Positive Pay – also known as Check Positive Pay – is a fraud detection tool that banks use to monitor checks for fraudulent activity including forgery and counterfeiting. It is more accurate and efficient than the traditional approach to fraud monitoring, and as such it not only reduces the risk of fraud, but also enables banks and corporates to free up staff to focus on more value-adding activities.
Let’s take a closer look at Positive Pay, why it’s important, how it works, and how it improves the fraud monitoring process.
What is check fraud?
Check fraud is a type of fraud in which fraudsters obtain money illegally using checks. Check fraud can take a number of different forms. These include forging an account holder’s signature on a check, stealing and cashing a check from someone else, and creating counterfeit checks. Other types of check fraud include:
- Check kiting – an account holder writes a check for a value higher than their account balance their own account, and deposits it in another account.
- Check floating – account holder writes a check to buy time before funds have been deposited in their account.
- Paperhanging – account holder deliberately writes a bad check on their account.
- Chemical alteration – fraudster uses chemicals to scrub information from a check, such as the recipient’s name, and replaces it with new information.
Check fraud continues to be a challenge for businesses, particularly those that issue large volumes of checks. The American Bankers Association (ABA) found that check fraud accounted for 47% of industry deposit account fraud losses – amounting to $1.3 billion – in 2018. More recently, the 2021 AFP Payments Fraud and Control Report found that checks were the payment method most impacted by fraud activity in 2020, although the report also noted that check fraud has decreased significantly in recent years.
What is Positive Pay?
Positive Pay is an automatic fraud detection tool that banks use to identify fraudulent or counterfeit checks. Companies send an electronic communication to banks with details of all their outstanding checks, and banks use information such as the check number and dollar amount to match checks that are presented for payment.
Checks that cannot be matched are then handled as exceptions, with payment of the check withheld until the company decides whether or not to accept the check. In some cases, checks will still be cleared – for example, if the discrepancy that has been identified is a minor error, rather than an indication of fraud. Some banks charge for Positive Pay, while others provide the service free of charge.
Why Positive Pay?
Despite the shortcomings of checks as a payment instrument, it’s clear that checks are not going away in the US. However, they continue to be associated with significant fraud risk, which in turn results in high costs. As such, it is important to reinforce checks with some of the security associated with electronic payments.
Why is this important?
Electronic payments are more secure than checks, not least because any instances of fraud would usually need to originate from the corporate network. Likewise, electronic messages can be checked for fraud using a monitoring process.
Checks, in contrast, are pieces of paper that are handed into banks and credit unions in their thousands using standard formats. There is a significant risk that fraudsters may undertake fraudulent check printing – particularly if banks are flying blind, with no knowledge of which checks their corporate customers are printing.
As such, Positive Pay aligns the corporate customer with the bank, ensuring that both parties are on the same page with respect to all outstanding activity.
How does it work?
The Positive Pay process follows a number of key steps in order to reduce the risk of check fraud:
- A check is printed/issued and sent to the recipient.
- Details of the check are included in the list of checks that the company sends to its bank, ensuring that the bank is aware of all outstanding checks issued by the corporate customer.
- The check is presented to the bank for settlement.
- Information from the check is compared to the information the corporate customer has provided about checks that have been issued. This process involves looking at different types of information, including:
- Check number
- Dollar amount
- Account number
- A match to the check is or is not identified.
- If a match is found, the check can be processed without any need for a manual review.
- If a match is not found, or if there is a discrepancy in some of the information, the bank will handle it as an exception and send details of the check to the company to review. Exceptions can also be raised if the check appears to be a duplicate of a check that has previously been paid. In the meantime, the check will be blocked until the corporate decides whether to return the check or release it for payment.
Variations of Positive Pay
In addition, there are some other variations on the Positive Pay model outlined above:
- For Payee Positive Pay – also known as Payee Match or Payee Verification – the identity of the payee is verified alongside the other information provided to the bank, providing an additional level of security.
- With Teller Positive Pay, checks presented over the counter to the issuing bank’s bank teller are checked against Positive Pay. This service may be included automatically with Positive Pay.
- Another variation is Reverse Positive Pay, which is a reversal of the traditional Positive Pay model. With Reverse Positive Pay, the bank informs the company about checks that have been presented for payment. The company compares the list with the checks the company has issued, and tells the bank whether or not to pay the checks that have been presented. However, if the company does not respond promptly, the bank may proceed with clearing the check.
With this approach, companies do not need to create issue files to send to the bank – but they do need to review all checks that are presented for payment, rather than only looking at the exceptions flagged by the bank. As such, it is only likely to be suitable for businesses that issue smaller volumes of checks. It is also cheaper than Positive Pay – however, it is less reliable as a means of mitigating fraud risk.
- ACH Positive Pay is another fraud monitoring tool that combats automated clearing house (ACH) fraud by enabling users to review debits and credits before they are cleared, and either accept or reject individual items. Businesses can set up transaction filters to control which entries should be posted without interruption, with any transactions that fall outside these rules generating an alert.
For example, a company might place restrictions on transactions that exceed a specific amount, or might block or allow transactions involving particular companies. In other cases, users may block all ACH activity from posting without authorization.
How does Positive Pay improve the process?
Check Positive Pay reduces the likelihood that companies will fall victim to check fraud, and as such is an important risk mitigation tool. In addition, it also improves the efficiency of the fraud monitoring process. Other benefits include automatic check reconciliation.
If organizations do not use Positive Pay, the reality is that they will need to cast a broad net in order to validate cashed checks, and hope that the selection they have chosen for inspection includes any fraudulent activity that may have occurred.
By adding Positive Pay, organizations can free up time that can then be spent on more value-added activity. Any investigations that are carried out are on checks where risk has already been identified. As a result, the fraud detection process is not only more accurate when it comes to detecting fraud, but is also much more efficient and makes a better use of people’s time.
What are the possible drawbacks and limitations?
It’s important to note that Positive Pay is not completely foolproof, and cannot detect every type of check fraud. For example, a forged signature on a check will not be identified by Positive Pay. Errors in the list of checks that have been issued may also mean that instances of fraud could fall through the net – for example, a check might be omitted from the list provided by the company to the bank.
A further consideration is that sending lists of issued checks to the bank takes time and effort – but this is nevertheless an important tool for combating check fraud.