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 fraudulent is sent back to the issuer for examination.

The service matches the check number, dollar amount, and account number of each check against a list provided by the company. If these do not match, the bank will not clear the check.

Understanding Positive Pay

Positive pay is a fraud-prevention system offered by most commercial banks to companies for a fee to protect them against forged, altered, and counterfeit checks. Positive pay allows banks to verify that the checks they process actually clear.

If security checks are not put in place to authenticate the checks written by businesses, identity thieves and fraudsters can create counterfeit checks that can be presented to the bank, where fraudulent withdrawal requests may be honored. To protect itself against check fraud, a company may adopt positive pay.

The system acts as a form of insurance for a company against fraud, losses, and other liabilities.

How the Positive Pay System Works

When a company issues checks, it sends a list to the bank. The information transmitted to the bank includes the check number, date, and dollar amount. In some cases, the payee may also be included on the list. This prevents anyone from altering the name of the recipient. As checks are presented to the bank, it compares each check with information on file.

If the information does not match, 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. If the company finds an error or other minor problem, she can advise the bank to clear the check.

If the company forgets to send a file to the bank, all checks presented that should have been included may be rejected by the bank.

There is generally a charge incurred for using the positive pay system, although some banks now offer the service for free.

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

Reverse Positive-Pay System

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. The company is responsible to 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.