What is Positive Pay

Positive pay is a cash-management service employed to deter check fraud. Banks use positive pay to match the checks a company issues with those it presents for payment. Any check considered to be potentially fraudulent is sent back to the issuer for examination.

BREAKING DOWN Positive Pay

Part of a company’s business operations is issuing checks as payment for services rendered. Checks are paid to employees, suppliers, vendors and other businesses that a company purchases goods and services from. However, if security checks are not put in place, identity thieves and fraudsters can create counterfeit checks that can be presented to the bank, where, if nothing seems amiss, the fraudulent withdrawal requests may be honored. To protect itself against check fraud, a company can adopt a process known as positive pay.

Positive pay is a fraud-prevention system offered by most commercial banks to companies for a fee to protect the companies against forged, altered and counterfeit checks. Positive pay allows the banks to verify that the checks they process are funded properly. When a company issues payroll or other types of checks for the week or month, it sends the check register list to the bank which stores the information in its database. The information transmitted to the bank includes the check number, date and dollar amount. As the checks are presented to the bank to be deposited or cashed, the bank compares the information it has on file with each check presented.

If the information for any of the checks does not match the file, the bank notifies its corporate customer through an exceptions report and withholds payment until the company advises the bank to accept or reject the check. When the check presented to the bank does not match the company-provided list of distributed checks, this does not necessarily mean that the check will not clear. The bank can flag the check, notify a payroll representative at the company and seek permission to clear the check. If the company representative finds there was a clerical error or other minor problem, she can clear the bank to fund the check.

Some banks also accept files from companies that contain the name of the payee for each check, which helps to prevent someone from illegally altering the name of the payee.

Although it is effective at catching bad checks, the positive-pay system costs more than other systems. In addition, if the company forgets to send a file to the bank, all checks presented to a teller that should have been included in that file may be rejected by the bank.

A variation on the positive-pay concept is the reverse positive-pay system, which requires the check issuer to self-monitor its checks; the issuer must then alert the bank when it declines a check. The bank notifies the company daily about the presented checks and clears the checks approved by the company. Typically, if the company does not approve the checks within a relatively short time frame, the bank will be compelled to pay the checks. This method, therefore, is not as reliable and effective as positive pay, but it is cheaper.