What is Positive Pay? (And Other FAQs About This Fraud Safeguard)
Over the years, our team of fraud examiners and advisors has completed many business process reviews to help companies become more efficient and more protected, but we’ve recently seen an increase in companies that want to have their disbursement processes reviewed.
Rightly so. Wire and check fraud is on the rise.
One of our most common recommendations for organizations looking to improve the disbursement process is to start using Positive Pay. But, many organizations are unaware of what Positive Pay is and how they can use it to protect against fraud.
So, what is Positive Pay, and how should companies be using it to their advantage?
What is Positive Pay?
Positive Pay is a relatively simple, cost-effective cash service offered by banks to help reduce the risk of check fraud by implementing an external safeguard.
How does Positive Pay work?
Positive Pay automatically matches checks presented for clearance to a disbursement detail that the company provides to the bank when checks are issued. If all key details agree between the checks and the disbursement detail at the time the check is presented for deposit, the check is automatically cashed by the bank.
If a check is not on the disbursement detail (or if the check details don’t agree with the disbursement detail), it’s put on “hold” by the bank. The bank then alerts the company of the “hold,” and the company is responsible for reviewing the flagged items to determine if the check should be cashed or not.
The company alerts the bank of the final judgement—to process the check or deny the check from being cashed.
What are the benefits of using Positive Pay?
Positive Pay is a very effective fraud prevention tool. It helps identify fraudulent transactions before they happen, can help to streamline your fraud prevention processes and can reduce the risk of fraud related to check modification.
For example, checks may be intercepted in the mail, and details like vendor name or dollar amount may be fraudulently edited and then presented for deposit. Positive Pay would help to mitigate the risk of that modified check being cashed.
Which companies should use Positive Pay?
Positive Pay can be helpful in reducing the risk of fraud to any company that issues checks.
When used correctly, Positive Pay is especially helpful to companies that have a smaller accounting department and may have a harder time properly segregating duties in the disbursement process.
For example, if senior management reviews the disbursement listing in conjunction with signing checks and directly uploads the disbursement listing to the bank, the risk of checks being modified by other accounting staff after being signed is greatly reduced.
What details should be included in a disbursement listing?
We recommend setting up Positive Pay with your bank to ensure that the following check details are included on the disbursement listing and must agree prior to the check clearing the bank:
- Payee
- Check number
- Date
- Dollar amount
Is Positive Pay customizable?
The level of customization your company has with Positive Pay will largely depend on your bank and the options they make available. Banks may be able to offer you various options about notifications, communication, tools, formats and documentation storage.
Some banks also offer different Positive Pay solutions that accommodate businesses of different sizes and that have different activities.
How fast would a bank typically alert me of any discrepancies?
Most banks will strive to alert you as soon as possible if any discrepancies are found between a check presented for deposit and the disbursement detail in the Positive Pay process. While the exact timeframe may vary across banks depending on their own systems, processes and communication methods, you can likely expect a near immediate notification.
Often, banks will notify the company every morning of checks that were presented for payment the previous day. The company will then have a few hours to approve or deny the checks. If the company doesn’t take action within the set timeframe, the checks will automatically clear.
For the clearest expectations, ask your banker about their average timeframes.
Are there any eligibility requirements for a company to enroll in a Positive Pay service?
Many banks do require companies to meet certain qualifications to enroll in their Positive Pay programs. Some common requirements might include having an existing, active account in good standing with the bank, issuing a certain number of checks and providing certain verifying documentation.
Banks may also investigate if your organization is a good candidate for the Positive Pay service based on your organization’s technology and processes.
How much does it cost for my company to use Positive Pay?
As you would expect, each bank has its own cost structure for the Positive Pay service. However, the cost is often minimal, with some banks only charging $50/month and others charging a small flat fee and variable fee based on each check written.
Are there added risks for my company by using Positive Pay?
We recommend that companies use Positive Pay because of its strong benefits, but it does come with additional considerations, especially when it comes to the security and confidentiality of your data.
You’ll likely want to give a fresh review to your vendor management policy, and depending on your company’s specific situation, you may also need to look into additional legal requirements.
Additionally, if a check is presented for review and not denied in a timely manner, the hold will be automatically removed by the bank. The check will be cashed, and the company is not eligible to get the funds returned. Once checks are presented to the company, the risk of cashing a fraudulent check is transferred from the bank to the company.
What can my company do to help ensure Positive Pay transactions are accurate?
The effectiveness of your Positive Pay system depends on the accuracy of the information that you submit to the bank. Unintentional errors could lead to a false alarm of fraud from your bank.
To help ensure your company is fully benefitting from Positive Pay, be sure that your check records are accurate and timely, your employees have been properly trained, you have existing strong internal controls in your disbursement processes and that you have good communication systems set up with your bank.
It’s also imperative to use clear vendor names or unique vendor identifiers. Banks use Optical Character Recognition (OCR) software as part of the Positive Pay process, and if the vendor name is not clear, the check will be incorrectly flagged as a hold.
Finally, in order to experience the benefit of Positive Pay, companies must have people prepared to process the bank notifications quickly. If a check is presented for review and not denied on time, the check will clear anyway, and the benefits of enrolling in Positive Pay will be lost.
What additional internal controls does my company need to implement to use Positive Pay?
Companies should consider implementing the following controls around the Positive Pay process to ensure proper segregation of duties:
- Someone independent of the check custody, check writing and disbursement processes should review the final disbursements listing prior to upload to the bank. We strongly recommend that this person be an owner or a highly trusted member of the senior management team.
- The person performing the final, independent review of the disbursement list should upload the file directly to the bank to prevent changes from occurring after their review.
- Checks that are flagged by the bank should be reviewed by someone without access to the checks.
How often should I review and update the Positive Pay settings and parameters for my business?
This will likely be different for every business, but generally, it’s best to review the effectiveness of all your fraud prevention methods, including Positive Pay, several times a year. This will allow you to make adjustments based on:
- Performance of your current processes
- Any successful or unsuccessful fraud attempts
- Changes in how you issue checks
- Changes in your company’s risk profile
- Changes in legal or regulatory compliance matters
Moving beyond the basics of “What is Positive Pay?”
Check and wire fraud are rampant in today’s environment. Taking the time to learn more about the Positive Pay services your bank offers can potentially save you a lot of money and time down the road.
But Positive Pay certainly isn’t the only fraud safeguard that companies should implement.
Connect with a Warren Averett advisor who can walk you through a thorough business process review designed to investigate many other ways your organization can be more profitable and effective.
