Digital payment systems have allowed small businesses to streamline their income generation and also save time in the process. Still, safeguarding financial transactions against fraud is a concern for businesses of all sizes.
Most of our clients have moved towards ACH transfers (which have 0 fees with Finli) and credit card payments, but there are also companies who still get paid by check. And check fraud is a big threat for the SMBs who rely on it.
For this reason, an innovative solution known as Positive Pay has emerged as a critical defense mechanism.
In this guide we’ll discuss about Positive Pay, the system designed to detect and prevent fraudulent checks from harming your business finances.
By exploring its mechanisms, benefits, and implementation strategies, we aim to equip company owners, financial managers, and anyone concerned with transactional security with a deeper understanding of how Positive Pay can act as a shield, protecting the lifeblood of their business operations against potential financial threats.
What Does Positive Pay Mean?
Positive Pay is a fraud-prevention service offered by banks to protect businesses against check fraud.
It works by having companies submit a list of issued checks to their bank, including details like check numbers, amounts, and payee names. The bank then matches this information against checks presented for payment.
If a check does not match the details on the list (indicating a potential fraud), it is flagged, and the bank alerts the company, allowing them to decide whether to authorize the payment or not.
This system significantly reduces the risk of fraudulent checks being deposited, offering a layer of security for business financial transactions.
How Does Positive Pay Work?
Positive Pay operates through a systematic process designed to detect and prevent check fraud.
Here’s how it works:
Check Issuance
When a business issues checks, it generates a list of all the checks written. This list includes key details for each check, such as the check number, date, amount, and payee name.
File Submission
The business then submits this list to its bank, usually through an online banking platform. This step is important as it allows the bank to know exactly which checks are legitimate and authorized by the business.
Check Presentation
When someone attempts to cash or deposit a check, the bank reviews the presented check against the list provided by the business. This is to verify that the details match exactly what was authorized.
Verification
- Match: If the details of the presented check match the list (check number, amount, and payee name), the check is verified and processed normally.
- Mismatch: If there’s a discrepancy, indicating a potential fraudulent activity (e.g., altered check amount or forged check), the check is flagged as suspicious.
For any check flagged, the bank alerts the business, providing details of the discrepancy. The business then reviews the check in question and instructs the bank whether to pay or reject the check.
Based on the business’s instructions, the bank will either proceed to process the check or reject it, thereby preventing potential fraud.
This process provides a proactive approach to safeguarding businesses against the risk of check fraud by ensuring only authorized checks are paid. It’s a collaborative effort between banks and businesses to secure the financial transactions and maintain the integrity of the payment system.
Who Needs Positive Pay?
Positive Pay is essential for businesses of all sizes that frequently use checks to collect payments. It’s particularly valuable for companies with high transaction volumes, those that issue large-value checks, or businesses in industries vulnerable to financial fraud.
Non-profit organizations and governmental entities can also benefit from Positive Pay’s protective measures.
By adopting this service, any organization looking to enhance the security of its financial transactions and minimize the risk of check fraud can significantly safeguard its assets, ensuring that only authorized checks are processed and paid.
What Are the Benefits of Using Positive Pay?
Using Positive Pay offers several key benefits that enhance financial security and operational efficiency for businesses:
- Fraud prevention: The primary advantage is the significant reduction in check fraud risk. By matching check details against a pre-approved list, Positive Pay helps catch fraudulent or altered checks before they are cleared, safeguarding against potential financial loss.
- Financial control: It gives businesses greater control over their financial transactions. By reviewing and deciding on the payment of flagged checks, companies can prevent unauthorized transactions and maintain tighter control over cash outflows.
- Reduced losses: By preventing fraud, businesses can avoid the financial losses associated with fraudulent checks. This protection is especially critical for large-value transactions where the potential impact of fraud is higher.
- Enhanced reconciliation: Positive Pay simplifies the reconciliation process. Since only authorized checks are processed, businesses can more easily match their accounting records with bank statements, reducing the time and effort required for monthly reconciliations.
- Increased confidence: Utilizing a system like Positive Pay can boost confidence among business stakeholders, including customers, suppliers, and financial partners, by demonstrating a commitment to securing financial transactions and operations.
Reverse Positive Pay vs. Positive Pay
Positive Pay and Reverse Positive Pay are both banking services designed to help businesses protect against check fraud, but they operate in slightly different ways.
Positive Pay
Positive Pay requires the business to send a list of issued checks to their bank, including the check number, account number, date, and amount for each check.
When a check is presented for payment, the bank compares it against this list.
If everything matches, the check is processed. If there’s a discrepancy, the bank alerts the company and awaits instructions on whether to pay or reject the check.
This system places the onus on the bank to catch and flag fraudulent checks based on the information provided by the business.
Reverse Positive Pay
Reverse Positive Pay, on the other hand, is more hands-on for the business. Instead of the bank comparing issued checks against a list provided by the business, the business is responsible for reviewing all checks presented for payment.
Each day, the bank sends the company a list of checks that have been presented for payment.
The business then reviews this list and tells the bank which checks to pay or reject. This method gives the business more direct control over which checks are processed but requires more effort to review and approve each transaction.
Key Differences between Reverse Positive Pay and Positive Pay
- Initiation and control: Positive Pay is more proactive, with the bank taking an active role in fraud prevention based on the list provided by the business. Reverse Positive Pay is reactive, with the business reviewing and approving checks after they are presented.
- Effort and responsibility: Positive Pay requires upfront effort from the business to provide check details but less day-to-day management. Reverse Positive Pay demands daily involvement from the business to review and approve checks.
- Level of control: Reverse Positive Pay offers businesses more direct control over their transactions but at the cost of increased administrative work.
Both systems aim to mitigate check fraud, but the choice between them depends on the specific needs, resources, and preferences of the business.
Positive Pay is suitable for businesses looking for a more set-it-and-forget-it approach with the bank playing a significant role in fraud detection.
Reverse Positive Pay might be preferred by businesses wanting more direct control over their transactions and willing to dedicate the necessary resources to review checks daily.
FAQ on What Is Positive Pay?
What is the difference between ACH and positive pay?
ACH (Automated Clearing House) and Positive Pay are distinct financial services. ACH is a network used for electronically moving money between bank accounts across the United States, facilitating direct deposits and payments. It’s known for processing large volumes of credit and debit transactions in batches. Positive Pay, in contrast, is a fraud-prevention service offered by banks that helps businesses protect against check fraud. It involves verifying check details (like number, amount, and payee) submitted by the business against checks presented for payment, flagging discrepancies for review. ACH focuses on electronic transactions, while Positive Pay secures paper check processing.
Is positive pay worth it?
Yes, Positive Pay is worth it for businesses that use checks frequently. It significantly reduces the risk of check fraud by ensuring that only checks matching pre-approved details are processed. While there may be associated costs, the protection it offers against potential financial losses and the enhanced security of financial transactions can provide substantial peace of mind and financial safeguarding, making it a valuable investment for businesses aiming to protect their assets.
Is positive pay mandatory?
No, Positive Pay is not mandatory. It is an optional service offered by banks to help businesses prevent check fraud. While highly beneficial in safeguarding against unauthorized transactions and financial losses, the decision to use Positive Pay rests with the individual business, based on their assessment of risk, transaction volume, and specific needs. Businesses can choose to adopt this service to enhance their financial security, but it is not a regulatory requirement.
What happens if positive pay is not done?
If Positive Pay is not implemented, a business becomes more vulnerable to check fraud. Without the protective verification process that Positive Pay provides, fraudulent or altered checks may go undetected and be wrongfully paid out. This can lead to financial losses, complications in reconciling bank statements, and potential damage to the business’s reputation. While not using Positive Pay doesn’t automatically mean a business will fall victim to fraud, it does mean missing out on a crucial layer of security that could prevent such incidents and safeguard the company’s finances.
What is the alternative to positive pay?
An alternative to Positive Pay is Reverse Positive Pay, where businesses review and approve all checks presented for payment, giving them direct control over transactions.
The best option is to use a payment management system like Finli, which provides bank-level protection and quick payments via ACH and credit cards.
For businesses that are moving away from collecting payments with checks, and want to enable their customers to make digital payments like ACH and Credit Card, Finli is a great alternative. For just $39/month, you can enjoy a modern platform and a plethora of features: instant invoicing, CRM, inventory management, pay by link, and autopay.
Now it’s easier to use Finli, with our mobile app. Download it on your smartphone and manage your transactions on the go.
