Is positive pay a scam?

Positive pay is a service offered by banks under which companies send a list of issued check numbers and amounts to the bank, and the bank only accepts checks that are on this list. However, a reader has a conflicting view of Positive Pay, which is as follows:

"…I differ with Positive Pay as a best practice. We have not implemented Positive Pay here because our opinion is that it amounts to paying our bank to reduce their liability. Without Positive Pay, our attorneys tell us that the bank is responsible to exercise due care in catching an altered check. Under Positive Pay, the bank exercises due care by matching the check number and amount. The bank has no duty to catch a PAYEE alteration that does not alter the amount. Of course, the banks love Positive Pay. They can charge for it, it makes transaction processing easier and cheaper, and it reduces their liability."

Is this reader correct? Let’s review the legal underpinnings of this concern with Positive Pay. The legal source document is Articles 3 and 4 of the Uniform Commercial Code (UCC), which governs the liability for losses from counterfeit or forged checks. The UCC does state that banks must exercise due care in catching an altered check. However, according to Section 3-406 of the UCC, if a company fails to exercise “ordinary care”, it may be restricted from seeking restitution from its bank if its failures contributed to a forged check or check alteration.

To make matters worse, banks are inserting statements into their deposit agreements that absolve them from liability when measures such as Positive Pay are offered to their customers but are not utilized. Although the UCC prohibits a bank from disclaiming its responsibility (or limiting its damages) for lack of good faith or for failing to exercise ordinary care, the rules do not prevent parties from agreeing to shift more liability from the bank to the account holder.

In short, our reader’s lawyers may be correct in pointing out that the bank is responsible for exercising due care in catching an altered check, but the bank may have shifted some of this liability to their account holders. The only way to determine for certain who is responsible is to read the fine print in your deposit agreement.

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