Positive Pay: A highly effective defense against check fraud

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September 15, 2006

Why positive pay?

In the “good old days” of banking, check fraud was limited to the occasional stolen checks and forged signatures. With the explosion of high powered and inexpensive computer and scanning equipment, fraudulent checks have become both easy to make and very attractive to organized crime. According to an American Banker’s Association (ABA) survey criminals attempted to pass more than $5.5 billion in fraudulent checks in 2003. As forgers’ capabilities have increased so has the ability of financial institutions to detect and prevent fraudulent activities.

How does it work?

“Positive pay” is the primary tool for prevention of check fraud. Using positive pay, the contractor produces an electronic file along with each check run that is transmitted to the bank. The bank then uses the issued file to match incoming checks. Checks that do not match are not paid unless so ordered by the contractor. In its simplest form it matches the account number, check number and dollar amount of each check presented for payment against a list of checks previously authorized and issued by the company.

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A related service is provided for those unwilling or unable to make the transmission at each check run. Reverse positive pay intends to provide similar protection, but without the initial transmission. Using reverse positive pay, the contractor receives a daily transmission of incoming checks. It is then up to the contractor to provide approval for the payment. There is generally a fee charged by the bank for positive pay, although some banks now offer the service for free. The fee might well be considered an “insurance premium” to help avoid check fraud losses and liability.

How it benefits you:

  • Sophisticated defense against check frauds and losses.
  • Provides multiple layers of security.
  • Allows you to detect exceptions at the time of presentment, rather than during subsequent statement reconciliations.

What’s the bottom line? Positive pay is one of the reasons the ABA has reported a decrease in total dollar losses associated with check fraud in spite of an increase in attempted fraud. The service can help you to more quickly identify fraudulent checks and safeguard against fraud losses. You may distribute tens, or hundreds, or thousands of checks each month. But no matter how many, you want to make sure the checks clearing your account are truly yours and not the creation of somebody with a fancy printer.

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