Positive Pay: What It Is, How It Works, vs. Reverse Positive Pay

What Is Positive Pay?

Positive pay is an automated cash-management service used by financial institutions 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 suspect is sent back to the issuer for examination. The system acts as a form of insurance for a company against fraud, losses, and other liabilities to the bank. There is generally a charge incurred for using it, although some banks now offer the service for a reduced fee or free.

Key Takeaways

  • Positive pay is a fraud-prevention system offered by most commercial banks to companies to protect them against forged, altered, and counterfeit checks.
  • Identity thieves and fraudsters often try to create and cash counterfeit checks, and those checks could be cashed.
  • Companies usually provide a list to the bank of the check number, dollar amount, and account number of each check.
  • The bank compares the list to the actual checks, flags any that do not match, and notifies the company.
  • The company then tells the bank whether or not to cash the check and the banking officials will do what the company requests of them.

Understanding Positive Pay

In order to protect against forged, altered, and counterfeit checks, the service matches the check number, dollar amount, and account number of each check presented against a list provided by the company. In some cases, the payee may also be included on the list of the checks. If these do not match, the bank will not clear the check. When security checks are not put in place, identity thieves and fraudsters can create counterfeit checks that may end up being honored.

When the information does not match the check, the bank notifies the customer through an exception report, withholding payment until the company advises the bank to accept or reject the check. The bank can flag the check, notify a representative at the company, and seek permission to clear the check.

In addition, if the company finds only a slight error or other minor problem, it can choose to advise the bank to clear the check. If the company forgets to send a list to the bank, all checks presented that should have been included may be rejected, which could cause some financial problems.

As banks may not be responsible for fraudulent checks, companies should review the institution’s terms and conditions thoroughly.

Reverse Positive Pay vs. Positive Pay

A variation on the positive-pay concept is the reverse positive-pay system. This system requires the issuer to monitor its checks on its own, making it the company’s responsibility to alert the bank to decline a check. The bank notifies the company daily about all presented checks and clears the checks approved by the company.

Typically, if the company does not respond within a fairly short time, the bank will go ahead and cash the check. This method thus is not as reliable and effective as positive pay, but it is cheaper.