What is Positive Pay?

Positive Pay in a banking context is an anti-fraud service provided by almost every commercial bank in the United States.  It protects the check issuer against counterfeit and altered checks.

Positive Pay is an optional service that most bankers strongly recommend for businesses.  Remember, businesses are not afforded the same federal protections the Regulation E provides consumers.

The business issues a file to the bank, either through a file transfer protocol or via an upload portal provided by the bank.  The file contains the check number, amount, payee and a void flag.  Every time checks are cut, normally daily, the business provides this file to the bank.

The bank compares checks clearing to the listing of open and uncleared items provided by the business.  If the check does not match the provided information, the bank will suspend clearing and ask the business to resolve the difference.  The business and bank must establish default rules for this review process.  Typically the business will have a short window of time to resolve the difference or the exception check will be returned unpaid.

When Positive Pay is used in conjunction with the bank’s account reconciliation process, a fairly accurate list of checks issued, checks paid/closed and checks outstanding can be provided by the bank to assist with the reconciliation process, significantly reducing the most time consuming step of reconciling a bank account.

All checks that are voided should also be transmitted to the bank with the appropriate flag to indicate a voided transaction.  This will allow the bank to prohibit checks that were originally issued but later voided from clearing.  And these voids can be properly accounted for on the bank’s reporting of outstanding checks.

A side benefit may be the elimination of stopped items.  If the business provides timely voided check data to the bank, the bank’s positive pay function will block a voided item from clearing.  Before relying exclusively on Positive Pay protection, make sure the bank’s policies for retaining uncleared items corresponds with the stale dating rules for old checks.  Institutions will consider a check too old to cash after a designated time.  Make sure all of the dates for this process line up with the bank’s Positive Pay retention rules.

If only items pre-authorized by the business are allowed to clear a disbursing account, check fraud should be dramatically reduced.

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