it would be the final word on the topic. Not so. Many states had already drafted or passed e-signature
legislation; Utah was first in 1997. While the e-Sign bill sets limits on states’ power, there is a
possibility of conflict between state and federal laws.

“There are tons of regulations and rules published over hundreds of years that
[mandate] when an authentic signature is required,” says Jeff Irby, director of electronic commerce
for KPMG Consulting’s Financial Services practice. “It’s [only been] in the last 10 years or so that
courts will accept a faxed original. It’s not surprising that states are not going to just sign up for
[e-signatures] without thinking through the ramifications.”

At one end, some lawyers believe it’s possible that state governments could sue the
federal government on the grounds that e-Sign exceeds federal powers granted in the Constitution to regulate
interstate commerce. While Timothy Keehan, a banking law partner in Mayer, Brown & Platts Washington,
D.C. office, says such challenges are unlikely to “pass muster,” he says that “states may
attack the law indirectly. . . by taking some of the provisions in [the law] and maybe add[ing] additional

Another legal tangle is liability: who bears responsibility for an e-signature transaction
that is incorrect or fraudulent? Federal law doesn’t mention liability, notes Keehan, meaning it is
“something the state can take and run with.” Consumer advocacy groups have expressed concern
over liability, Keehan notes, and state governments may react by placing liability on companies rather
than consumers, or by limiting consumer liability.

Of course, issues of security, liability and consumer protection are not new. Professor
Eben Moglen of Columbia University Law School points out that “every kind of benefit for the consumer
is still possible” in a world of e-signatures and digital certificates. Attempts to limit the adoption
of electronic signatures in the name of consumer protection are misguided, he believes. “It’s dumb to
think you can protect consumers by saying, ‘You didn’t use a ballpoint pen.'”
Bruce Shenitz

Simply put, an electronic signature is a digital code that verifies a person’s identity.
But e-signatures can come in different varieties. They include digital certificates, which reside on a computer’s
hard drive and use data encryption to insure that the signer is really the person they claim to be. Biometrics
is another well-known e-signature possibility, using electronic fingerprints, voiceprints, eye scans and
other methods to verify a customer’s identity.

E-signatures hold great promise for the financial services industry in particular. First,
there are major cost savings. According to Bryan Keane, senior eFinance analyst at Prudential Securities
in San Francisco, brokerages could save up to $10 of the cost of opening an account. E-signatures may also
increase the likelihood that a customer will actually complete a transaction. Currently, many transactions
started online must be completed offline. For example, while a customer can open a brokerage account online,
the final step involves mailing in a signed printout of the application. “If you can streamline by getting
them to sign on the [electronic] dotted line, you can close the customer, so business goes up as a
result,” Keane says.

Terry Ransford, Senior Vice-President and Director of e-commerce at Chicago-based Northern Trust,
doesn’t think that e-signatures will mean more transactions. But he does agree that electronic signatures will,
at the least, be more efficient.

“I don’t know that [e-signatures] increase the velocity of e-transactions as much as
they make them more efficient,” he says.

Banks must first overcome consumer reticence over using such methods. “We have to get
our customers comfortable with the trust in the digital signatures and certificates,” Schutze says.
Despite the fact they’ve been in use for some time, digital certificates have yet to catch on. Consumers
are wary of biometrics, which entails physical scanning.

During a hearing of the House Banking subcommittee on monetary policy in September, experts
urged the committee to take actions to raise the general level of confidence in e-commerce. “Regulators
should seek to clarify the law and create greater predictability regarding the application of financial
services laws to new financial products,” Thomas P. Vartanian, an electronic commerce law expert at
Fried, Frank, Harris, Shriver & Jacobson told the committee.

And other financial services companies may not be so eager to surrender the “last
mile” that Schutze talks about. Ameritrade recently announced it would become the first online brokerage
to offer digital certificates to a broad range of customers. Banking industry advocates, of course, insist
that no one can perform this role as well as banks, as they ultimately have to provide bank account
and credit card verification.

“The bank’s role has traditionally been to foster trade, to make it easier to buy and
sell things, and to facilitate payment,” says Ransford. The growth of the potentially huge B2B
e-commerce market, he says, has highlighted the need to facilitate e-payment systems. “The banks that
grasp that [fact] the quickest will have a leg up on competitors.”

For all their promise, electronic signatures are far from a finished product. Banks will
have to virtually “re-engineer some of the bank applications,” in order to utilize digital
signatures, Shutze says. Since some current applications require that employees look at a transaction
offline and process it manually, “banks will need to make these applications happen
automatically,” he adds.

In addition, not all proprietary systems are interoperable, which presents a barrier to the
smooth operation of the enhanced e-commerce marketplace. But with e-sign as a foundation, and some time to
work out the remaining legal and technical issues, signing a document with a pen may eventually go the way
of carbon paper and slide rules and provide big revenues for banks.

Article reprinted from the Banking Insider, Copyright © 2000 KPMG LLP.
Reprinted with permission of KPMG LLP. All Rights Reserved.

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