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Technological advances have made online banking more convenient for consumers and businesses. The passing of the Check 21 Act in 2003 made much of that possible. It gave banks the ability to clear more checks faster than ever before, including digital image checks. That’s a convenience, but it also exposes companies and individuals to potential fraud. One of the tools used to prevent that fraud is a system called “positive pay.” In this article, we'll detail exactly what positive pay is and why, while important, it's an imperfect system.


What is positive pay? 

Positive pay is an automated cash management system used by banks and businesses as a spend control tool to detect check fraud. It employs a “check-issue file” that is sent to the bank by a company to be used for matching check numbers, account numbers, issue dates, and dollar amounts. The idea is to catch fraud before the check is processed through the bank.


This system is particularly useful for digital check images that consumers have scanned on their mobile device. One of the more common forms of fraud is the presentation of these check images at more than one location or on numerous occasions. The check-issue file will show the bank when a check has already been processed, resulting in a denial of redundant efforts.


Though effective, positive pay is not a panacea for preventing check fraud. The Patriot Act of 2001 includes KYB and KYC regulations for banks and private enterprises to verify the identities of financial account holders and vet the provenance of business clients and customers. This aids in the enforcement of penalties when cases of check fraud are detected.


How positive pay works 

Positive pay requires a commitment to more effective spend management. The check-issue file is generated by the company. It’s then sent to the bank electronically to be used for verification as checks are presented for payment. Think of it as a matching system. When a check is presented at the counter or comes through in a deposit, the bank will match:

  • Check number
  • Account number
  • Date of issue
  • Amount        

Some check-issue files also contain the payee’s name, but not all. If any of this information does not match, the check will be flagged, and the company will be notified. The appropriate parties at the company will then do a spend analysis to determine if the check is legitimate, at which point they can notify the bank whether to approve or deny payment.


Reverse positive pay versus positive pay 

With reverse positive pay, the onus is on the company, not the bank, to detect fraudulent checks. Instead of the company sending the bank a check-issue file, the bank sends the company a daily list of checks presented for payment. The company then checks that list against their own records and notifies the bank to approve or deny payment.


Unlike positive pay, where the company only reviews the exceptions, reverse positive pay requires a review of all items presented for payment on the previous day. The list is sent by the bank the morning after and there’s a decision period for when the denials need to be submitted. Any non-decision items will be automatically paid at the end of the decision period.


Reverse positive pay has benefits and drawbacks. It can be used to detect fraudulent spending activity and zombie spend that won’t be visible to the bank in a traditional positive pay system. On the downside, it requires more resources and daily vigilance by the company. Reverse positive pay is also not as reliable as positive pay, but it is cheaper.      


Why you need more than just positive pay


It would be nice if we could simply issue startup corporate cards to all businesses and eliminate check writing completely, but that’s not how the world works. Clients often like to pay by check. Vendors sometimes require that they get paid by check. Landlords and lease agents like to have paper or digital checks for record keeping purposes.


Positive pay and reverse positive pay are useful tools for preventing check fraud, but neither of them can be counted on as foolproof. To help support both positive pay and reverse positive pay, companies should have a robust fraud protection system in place. This system should include tools that monitor check payments, credit card spending, expense reimbursement, and billing activities.  

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