Glossary

What is Positive Pay?

Positive pay is a cash-management service that serves as an automated means of detecting check fraud. It’s implemented by banks and offered to businesses as a service in order to help detect and safeguard against fraudulent checks and transactions.

Banks use positive pay to match the checks issued by a company against the ones that the same company brings to the bank for payment. An automated system determines whether there is anything suspect about the check. If so, it’s sent to the issuer to be examined and verified.

This process is designed to ensure that fraudulent checks aren’t processed by the bank, avoiding unnecessary losses and liabilities for businesses that bank with them.

Generally, banks will charge a fee for businesses that use positive pay— though some will offer it as a free service to entice new clients.

How Positive Pay Works

When a company or individual signs up for positive pay at their bank or financial institution, the first step is to present the bank with a list of approved check information. This list is often issued on a daily basis, accounting for any checks issued by the company in the previous 24 hour period.

Whenever a check is presented to the bank for payment, the automated Positive Pay system compares the check number, dollar amount, and account number of the check with the list provided by the business. If they don’t match up, the bank will refuse to clear the check and send its information to the company for verification. If the company verifies the check, usually due to the flagged inconsistency being an obvious minor mistake, the check will be cleared.

If a company fails to send an approved list of checks to the bank for a given day, the bank will often decline all checks presented on that day until they can be verified by the company.

What is Reverse Positive Pay?

In addition to traditional Positive Pay verification, there’s also the concept of reverse positive pay. In this case, businesses and other check issuers monitor their own checks. Each day, the bank notifies the company of any checks that have been presented, and then the company clears the checks after they’ve been verified against their own records.

In some cases, there’s a short period after which a bank— if it hasn’t heard back from the company that they should decline a check— will cash the check.

While this system has its downsides— it’s not as reliable as traditional positive pay— many companies opt for it because it comes with less expense.

Who Needs Positive Pay?

Businesses and individuals who regularly issue checks must decide for themselves whether Positive Pay is a worthwhile service for them relative to its cost. In cases where positive pay is offered as a free service from the bank, there is little reason not to enjoy its benefits. In cases where it comes with a fee attached, users may be less sure of whether it’s a worthwhile services.

In many cases, positive pay is an effective— though imperfect— method to help avoid check fraud.

Limitations of Positive Pay

While Positive Pay can be an effective security measure in some cases, it isn’t without its limitations. Here are some of the areas where Positive Pay may not be enough to stop fraud.

Over-the-Counter Checks

Traditional Positive Pay is designed to help reduce check fraud primarily when it comes to transmitted or scanned checks. However, not all Positive Pay setups are equipped to handle verification of checks handled in person at a banking location. Not all banks offer verification over-the-counter, so it’s important to ensure that when instituting Positive Pay that all check-cashing scenarios— including in person— will be properly verified.

Verification of Payees

Positive Pay traditionally only verifies checks using check numbers, amounts, and dates. However, it doesn’t include verification of payees to ensure there haven’t been any changes to the payee’s name on the check.

Fortunately, many banks augment their traditional Positive Pay services with Payee Positive Pay. This feature generally comes with additional fees. Businesses looking to use Positive Pay should consider their unique situation and whether payee verification is necessary— and whether their software and bank will even support it.

Formatting

Checks can be transmitted in a range of file formats, and not all banks use a standardized format— or even a consistent format at one bank. When programming Positive Pay at your organization, make sure that you account for the potential of different file formats for checks.

Summary

  • Positive pay is an automated system for detecting check fraud that compares checks presented for payment at a bank to a list of approved checks provided by the issuer.

  • Positive pay works by comparing the check number, dollar amount, and account number of the check with the list provided by the business. If they don’t match up, the bank will refuse to clear the check until it’s verified by the issuer.

  • Payee Positive Pay also verifies payee names against an approved list from the issuer.


The content found here is for informational purposes only, and not for the purpose of providing advice, including but not limited to, financial, legal, or tax advice. Any opinion found here does not necessarily represent those of Bill.com.

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