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The Electronic Credit Department Gains Prominence: But Watch for Computer Virus

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By Doug Fox, CCE and Scott Blakeley, Esq.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP

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.

b. E-Checks

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.

f. E-Payment

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 unknown.

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 at

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