electronic signatures

By Brad Powell

Leaders at banks and credit unions that have not adopted electronic signatures are feeling the pressure.

Maybe the pressure is coming from customers and members. Remember when your neighbor said they would NEVER shop online? Now Amazon boxes arrive at least three times per week. By now bank customers and credit union members are comfortable conducting any and all sorts of business online, so they want to manage their finances via desktop, mobile phone or tablet – or all three – as well.

Or maybe the pressure is coming from their managers, who imagine the efficiencies and risk reduction that electronic signatures could produce.

Or it could be pressure from vendors who aggressively pitch their electronic signature solution – and tell you, “It’s easy.”

In response, I have two words: Slow down.

Yes, moving to electronic signatures can please customers and help your bottom line – and it’s not rocket science to install. But “easy” is the wrong word – it’s not complicated, but only if you know the landscape, pay attention to detail and make the move for the right reasons.

To help you evaluate this decision, I’ve put together a list of five things a bank or credit union must do before adopting electronic signatures. If you go forward with an e-signature solution, make sure you have covered these points before you begin.

1. Make Sure You Use Standards

The array of laws governing electronic signatures is complex. There are federal E-SIGN laws, state laws that fall under the Universal Commercial Code (UCC) and additional rules and regulations that govern electronic transactions for specific industries.

Fortunately, financial services companies can implement standards – sets of accepted guidelines and strategies – to ensure electronic signature solutions meet all regulatory requirements.

For clients who handle financial transactions, we start with Standards and Procedures for Electronic Records and Signatures (SPERS). You will always need something like SPERS -- and depending on the industry, you might need more.

If you know which standards apply to you and start there, you should not have a problem. Going without these standards, on the other hand, could get you into trouble.

2) Take Authentication Into Account

Authentication may sound complicated, but it’s an easy concept to understand: Is the person conducting the transaction who they say they are?

For low-risk electronic transactions, you don’t have to do much to authenticate identity. A mistake will not cost you much, and it’s probably not worth spending time and money on high-level authentication for these sorts of transactions.

But for a high-risk transaction like an auto loan, a mortgage or a promissory note, the risk obviously escalates. That means you need to pay much more attention to authentication. The member making the electronic transaction has to be who they say they are.

There are several ways to approach authentication for e-signatures. The gold standard is integrating authentication into your internet banking system. If your internet/mobile banking system is fully credentialed, you can rely on its authentication in your electronic signature solution.

That’s an ideal situation, because most institutions already have authentication, there’s already a process in place and you know it is reliable.

If you can’t integrate authentication, you still will need to do something significant for higher-risk transactions. For new account openings, for example, you can use third-party services such as credit reports or other services that verify identity.

The bottom line is simple, though: Measure your risk and calibrate the level of your authentication process accordingly.

3) Be Prepared to Drop to Paper

When a customer or member decides he wants to complete a transaction offline after starting it online, that’s “dropping to paper.” There are two times when it is crucial that financial institutions make this option available.

• When the document is being created. For the document to have full legal force and effect, you need to allow the customer to drop out of the process. They need to be able to opt out and say “I don’t want to do this – I want to do it on paper instead.” As with authentication, this is more important for higher-risk transactions. Without giving customers this opt-out, the entire document could be invalid.

• In the servicing stage -- selling a loan, delivering it, or simply fulfilling a request for a copy -- you may need to be able to drop to paper – and drop to paper correctly. It will require you handle access control, document identification and other aspects correctly. If you don’t and there’s a problem with the document later, you could wind up discussing the matter in court.

Many of us would like to live in a super-efficient, cost-effective world where all transactions are handled without paper. But that’s not always going to happen. The ability to drop a transaction to paper smoothly and without negative ramifications is a key step in the e-signature process.

4) Recruit an Expert

Missing one detail when moving to electronic signatures can be costly. And simply following the standards does not ensure that you’ve done everything right.

To avoid mistakes, you need someone – in house or on contract -- who knows the subject well. Beyond the technical expertise, engage an attorney or another compliance expert who can give you high degree of confidence that you have taken the proper steps. He or she will keep you from wondering “What if?”

5) Make Sure You’re Using Electronic Signatures as a Competitive Advantage

Before starting this process, ask yourself “Why are we doing it?”

Maybe your members or customers want the ease of electronic transactions. Or you have heard that a competitor has had success with a similar solution.

Those aren’t bad reasons. But a better one is knowing that a move to electronic signatures makes sense for your institution.

Search for reasons such as:

  • It will allow you to issues loans or open new accounts faster. If that happens and you add revenue, you’ll know you made a good choice.
  • It will reduce risk. If you’ve followed all the proper steps in setting up your system, each e-signature transaction will produce a signed promissory note that meets all legal requirements. That carries significant value.
  • It will reduce costs. Even considering the detail-heavy work in the setup phase, using electronic signatures is generally less expensive than handling paper documents.

In the end, you need to find reasons like these to justify the move to electronic signatures – tangible benefits for your financial institution. If you make the switch for the right reasons and carry out the process in the right way, you will not regret it.

Read Part II: 5 Mistakes Banks and Credit Unions Must Avoid When Moving to Electronic Signatures


Compliance and Your Credit Union

Does your credit union:

• Face an daunting burden of regulatory requests?
• Struggle to manage the multiple experts inside and outside your organization who must respond to exam requests?
• Use email for regulatory communication -- possibly opening yourself to legal discovery?
• Receive the same request more than once but provide a different answer each time?

If these challenges sound familiar, Axiaware's new credit union compliance software product, Redboard, could help.

Learn More About Redboard