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-Žand 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:
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
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.
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.
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.
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.
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
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.
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.
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
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
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