Positive Pay: What Is It And How Does It Work?
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Summary:
Positive Pay is one of the most reliable systems to help prevent check fraud. Positive Pay compares past checks with the current checks presented for payment. Major discrepancies or errors will lead to an alert, giving a financial institution a way to prevent loss and fraud.
In the world of finance, few terms sound genuinely uplifting. One of the few that does is “Positive Pay.” You may have heard this term when discussing check fraud or even credit card fraud. But what does this term mean, and what does it have to do with fraud?
Positive Pay is a system that checks for fraudulent checks presented for payment. It’s there to prevent altered, forged, or duplicated checks from clearing. If you’ve ever paid by check, you’ve used the Positive Pay system.
Before you write your next check, it’s wise to understand how your check gets processed. This article will help you understand how this works.
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What is Positive Pay?
Positive Pay is a specialized service that is designed to help protect businesses and people against fraudulent checks. Most commercial banks are enrolled in Positive Pay and use it for a small fee.
For most business customers, Positive Pay is what will protect you against ACH fraud as well as counterfeit check creation. This is a service that is frequently offered as an add-on or as a standard feature for business accounts.
How does Positive Pay work?
Whenever a check is used to pay a party, the check will be run through Positive Pay. Positive Pay will compare the information on the check with previous data provided by the issuer. This will involve checking the check number, dollar amount, check date, and the name on the check against a list provided by the company.
If the information doesn’t seem consistent with what’s on the list, Positive Pay will flag it as potentially fraudulent. This triggers a warning that ensures that the banks do not accept the check automatically. The issuer of the check will then be contacted to confirm the check’s validity before it is cleared.
Can a bank clear a check that only has a slight error?
Positive Pay is awesome in the sense that it helps banks detect ACH fraud as well as track identity thieves. However, everyone makes mistakes, and that includes companies and banks. Sometimes, a slight error can occur.
If it’s a small issue, such as a payee name being misspelled or an issue date not being quite right, the bank can go ahead and clear the check. Banks will often only do this if they get approval from both the issuer of the payment and the recipient.
If a bank forgets to send a list of checks to Positive Pay, there’s a chance that all those checks will be rejected. Thankfully, most banks will never allow this to happen.
Pro tip — Banks don’t always succeed at stopping fraudulent checks, so there is a chance that you may at some point see a fraudulent payment charged to your account. Check your bank’s terms to find out what they do for fraud so you’ll know how to proceed if this happens. If the terms seem to place you at too much risk in cases of check fraud, consider getting a new checking account.
What happens if a company forgets to send a list to Positive Pay?
If a company forgets to send a list, Positive Pay will work under the assumption that all of the checks that should have been on that list, including any you sent out, are fraudulent. As a result, all of them will be marked as exemptions and will be blocked from processing.
From there, what happens depends on your bank’s unique policy. It’s possible that you may have to reissue and reapprove all the checks you sent out. However, you may be able to call the bank directly to sort things out.
Who is in charge of using Positive Pay?
Financial institutions that run checking accounts, such as banks and credit unions, typically have a dedicated department for this. It’s called the Cash Management Department, and the people who work there are expected to monitor their Positive Pay system for check fraud. The people in the Cash Management Department are there to work with the system.
They are there to perform security checks on all suspicious transactions, thereby reducing the risk of counterfeit checks and other liabilities that the bank could be facing. However, if you are a company, you may need to have an accountant who sends lists to the bank.
What is Reverse Positive Pay?
Reverse Positive Pay is a twist on the Positive Pay system. In this case, it’s up to the check issuer to keep an eye out for fraud rather than the financial institution. With Reverse Positive Pay, companies are expected to keep an eye on payments and monitor all of its presented checks.
If company staff spot a fraudulent check, it’s their responsibility to call the bank and tell support staff to cancel the payment. If the bank’s customer support staff does not get a phone call from the company in question, they will not seek permission to process the check. They’ll just go ahead and clear it.
Reverse Positive Pay service places responsibility for the charge incurred and other liabilities on the company. As a result, any financial problems that arise from fraud that gets by under the radar will be the company’s responsibility.
Professionals’ tip — Even if Reverse Positive Pay seems to save you money, choosing it in place of Positive Pay probably isn’t a good idea if your company issues many payments. Because Reverse Positive Pay requires a lot of work and exposes you to a lot of risk, you’re probably best off following most other companies by sticking with bank-provided fraud-prevention services like Positive Pay.
Avoid the risk of check and ACH fraud with credit?
On the subject of businesses and the risk of fraud….One intriguing possibility for minimizing the risk of check and ACH fraud is for your business to handle its payments using a business line of credit. If your company seldom issues checks and seldom authorizes direct debits from a checking account, there’s less risk that a fraud attempt will slip through undetected.
FAQ
Why is Positive Pay important?
Positive Pay is what prevents a lot of business customers and banks from having to deal with loss. It keeps bank fees low and ensures that faux checks don’t get cashed. Prior to this system, it was very difficult for banks to identify false checks and prevent check and ACH fraud.
How do you use Positive Pay?
If you are a customer of the bank, you don’t need to do anything to be a part of this system. Positive Pay is a basic part of most business banking and online banking account memberships. It’s there to keep you and your bank safe.
How do businesses use Positive Pay?
If you are a business account customer, things are going to be a bit different. While your bank should give you a tour of the system, we’re still going to explain the basics below:
Positive Pay basics for business
These are the basic steps you can expect to go through when using Positive Pay as a business.
- Your company will submit a list of the checks and ACH transactions they are going to issue to Positive Pay. This will be an electronic list. This is generally done on a daily basis.
- As you send out payments, Positive Pay works to check for counterfeit checks. Any check not on the list gets marked as an “exception item” and is included in your exception report. The bank notifies you.
- You check the exception report and determine if the check should go through. If any exception items are legitimate, such as valid checks flagged due to small errors, you can tell the bank to proceed.
Useful tip — If you are not sure whether your bank notifies companies of exceptions, the best thing you can do is call up the banker who deals with your commercial account.
Should I use Positive Pay?
Yes! It’s an easy way to prevent people who create counterfeit checks from harming your company. If you are worried about your company’s security, you are going to find this service to be one of the best money can buy.
What is Positive Pay format?
This term refers to the way that the Positive Pay system requires you to format the list. The entire system is automated, so you will have to upload your list in one of a handful of approved file formats.
These formats will include information like the check number, the issue date, the amount of money it’s for, and the name of the payee.
Formatting tip — Many forms of accounting software will have a feature that allows you to export data in approved file formats automatically. It’s worth an investment. Positive Pay also allows XLS (Excel) and CSV (comma-separated values) material.
Key takeaways
- Positive Pay checks for fraudulent checks presented for payment. It prevents altered, forged, or duplicated checks from clearing.
- Positive Pay also guards against fraudulent electronic fund transfers, aka ACH fraud.
- Positive Pay compares data from new checks and ACH transactions against prior payment data. If discrepancies are found, the transactions are flagged as possibly fraudulent.
- Flagged transactions may simply be rejected or may be cleared with account holder approval, depending on a specific bank’s procedures and the nature of the discrepancy found.
- Banks, businesses, and individuals all benefit from the protections provided by Positive Pay.
- Reverse Positive Pay is an alternative some banks allow businesses to choose. This system places responsibility for identifying and stopping fraudulent transactions on the businesses rather than the bank. Most businesses should prefer Positive Pay over Reverse Positive Pay.
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