Historically, most credit departments have provided their customers with paper credit applications, to be filled out by hand and carried or sent back, by fax or mail. This has been the common approach for decades. However, with the explosion of Internet use over the last ten years and its expanded capacity for rapidly moving information, transactions that used to be accomplished with paper are fast moving to electronic forms. One example of this occurred on September 11, 2001.
The attacks that day dramatically interfered with payment systems because so many airplanes intended to transport paper checks were grounded. This delayed collection and raised the check float to $47 billion. At the same time, Internet-based payments were not affected by this dramatic act of terrorism. Recognizing this issue, Congress passed the Check Clearing for the 21st Century Act (Check 21), which allowed the digital image of a check to be processed and presented for payment on a same-day basis. This was a game-changing event. Check 21, as it’s known, eliminated the processing of original paper checks over multiple days, allowing the Federal Reserve to reduce its per-item check processing costs by over 70% in 2010. The Act also reduced the payment collection cycle, and our government estimates savings in working capital costs of $1.37 billion.
The benefits we have seen from Check 21, and other instances where electronic transactions have replaced paper ones, cause us to consider whether our clients should move to electronic credit applications. Here are a few of the potential benefits. It is possible to set up the credit application such that the person entering the information cannot skip a box. While they might still type in fraudulent information or insert a fake phone number, computers have perfect handwriting and the information in an electronic format is easier to read than someone’s handwriting. In addition, by having the applicant fill out the application online, the salesperson is not stuck in the situation of hovering over the applicant and creating an awkward moment. The witnessing aspect can be accommodated electronically, in a manner similar to the way a purchaser online obtains a license to software or music. Last, for many there are advantages to using electronic credit applications when it comes to mailing, handling, storing and retrieving the information.
Making a move to electronic credit applications raises the question of whether an electronic credit application (contract) is as enforceable as one entered into in a paper form. Electronic contracts did not first appear with the advent of the Internet. In the late 1800’s, courts were asked whether agreements formed electronically (via the telegraph) were enforceable. More recently, electronic contracts have been met with favor by the few courts that have addressed the issue. There are also federal and state statutes that lend credence to the same conclusion—that there should be no reason to disfavor electronic contracts. There are some important details to attend to, for companies using electronic credit applications, to help ensure they will be enforced. Companies need to look at where they do business and decide how to set up the form (what form of encryption to use, and how to gain consensus with the customer to do business electronically). They also need to pay attention to their individual state laws and meet all the requirements for doing business electronically. From an enforcement standpoint, there are always some judges who “go their own way,” whether we are talking about an evidentiary ruling, a contract dispute, or any other legal proceeding. The situation is no different with electronic contracts. However, the case law and statutes suggest that by following a few important steps, electronic credit applications will be enforceable—and in the long run, they’ll help save you time and money.
For more information regarding the benefits and enforceability of moving to electronic credit applications please contact Dan Reich at (262) 792-1818.