In the battle against check and ACH fraud, positive pay stands as an indispensable line of defense for financial institutions. By validating checks against a pre-approved list, it preemptively blocks unauthorized transactions, protecting your account holders and mitigating potential losses.
In this guide, we delve into the definition of Positive Pay. Read for insights for FI and cash management department leaders on how to leverage this often-overlooked fraud prevention tool.
We know your aim is to safeguard account holders while simultaneously enhancing your revenue with new cash management solutions.
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Table of contents
- How does Positive Pay work?
- Positive Pay Workflows: How They Operate
- Reverse Positive Pay: An Alternative Approach
- Implementing Positive Pay for Business Account Holders
- Frequently Asked Questions
How does Positive Pay work?
Positive Pay is a cash management and fraud prevention technique that matches checks issued, usually by a business, against those presented for payment, flagging discrepancies for verification.
So how does this system function in practical terms? The process involves comparing information from both parties to ensure that all checks being processed for payment are authorized. This approach serves as strong protection against any fraudulent activities surrounding counterfeit checks and strengthens overall financial security measures through its reliable functioning as part of banking services available today.
An Example of Check Positive Pay
A simple example of Positive Pay in use would be a credit union providing a small business like a floral shop with the service. The floral shop owner would provide the credit union with a list of checks issued, including check numbers, amounts, and payee information. This list is then used by the credit union to verify checks presented for payment against the issued checks.
Any check not matching the provided details is flagged for review, and the floral shop owner is alerted to either approve or reject the payment within a certain timeframe ensuring that only authorized checks are processed and paid.
Positive Pay can extend to ACH transactions, offering businesses the ability to set rules and review incoming debits for unauthorized activity, thus enhancing electronic payment security.
Example: the shop owner may establish guidelines that only ACH debits from suppliers of flowers and floral accessories are permitted. That rule would prevent any unauthorized or fraudulent charges from unknown entities.
Additionally, the owner could specify a maximum transaction limit, providing an extra layer of control over the shop’s finances. This proactive approach to managing electronic payments fortifies the business’s defenses against increasingly sophisticated fraud tactics in the digital landscape.
Positive Pay Workflows: How They Operate
Curious about how this system works in more detail. Allow us to explain.
First, a business account issues checks. Next, that business generates a file containing all the necessary information about the issued checks. This file is then run through a Positive Pay system and sent to the financial institution for processing.
Exception Handling in Positive Pay
If a discrepancy is identified and the check details provided for payment do not match your records, your financial institution will take action. The bank will flag the check, generate an exception report, and hold off on making any payments. You will then receive prompt notification through your online banking platform when the issue has been detected by the bank.
Essentially, this process resembles having an integrated alarm system within your financial institution that alerts you of anything suspicious or out-of-place in regards to checks presented for payment.
Automated Decision Rules
At this stage, the Positive Pay system leverages advanced, predetermined rules. A financial institution with Positive Pay enabled allows for the creation of automatic decision rules that dictate how exceptions are managed, for example, automatically declining checks exceeding specific criteria or amounts.
By automating this process, the check verification procedure becomes more efficient and only authorized transactions can be processed while reducing the need for manual review.
Reverse Positive Pay: An Alternative Approach
When you desire to take on more accountability for overseeing and confirming checks, Reverse Positive Pay becomes involved. With this method, the responsibility shifts onto your business to monitor any checks submitted for payment. It involves a more active approach where you must be proactive and observant in order to ensure successful payments through pay verification.
ACH Positive Pay Definition
Let’s do a baseline definition on ACH Positive Pay for financial institutions and business account holders. ACH Positive Pay is a fraud prevention service that enables FIs and businesses to set filters or parameters for Automated Clearing House (ACH) transactions. These could include such things as approved payee lists, transaction amount limits or entries for specific types of transaction.
When an ACH debit or credit comes through that does not match the established criteria, the item is flagged as an exception for the business to review and decide whether to pay or return before the item is processed. Implementing ACH Positive Pay is an important proactive step that both financial institutions and businesses can take in protecting themselves from unauthorized ACH or fraudulent activity.
ACH Positive Pay vs. Check Positive Pay
The difference between ACH Positive Pay and Check Positive Pay is that they provide deposit fraud protection for different types of financial transactions. ACH Positive Pay operates differently than Check Positive Pay. The process utilizes an approved vendor list for comparison and identification of any suspicious ACH pay activities.
ACH Positive Pay is designed for ACH-based transactions, and offers financial institutions and business account holders way to establish rules that operate in real-time about which transactions should be allowed based on specific criteria, such as vendor, transaction amount, or transaction frequency.
Check Positive Pay in contrast is for protecting against check fraud. This solution compares each check presented for payment against a file with a list of checks issued by the business.
ACH Credits and Debits
To better understand ACH credits and debits, let’s go back a bit. ACH credits are considered as ‘push’ transactions such as direct deposits or automatic bill payments, in which the sender initiates the transfer of funds from their bank account to another person’s account through the ACH network.
On the other hand, ACH debits are known as ‘pull’ transactions commonly used for regular expenses like utilities or insurance premiums. In this type of transaction, the recipient gives authorization to draw funds directly from the sender’s bank account through using the services provided by an intermediary – also known as the ‘ACH Network’.
ACH Positive Pay Workflow
So how exactly does the ACH Positive Pay workflow happen behind the scenes? The process involves the FI and the business account holder setting up guidelines based on the Originator of incoming debit transactions through ACH. These rules provide business account holders with the opportunity to review all debits before they are processed by the financial institution, allowing for an informed decision to be made. It essentially acts as a security checkpoint for electronic payments, effectively stopping any potential fraud attempts from being successful.
An ACH Positive Pay Example
Let’s say one of your account holders is a thriving real estate company that manages numerous transactions daily, from property purchases to vendor payments. With an increase in electronic payments, the risk of unauthorized ACH transactions has become a concern for this business.
To address this, your treasury team collaborates with the the real estate business to implement ACH Positive Pay, aiming to bolster the security of their ACH transactions.
The real estate company works with their bank to implement ACH Positive Pay, focusing on securing electronic payments amid rising unauthorized ACH transaction concerns. They establish rules, like setting maximum payment thresholds and defining specific payment days for transactions. Approved ACH vendors include trusted property management software providers, construction firms for renovations, and utility companies for property maintenance.
Daily, the company reviews a list of pending transactions, authorizing those from their approved list and flagging others for review. This method sharply reduces fraud risk, streamlines payment processes, and enhances control over the company’s finances. Through ACH Positive Pay, the real estate company creates a strong safeguard against the potential of ACH fraud.
Implementing Positive Pay for Business Account Holders
For banks and credit unions looking to offer and implement Positive Pay for business account holders, here’s a very high level view of what needs to happen.
- The business account holder must compile a check-issue file containing pertinent information such as date, dollar amount, account number and check number for each written business check.
- In an ideal Positive Pay workflow, a business account holder should promptly update their check-issue record after writing checks to ensure precision and maximum effectiveness for fraud prevention.
- In the case of ACH transactions, business account holders and FIs should work upfront to implement the ACH decisioning rules, and business holders should update those rules regularly as new criteria emerge.
- It’s crucial for business account holders and financial institutions to work collaboratively ensure proper functioning of a Positive Pay implementation.
Who Offers and Implements a Positive Pay System?
Typically it will be a financial institution’s treasury or cash management department, that will have the most involvement in offering and implementing Positive Pay for its business clients.
While Positive Pay integration may sound complex, there are providers that specialize in Positive Pay that enable FIs to offer the service to its business clients. These services, like Positive Pay by AFS have an intuitively designed interface allowing for convenient monitoring of exception items and uploading issue information related to cash management.
Advantages and Limitations of Positive Pay
Positive Pay, comes with its own set of advantages and disadvantages. One major benefit is its ability to provide considerable safeguard against fraudulent payments, thus potentially saving the business from significant monetary damages.
It does necessitate continuous monitoring of exception lists in order to prevent fraud and may also call for additional measures regarding data security during implementation.
Strengthened Fraud Protection
The main benefit of utilizing Positive Pay is its ability to enhance your defense against fraud for your FI and for your business account holders. By comparing issued check information with those presented for payment, it effectively blocks forged, altered and fake checks from being paid out. ACH Positive Pay prevents unauthorized debits from a business owner’s account.
Differentiate Your Financial Institution
For a bank or credit union, having a Positive Pay service available as an offering has several advantages. First, it sets your FI apart and shows that you take fraud seriously. Offering a check and ACH Positive Pay option to business clients shows your level of commitment to not only protecting their financial assets but also to providing them with sophisticated tools to manage and control their funds.
By integrating this service, your institution demonstrates a proactive approach to security and a dedication to innovative solutions that enhance the banking experience for your clients. This can significantly boost the trust business customers place in your institution, potentially leading to increased customer loyalty and retention.
Additional Offering = More Revenue
Often, financial institutions will offer a Positive Pay solution as an add-on service to business account holders. Having this as an add on presents an opportunity for treasury departments to generate more revenue.
The revenue from Positive Pay usually comes through Business Process Outsourcing. While there are many ways it can be implemented and invoiced, FIs can ultimately choose to charge business account holders for the operation of Positive Pay on their behalf.
Considerations for FIs and Account Holders
Despite the obvious advantages of utilizing Positive Pay services, there are some factors that businesses should take into consideration. They must establish and maintain strict internal controls for creating positive pay files and select a system that covers all possible check-cashing scenarios. They should be mindful of the limitations associated with these services as fraudulent checks may go undetected if payee names have been altered by fraudsters.
Positive Pay is an effective resource that provides substantial defense against fraudulent check and payment activities. Its strong authentication protocols and methods for managing irregularities make it a valuable asset to your organization’s financial strategies.
Frequently Asked Questions
Is Positive Pay worth it?
Positive pay is a valuable investment as it serves as an efficient means of preventing fraud and detecting potential fraudulent transactions in advance. By implementing this tool, the risk of check alteration can be significantly reduced, resulting in more streamlined processes for safeguarding against fraud. In summary, positive pay offers various benefits related to combating financial crime and improving security measures surrounding payments.
What is the difference between Check Positive Pay and ACH Positive Pay?
Check Positive Pay and ACH Positive Pay differ in their purpose, with the former focused on detecting fraudulent checks and the latter designed for identifying potentially fraudulent ACH transactions. While Positive Pay relies on a list to compare checks, ACH positive pay uses filters as a means of intercepting suspicious payments.
Check Positive Pay requires an uploaded file for comparison. ACH Positive Pay is requires rules set up in advanced.
How much does Positive Pay cost?
The cost of Positive Pay will vary widely for an FI and for a business account holder. Often a Positive Pay solution is built into another software platform that an FI or credit union is already using like their core banking platform.
If an FI is offering Positive Pay as an add-on service to account holders, the price can be set by the institution.
What is an exception in Positive Pay?
An instance of deviation in Positive Pay arises when there is a disparity between the check information submitted by the business account holder and that presented for payment, resulting in the bank generating an exception report and delaying or denying payment. The company will receive this report to notify them of any discrepancies found.
In the case of ACH Positive Pay, an exception occurs similarly when an ACH debit presented for payment does not align with the established filters or rules set by the business, such as those pertaining to the originator or amount thresholds. The bank will then issue an exception notification, prompting the business to review the transaction and decide whether to accept or reject the debited amount. This ensures that only authorized ACH transactions are processed, and any unauthorized or irregular activity is quickly brought to the business’s attention for immediate action.
The occurrence of mismatched details prompts the creation of an exception report by banks during transactions through Positive Pay. This leads to a delay or denial in payments as they investigate Notifying business account holders with their exception findings.