What is positive pay: A guide on preventing check fraud

Positive pay is a must-have tool for businesses looking to protect themselves from check fraud. By matching check details with the bank before payment, it helps catch fraud early.

In this post, we’ll break down how positive pay works, why it’s so effective, and when it makes sense to use. We’ll also touch on a few other fraud prevention methods, like reverse positive pay and ACH positive pay, and how they fit into a broader fraud protection strategy.

What is positive pay?

If discrepancies are found—such as mismatched amounts or unlisted check numbers—the bank flags the transaction for review, helping businesses avoid costly errors or fraud.

For example, imagine a company issuing payroll checks. The business provides its bank with a list of check numbers, amounts, and payees. When an employee deposits their check, the bank matches the details with the list. If everything aligns, the check is cleared. If not, the bank halts the transaction until the business confirms or denies its validity.

There are other several types of positive pay systems such as:

• Reverse positive pay: The bank shares transaction data with the business for approval before processing payments.
• ACH positive pay: Verifies ACH payment details to protect against unauthorized electronic transactions.

Each system has unique advantages, which we’ll explore in more detail later.

How does positive pay work?

Positive pay operates as a multi-step fraud prevention system. Here’s how the process typically works:

1. Submit payment data: The business provides a file containing payment details—such as check numbers, amounts, and payees—to the bank before transactions are processed.
2. Match transactions: When a payment is presented, the bank cross-references it with the approved list.
3. Flag discrepancies: Any mismatched details, such as an altered amount or unknown check number, result in the transaction being flagged.
4. Approve or Reject: The business reviews flagged transactions and decides whether to approve or reject them.

Positive pay requires businesses to submit accurate and timely transaction data. Most banks set deadlines for file submission, making it essential to stay organized. While there are fees for using positive pay, the fraud prevention benefits typically outweigh the costs.

Who should use positive pay systems?

Positive pay systems are ideal for businesses that want to reduce fraud risk and improve financial security. Organizations that issue frequent payments—whether by check or ACH—can benefit greatly from this added layer of protection.

High-volume payers like payroll-heavy businesses, government agencies, and enterprises with significant vendor transactions should strongly consider positive pay.

Reverse positive pay and ACH positive pay

Positive pay offers tailored options to address different payment methods and fraud risks. Each type is designed to protect specific transaction types while streamlining verification.

Here’s a simple comparison of each:

Reverse positive pay

Reverse positive pay shifts the verification responsibility to the business. The bank provides transaction details for review, and the business must approve or reject payments before they are processed. While this method offers complete control, it can be time-intensive without automated tools.

ACH positive pay

ACH positive pay adds a layer of security to electronic transactions by verifying details like account numbers, amounts, and pre-approved criteria for ACH payments. This helps businesses protect against unauthorized or altered electronic transfers, which are increasingly targeted by fraudsters.

Selecting the right type of positive pay depends on your business’s payment methods and operational needs. Often, combining multiple types of positive pay provides the most comprehensive fraud protection.

Pitfalls of positive pay systems

Positive pay systems offer valuable fraud prevention, but they’re not without challenges. Common problems with positive pay include:

• Data accuracy risks: Errors in uploaded transaction details can result in legitimate payments being flagged or delayed.
• Costs: Positive pay services typically involve bank fees that vary by transaction volume and system complexity. Larger businesses may negotiate lower rates, while smaller ones might feel the impact more.
• Time investment: Regularly submitting transaction data and reviewing flagged payments can become time-consuming without automation.

While effective against external check and ACH fraud, positive pay doesn’t cover internal fraud, phishing, or digital fraud. Combining it with broader fraud prevention tools provides stronger protection.

How to further prevent fraud

To overcome the pitfalls of positive pay, businesses should adopt automation tools, enhance data accuracy, and implement complementary fraud prevention measures for robust protection. In more detail, this includes:

• Dual authorization: Require two approvals for high-value transactions to enhance oversight.
• Automated data submission: Use financial tools to ensure accurate, timely uploads and reduce manual errors.
• Enhanced security: Implement multi-factor authentication and encryption to block unauthorized access.
• Frequent reconciliation: Regularly review accounts to quickly catch and address discrepancies.

By addressing the limitations of positive pay and incorporating complementary fraud prevention measures, businesses can create a robust defense against unauthorized transactions.

Stay in control of your payments with Ramp

While positive pay systems help safeguard check payments, it may still leave gaps in fraud prevention. With Ramp’s all-in-one finance management system, our platform offers additional security measures to protect all aspects of your financial operations.

From virtual card technology to multi-layered fraud prevention protocols, Ramp delivers tools that ensure your business stays secure and in control. Here’s how:

• Virtual cards: Shield your real card details during transactions and reduce fraud risks for sensitive vendor payments and international transfers.
• Merchant restrictions: Block unapproved vendors, limit card usage to specific suppliers, and enforce category controls to prevent unauthorized purchases.
• Multi-layered security protocols: Protect your data with encryption-in-transit and tokenization, coupled with real-time fraud monitoring and alerts.

Ramp’s commitment to secure financial management extends to its Bill Pay solution. Stay in control with Ramp—all from one intuitive platform.