Overview of Positive Pay
A positive pay system detects fraudulent checks at the point of presentment and prevents them from being paid. This means that checks that have had their payment amounts altered or which are derived from stolen check stock will be flagged by the bank. The basic positive pay steps are:
- The issuing company periodically sends a file to its bank, in which are listed the check numbers, dates, and amounts of all checks issued in the most recent check run.
- When a check is presented to the bank for payment, the bank teller compares the information on the check to the information submitted by the company. If there is a discrepancy, the bank holds the check and notifies the company.
The positive pay system is an extremely effective way to prevent check fraud.
Some banks also accept files from submitting companies that contain the name of the payee for each check, which should prevent someone from illegally altering the name of the payee and having the payee issue payment to the altered entity.
A variation on the positive pay concept is reverse positive pay, where the bank sends information about its check acceptances to the company on a daily basis, and pays those checks that are approved by the company. Realistically, if the company does not approve the checks within a relatively short time frame, the bank will be compelled to pay the checks. Thus, reverse positive pay is not as effective a control as positive pay.
Problems With Positive Pay
Several concerns have been raised with the positive pay system, which include:
- If the company forgets to issue a file to the bank, all checks that should have been included in that file may be rejected by the bank.
- The file should contain all miscellaneous check transactions, such as manual checks, so that the bank will know what to do when these items are presented for payment.
- A check that is cut and taken straight to the bank may arrive at the bank teller before the associated file is sent to the bank at the end of the day, possibly resulting in a rejected check.
- The positive pay system essentially protects banks from liability, and yet they charge companies for this service.
In spite of these issues, positive pay can be of use in selected situations to put a stop to check fraud.
When a company elects to use ACH payments to issue electronic payments, it eliminates the need for positive pay, since checks are no longer being used as the basis for payments.