Electronic payments are increasingly common these days, but that doesn't mean they don't come with risks for small businesses.
When it comes to payment options, e-payments are often the preferred method for both customers and business owners. Often, all it requires is a simple click and instantly, money from a customer's bank account is transferred to your business.
With new innovations like mobile credit card readers, there seems to be no stopping the e-payment trend. But along with convenience and ease, there are potential risks you should keep in mind. Here are just a few:
- State law compliance. Certain e-payment methods may violate certain state regulations that dictate how money is transmitted in business transactions. State laws regarding the use of e-payments will vary, so make sure you're in compliance in every state where you do business. For example, e-payment company Square received a cease and desist order from Illinois regulators earlier this year.
- Tax evasion. The use of electronic payment methods often disorient the flow of tax collection. Because all businesses are required by law to provide all records of their monetary transactions for the purpose of verifying tax compliance, e-payments must also be recorded. E-payments are more susceptible to tax evasion because businesses often overlook disclosing electronic payments made over the tax period. Be sure that you don't make this mistake.
- Fraud. As electronic payment systems use more sophisticated technology, sophisticated hackers and identity thieves may try to infiltrate the system to commit fraud. Smaller businesses often don't have the luxury of having a designated finance department to comb through their records to catch fraud in time. Since e-payments can be more difficult to verify, fraud is a much bigger risk.
- Fraud protection. In addition to concerns about fraud, small business owners should also be wary of the fact that banks can only go so far in protecting them from it. Under the FDIC, the definition of consumer protection states that banks are only obligated to protect natural persons (i.e., humans), which does not include companies.
These are just a few of the risks that may come with electronic payments. For answers to specific e-payment issues affecting your business, you may want to consult an experienced business lawyer near you.
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