Positive Pay System

Positive pay system is an automated method that financial institutions use to detect fake or modified checks. This system is a cash management service where the company’s issued check matches the presented check. In case of any discrepancy, the check is marked out and sent back to the issuer for review.

The positive pay system helps financial institutions to avoid fraudulent activities. The banks do not clear any suspicious-looking checks, and the presenter is restrained from getting paid. This is a security measure that safeguards the customers from loss and deceit.

• Positive pay is automated system banks use to identify forged and modified checks that are presented for withdrawing money. This cash management service ensures a reduced risk of losing money to fraud.
• In this method, the issuing company provides a list of data to the banks. The data in the presented check matches the data provided by the issuing company.
• If the data does not match, the check is not cleared, and the issuing company is notified. In case of minor errors, the withheld payment process can be resumed under the company’s directions.

Positive pay is an automated system that financial institutions use to identify forged checks and control fraud. Positive pay in banking ensures that the details in the check issued by the company match the details in the check presented to the bank. In case of dissimilarity, the check issuer is notified about the incident, and the check is not cleared.

The positive pay system is a benefit provided to the customers who have availed of it. Usually, the banks charge a fee for this service, but in some banks, it is provided for a reduced amount or even for free. Customers enrolled in this system have their accounts protected by this cash management mechanism. 

When a check is presented for payment, the bank matches the data available on the checks with the data provided by the issuing company before processing the payment. The data matched includes the dollar amount, check number, account number, and date. In some lists, the payee is also included. If there is a positive pay confirmation, the presenter receives the money.

If the data does not match, the bank notifies the issuer about the incident by an exception report and does not clear the check. Instead, the money is held back until the issuing company instructs the bank to pay the money or stop the payment. The company can direct the bank to process the payment if the data have minor errors.

Let us understand positive payment system with the following examples:

Example #1

Grace is a vendor of Amacon Ltd. She received a check of $50,000 from the company dated March 11, 2022. When she went to the bank to encash her check, the details did not match those provided in the Amacon Ltd. list. The date in the issuing company’s list was March 11, 2020. Grace's payment was stopped as she did not get a positive pay confirmation. The bank contacted Amacon Ltd., and it was found that the error was on the company’s side. Representatives from Amacon Ltd. instructed the bank to clear her check, and she received his due payment. This is an example of positive pay system.

Example #2

Vendor fraud has become a common practice of late. Even though public awareness has increased, the tactics of such deception have risen steadily over the years. In such a scenario, the banks work with the customers to help minimize the losses due to fraudulent activities. The Washington Trust Bank provides several fraud detection services to its customers. The ACH Positive Pay mechanism is used to identify fraud from incoming electronic transactions initiated outside the bank.

The problems with this method are as follows:

• If the issuing company forgets to send a file to the bank, the bank may reject all the checks under that file.
• A check may be presented to the bank before a file is submitted. In that case, the check might be rejected by the bank.
• Preparing a list to provide to the bank is a time-consuming process.
• The banks provide the company a stipulated period during which inquiries must be conducted, failing which the checks will get rejected.

The benefits of this system have been discussed below:

• In addition, this method provides an additional layer of security for customers from fraud.
• It helps reduce the requirement of creating a new account after an old account is affected and closed.
• The customers can take direct control of who can receive payment from them, thus eliminating the possibility of facing losses.

An exception is referred to as an item that fails to match the list provided by the issuer. The exception item is sent to the issuing company through an image or fax. The company directs the bank on whether the check should be cleared. The payment is then processed according to the issuer’s discretion.

The differences between positive pay and reverse positive pay are as follows:

• In positive pay system, the bank notifies the issuing company about any discrepancy in the check and gets directions on how to proceed with the payment process.

• Reverse positive pay is a system where the issuing company notifies the bank to decline the check payment. The bank notifies the issuing company about all the checks presented and processes only the payments that the issuing company approves. 

This has been a guide to what is Positive Pay System. We explain its problems, exceptions, differences with reverse positive pay, benefits, and examples. You can learn more about from the following articles –

• Issuing Bank
• Automated Teller Machine
• ACH Debit