Say Goodbye to "NSF"
Your Check is in the E-mail
By Bradley D. 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-Æand 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
Bradley D. Blakeley Esq.
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Bradley D. Blakeley is a principal of Blakeley & Rallis LLP, Southern
California, where they practice creditors' rights and bankruptcy
law.
Brad Blakeley earned his bachelors degree from Loyola University,
Los Angeles, California, and his law degree from Santa Barbara College
of Law (J.D.). Practice Areas: commercial law and bankruptcy litigation.
Bradley has published dozens of articles in the area of creditors'
rights, commercial law and bankruptcy in The
Trade Vendor Quarterly. E-mail: bblakeley@vendorlaw.com
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