What is positive pay?

Positive pay is an automated cash-management service financial institutions use to prevent check fraud. Banks use positive pay to match checks from companies with those they issue for payment. Checks that raise flags are sent back to the issuer for examination.

Positive pay provides protection for banks against fraud, losses, and other liabilities. These are typically associated with using the positive pay system, although some banks waive the fee or offer discounts.

How does positive pay work?

Positive pay is a service provided by financial institutions to their customers. Here’s a step-by-step breakdown of the process:

1. The client enrolls in the program.
2. The company provides a list of checks to the bank with payees, dates, amounts, check numbers, and the corresponding account.
3. The bank cross-references the checks with the list from the client.
4. Validated checks are cashed.
5. Those that don’t match up are set aside. The bank contacts the client with details about these checks.
6. The client notifies the bank about whether to proceed or return the checks.

Is positive pay effective?

Yes—positive pay is an effective tool against common types of commercial payment fraud. Financial institutions flag any errors or irregularities and contact the employer before potential fraud occurs, protecting themselves and the employer.
This is because the submitted paycheck must match the information in the positive pay file the employer gave the bank for the check to be processed.

What are the rules for positive pay?

Positive pay rules include directions for submitting checks, a list for matching checks, and how to handle exceptions.

Rules for submitting a list of checks

• Include the check number, account number, issue date, and dollar amount for each check
• Choose a light background color and laser-printed checks
• Use an approved font size and style
• Provide enough space between letters and data

Rules for matching checks

• The check number, account number, and dollar amount must match
• The check is flagged as an exception item if the information does not match
• The bank will not pay an exception item without approval from the account holder

Rules for handling exceptions

• The bank will investigate exception items
• The bank will send the account holder exception items to review
• The account holder decides to pay or return the check
• If the account holder doesn’t respond by the deadline, the bank will process the item

Positive pay fees

Each bank may have its own positive pay fees depending on the organization’s relationship with the financial institution, the type of customer they are (small business, high-net-worth retail, or large corporation), and sometimes, the company’s net worth.

Some banks provide the service for free while others may charge clients on a per-use basis. For the latter, banks charge a flat fee for every item. Other banks require a monthly service charge. These banks may limit the number of transactions they’ll verify, or clients can access unlimited positive pay services.

On top of the service cost, there may be additional fees. These can include:

• Charges for additional items that go over the limit
• Payee matching fees
• Issued check fees

Businesses interested in the service can ask their bank about enrolment costs and whether there are any additional fees.

Reverse positive pay vs. positive pay

Reverse positive pay is a type of positive pay where the issuer monitors checks on its own. The company must alert the bank to decline a check.
The bank will notify companies daily about all presented checks and will clear ones that are approved.

If your business does not respond to the bank on time, the bank will cash the check.
The bank will also decline anything the business asks them to. Self-monitoring checks, however, is a lot riskier than the automated positive pay process.

Preventing check and electronic payment fraud

There are many ways positive pay reduces fraud. These include:

Check verification

Every check is automatically verified. Positive pay prevents payment of duplicate checks as well as against lost or stolen checks. Positive pay checks go into an organization’s positive pay file, which is sent to an organization’s bank. From there, all checks are verified once the bank compares each check number and dollar amount against each cashed check.

Positive pay exceptions

If a company sends a file of issued checks to its bank to review and a check doesn’t have a “match” in the file, the check becomes an “exception item.” The company sends an image or fax of the exception item to its customer to approve it for payment or request the bank return the check.

Fraud control

Positive pay dramatically reduces instances of check fraud. A business can immediately identify and return fraudulent items, such as payee name suspects. A bank works with a company to verify the sender or recipient either issued or received the checks posted to the account.

It’s the business’s decision

Ultimately, the business decides whether to accept the check or not. Online banking lets companies monitor and make decisions about exception items and upload issue information. Positive pay is akin to constantly monitoring accounts and getting a second set of eyes on all transactions.