Say Good-Bye to "NSF:
Your Check is in the E-Mail
By Scott Blakeley

New E-Payment Alternatives Reduce Risk Of Bad Check

Your credit analysis concludes that a new corporate customer may be too much a credit risk and you insist on a COD sale. You authorize shipment with your delivery driver to pick up a corporate check from your customer with delivery of the goods. The goods are delivered, but when the corporate check from your customer is presented, it is returned "NSF". Your customer files bankruptcy. What could the vendor have done differently to avoid the "NSF" check? The vendor may have used a check guarantee service. The vendor may have had the sales person pick up the check from the buyer, present the check for payment, and if it clears, release the goods. The vendor could also have looked to an electronic method of check payments to speed the sale and ensure payment.

With New Payment Technology, Say Goodbye to Bad Checks?

The technological revolution, in the form of the Internet, is not only changing the way in which vendors bring their goods to market, but it is changing the way in which vendors may be paid on their sale-®and perhaps eliminating the bad check. Part of the speed of the payment revolution is recent legislation that recognize force of an electronic signature.

National Commerce Act (The E-Sign Act). The E-Sign Act makes e-signatures as legally binding as ink-and-paper signatures, and can be used in legal proceedings. An e-signature is generally defined as a form of technology, including fingerprint readers, stylus pads and encrypted "smart cards", used to verify a party's identity so as to certify contracts that are agreed to over the Internet.

Some of the payment forms available to vendors to eliminate the risk of the bad check, depending on the type of business the vendor is involved, are:

E-Checks

Electronic version of a paper check. The e-check may provide for multiple payer, endorser signatures and is governed by the Uniform Commercial Code article covering checks. The customer may chose to have a third party accept the payments in an e-lockbox or have the receipt directed to the accounts receivable department for handling. E-checks use digital signatures, hardware tokens, duplicate detection, blinded account numbers, activation and current banking practices.

Guaranteed Checks

Software companies have developed websites that allow vendors to input checking account and payment information of a debtor to guarantee payment. Other companies are producing electronic systems, which allow vendors to accept check information through the phone, e-mail, or the Internet and provide a more accurate method of getting payment and streamlining the check acceptance process. A vendor can get the number of their accounts and in the same day, through the software, a company produces a check ready for deposit, printed by its own printer and processed through the Federal Reserve System.

Electronic Bill Presentment and Payment

EBPP is a system by which customers can call up and authorize payment of their bills online, either through a direct banking link, or through a Web site. EBPP is reduced operational costs associated with a paper-based billing and remittance process. EBPP has become a popular payment method in part because the customer requires e-payment. With commercial accounts, proprietary sites may be set up.

EMoneyMail

The site provides for party-to-party payments and for companies sending rebates or refunds to their customers. Customers paying on their accounts go to www.emoneymail.com and choose whether to pay by credit card, debit card or checking account. Vendors get an e-mail that payment has been sent, click on an attachment with a link to the eMoneyMail site.

Credit Card

Vendors have embraced credit cards for payment on their commercial sales. Payment by credit card is appealing as it allows for payment prior to goods being released. However, a vendor may risk chargeback of disputed balances. The credit card company is not obligated to verify whether or not the dispute is legitimate.

The vendor may be responsible for unauthorized purchases and fraud. A vendor may accept a personal credit card for a commercial sale, however it may be an indicator that the company the person is purchasing for is in financial trouble. However, it may mean that the person wants the frequent flyer miles. Credit card transactions conducted by telephone, fax or the internet, also known as card-not-present transactions, have a higher risk of fraud.

Virtual Credit Card

Customer can use a credit card online without giving their actual credit card number. Credit card issuer has customer download software that gives a one-time credit card number for the purchase. Vendor does not get the real credit card number.

CD Credit Card

Customer puts CD Credit Card into computer's CD-ROM drive. The software company contacts customer's bank for authorization, then sends an authorization number for payment processing to the online vendor. Vendor never has customer's credit card number. The CD Credit Card needs a password to be activated, thereby reducing the risk of fraud and unauthorized use.

Digital Cash

Web version of a phone card, which is currency that is only accepted on the Internet. Retailers download software that accepts the currency and customers download. Costumers purchase it with real money and vendors receive real money in exchange.

Virtual Points

Similar to frequent flier miles where users earn virtual currency. Some companies offer users the option of "cashing in" their currency points into their checking accounts or credit cards.

Party-to-Party Payment

A way to send money through the Internet to a vendor who does not accept creditcards payments. It is similar to an escrow account. The customer sets up an account with a credit card number attached and the vendor picks up the money by visiting the Web site.

Virtual Escrow

A third party ensures that the customer receives the item and the vendor receives payment. Both parties agree to use same service before their transaction and the customer sends payment using a credit card, check or bank transfer through the service. The escrow service verifies payment and then the vendor ships.

Digital Wallets

Customer downloads software that stores their credit card number and other information. Vendor downloads the same software to receive payment. The wallet stores shipping and billing addresses as well as credit card numbers.

Bad Check Laws Still A Remedy When Don't Receive E-Payment

While a vendor welcomes electronic payment over the risk of a traditional check, some customers will not go electronic thereby creating the risk of NSF. But bad check law provides some protections to a vendor. Bad check law is governed by state law, not federal legislation. All states have bad check laws. Each state may have different statutory provisions as to whether a party may be guilty of a crime and may be subject to civil penalties. Bad check law combats the principle of deception: the buyer of goods or services deceives the vendor into believing that payment is made, and the vendor releases the goods in reliance on such representation.

Generally, a vendor is required to establish the buyer's intent to defraud and knowledge of insufficient funds for a valid claim under the bad check laws. Most statesprovide that it is prima facie evidence of insufficient funds if: (a) the check was not honored, and (b) the buyer did not pay the check after written notice of dishonor of the check. Under the bad check laws, a vendor may have claims against the buyer on a civil basis (collection of the debt) and a criminal basis.

When the check is dishonored, a vendor has a claim for breach of contract. The vendor may also have a claim for fraud and check deception. The supposed buyer of goods without the intent to pay may constitute fraud. The purported purchaser's silence on this fact may constitute fraud, if such information is not reasonably available to vendor. A vendor may sue for the amount of check that was dishonored, treble damages and up to $1,500 plus attorneys' fees and costs. A vendor should send a demand letter for payment to the buyer advising of treble damages and an opportunity to cure the bounced check within 30 days.

A buyer may have defenses to the bad check. One defense the buyer may assert is a good faith dispute defense. The basis for this defense is that the goods or services were not as promised. The rationale for the exception is that a vendor cannot coerce the buyer into paying a bill which is unjust or which the buyer, in good faith, disputes. Another defense asserted by the buyer to the bad check is the representative capacity defense, i.e., the check maker was an agent or conduit. Other defenses to the bad check are that the contract is illegal and the buyer does not have the capacity to contract.

New E-Payment Alternatives Reduce Risk Of Bad Check

With the alternative payment schemes now available for vendors to ensure payment of their commercial sales, the "NSF" check is becoming less relevant. Central to the e-credit department is accelerating the cycle to make a credit decision and payment on the sale. The various payment mechanisms accelerate the payment cycle while reducing the risk of loss.

Blakeley & Rallis LLP 6/01