The U.S. mail service has been interrupted and used as a vehicle
for bioterrorism. The postal service is requesting a federal bailout
because of a downturn in demand as a result of terrorist attacks.
Likewise, the airlines were grounded after Sept. 11 which meant customer
payments were delayed.
Given the uncertainty surrounding federal mail service and risk of bioterrorism
being transmitted by the mail, credit departments may embrace electronic technology
to document the credit sale. While electronic commerce may increase as a result
of terrorist acts and the threat of new acts, vendors must be vigilant that
e-communications can be a target. Thus, encrypting e-communications can be
important to protect against hackers.
1. Documenting the Electronic Credit Sale
Federal and state laws now generally recognize that e-contracts have the same
force as ink and paper counterparts.
a. The Statute of Frauds and the EContract
Article 2 of the Uniform Commercial Code governs the rights and remedies of
a buyer and seller with the sale of commercial goods. Article 2 provides that
with the sale of goods over $500, there must be a signed writing. A signature
certifies the writing for the sale of goods. With the traditional sale of goods
over $500, the credit professional memorializes the sale agreement with a signed
credit application and signed invoices. Thus, the e-mail is an electronically
created contract and, thus, must be afforded the same respect as that afforded
to a paper contract.
b. The E-Signature Law
The Electronic Signatures in Global and National Commerce Act (The E-Sign Act),
a federal law, went into effect November, 2000. 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. Thus, the
example of the credit professional receiving an e-signature attached to an
e-P.O. is enforceable under the E-Sign Act.
The effect of the E-Sign Act is a uniform and nationwide legal recognition
that a vendor may engage in e-credit transactions across state lines and the
e-contract is valid with all states. Some of the relevant provisions of The
E-Sign Act for the credit professional are: (1) parties to the contract decide
on the form of digital signature technology to validate the contract; (2) Businesses
may use e-signatures on checks; (3) Businesses must require parties to the
contract to make at least two clicks of a computer mouse to complete a deal;
(4) The consumer decides whether to use an esignature or handwritten signature;
(5) Records of e-contracts may be stored electronically.
c. Verifying the E-Signature
A key question for the credit professional considering using e-signatures on
contracts and checks, however, is having a reliable way to certify an e-contract,
or authenticate an e-signature, to reduce the risk of fraud, or claims of unauthorized
use of an esignature. Technology to verify a person's identity, so-called digital
identification devices, is solving these concerns.
2. E-Mail Increases
A highlight of the significance of e-mail is when the World Trade Center was
struck, and phone service was unavailable for many in Manhattan, e-mail and
instant messaging was the only way to communicate. Email communications with
the customer, employer, employees and credit colleagues will continue to grow
in light of the terrorist acts and threat of acts. For example, use of e-mail
for assisting in the credit process, such as gathering credit information,
including credit reports, for decision-making; alerting credit association
members of problem accounts; communicate with credit peers; communicate with
customers, including sending files across computer networks; and the dunning
e-mail and collection efforts with the delinquent account.
However, the credit professional should consider making a hard copy of e-mails
to protect against disruption of the e-mail service. The hard copy will provide
a back up that may be faxed to a customer or others.
3. E-Payments Reduce Risk of Delay and Non-Payment
The aftermath of Sept. 11 is forcing credit professionals to reconsider the
way customers pay, encouraging e-payment alternatives to eliminate the threat
of delay of payment. This technology may be an important tool for credit professionals
to manage cash flow in this new environment. Part of the of the e-payment revolution
is recent legislation that recognizes the force of an electronic signature.
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:
a. 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 paperbased 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.
Electronic version of a paper check. The echeck may provide for multiple payers,
endorser signatures and is governed by the Uniform Commercial Code article
covering checks. The customer may choose 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.
c. 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.
d. Credit Card
Vendors have embraced customers using credit cards to pay for their commercial
sales. The U.S. mail service has been used as a vehicle for bioterrorism resulting
in delays with mail service. The credit card industry, however, claims that
the Sept. 11 events did not create serious disruption to merchants, other than
a drop off in transaction volume.
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.
e. 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.
Alternatives Reduce Risk of Delay Central to the credit department is accelerating
the cycle to make a credit decision and reduce delay of payment on the sale
in today's environment. The various e-payment mechanisms may achieve this and
reduce delay of payment in today's environment.
4. Computer Virus Risks
As noted, there are several reasons for the credit department to go electronic
in today's environment. However, terrorism can take many forms, including attacks
on computer systems. Although it is uncertain how terrorists may attack the
Internet, and what it may take to shut down the Internet, it has been show
that computer viruses can take down operating systems. The credit professional
should consider encryption and back up electronic files to protect credit information.
5. Cyber Attacks and Disaster Recovery Planning
In the aftermath of Sept. 11, companies which were located in the World Trade
Towers lost everything. Fortunately, many companies responded with disaster
recovery plans developed, in many cases, in preparation for the Y2K phenomena.
Most, if not all, computer systems had critical data backed up and stored at
remote sites. However, it is quite clear that extensive amounts of paper-based
documentation was destroyed forever; with legal and financial consequences
Vendors should develop redundant procedures ensuring that originals of key
agreements are stored at remote sites. Contingency plans need to be developed
so that the company's operations can continue; even after a catastrophic event.
Company IT professionals should re-scrutinize their firewall defenses against
viruses and hacking. Established security measures should be re-evaluated due
to the increased perception of risk of attack.
Douglas G Fox, GSCFM, CCE is a member of Mid-Atlantic NACM
and is active in the Greater Delaware Valley Region and Philadelphia area.
Scott E. Blakeley is a principal of Blakeley & Blakeley LLP
where he practices creditors' rights and bankruptcy law. He can be reached