Positive pay

From CEOpedia | Management online

Positive pay is a cash-management service used to prevent checks-related fraud. Generally, bank uses positive pay to match the checks that a company issues with those it presents fr payment. Positive pay can be one of the alternatives used in companies to prevent fraud such as cashing such exchanged checks.

How to Positive Pay works?

  • One of the parts of the company's business is issuing checks as payments for services rendered. Checks can be paid to employees, suppliers, sellers and other companies from whom the company purchases goods and services. However, if security checks are not carried out, identity thieves and fraudsters can create false controls that can be reported to the bank, where, if nothing is wrong, false payment claims can be honored. In order to protect against theft, the company may adopt a process called positive pay.
  • The company issuing the check creates a file containing the number of the check together with the date of its creation and the amount of all checks which it issues each day and sends the file to its bank. In the next stage, the bank compares information about checks in a file created by the company with checks submitted for payment and refuses to accept checks containing different information. This approach is considered one of the most effective ways to prevent fraud. Some banks offer a more advanced system of positive remuneration, thanks to which a company can view digital images of unique items on the internet and enter a pay our return decision on the spot. An improvement on the basic positive pay concept is for banks to also offer positive pay that includes the name of the payee, which keeps anyone from cashing a company check on which the payee name has been altered.
  • For those companies that do not want to spend time issuing a check file to the bank whenever they issue checks, reverse positive pay in the solution. Under this approach the bank creates a file containing information about all checks presented during the day, and sends it to the issuing company. Ideally, the company reviews the file and approves only those checks for which it has matching information. in reality the bank can wait only a short time for the company to review the file, and then accepts, all checks if it is not otherwise notified by the company - which makes this a weaker control than positive pay.

Problems with Positive Pay

  • If the person responsible for payment forgets to send a file with new checks to the bank after each check run, each check will be rejected by the bank for that period.
  • If the person responsible for the obligations, forget to include the retention of payments in the file, invalidated checks and manual checks, then the checks can be settled on the basis of the company will not be clear and vice versa.
  • If the bank updated its files with new incoming positive pay information only during an overnight batch process, then anyone taking a check directly from the company to the bank to be despite at once may find that the check will be rejected.

Benefits of Positive Pay

By using the positive payment function, you can automatically create a positive payment file from the system, for example from the payment register and send it to the bank. The bank will not complete the payment if it is presented and does not match the information about the positive payment. There are many default formats that are available and can even be customized for specific banks. Another advantage of a positive payment is that it stores a history that contains detailed data. You can also use history to play a positive payment file for your bank.

Examples of Positive pay

  • Direct Deposit: Direct deposit is a common example of positive pay. This is when an employee's paycheck is electronically deposited into their bank account. This eliminates the possibility of a check being lost or stolen and ensures that the employee will be paid quickly and securely.
  • Automatic Bill Pay: Another example of positive pay is automatic bill pay. This is when bills are automatically paid from an account each month. This eliminates the need to manually write and mail a check each month and ensures that bills are paid on time and in full.
  • Credit Card Payments: Credit cards are another example of positive pay. When a credit card is used to make a payment, the money is immediately transferred from the cardholder's account to the merchant's account. This eliminates the possibility of a check being lost or stolen and ensures that the payment is made on time.
  • Payroll Cards: Payroll cards are also an example of positive pay. These cards allow employers to easily and securely deposit money into an employee's account. This eliminates the need to physically issue a check and ensures that the employee will be paid quickly and securely.

Limitations of Positive pay

Positive pay is an important fraud prevention tool used by businesses and financial institutions. However, there are certain limitations of positive pay that must be taken into consideration when deciding whether or not to implement the system. These limitations include:

  • Complexity of Implementation: Implementing positive pay is a complex process that requires a considerable amount of time and effort. Banks may need to make considerable changes to their existing processes and systems to properly implement positive pay.
  • Cost: Implementing and maintaining positive pay can be expensive. Banks may need to purchase new software, hire additional staff, and invest in new equipment to properly implement the system.
  • Reliance on Banks: Positive pay relies on the bank to accurately identify and flag suspicious payments. If the bank does not have the necessary resources or expertise to properly identify fraudulent payments, the system may be ineffective.
  • Inability to Detect All Fraud: Positive pay is only effective against certain types of fraud. It does not protect against internal fraud or fraud committed by trusted vendors.

Other approaches related to Positive pay

Positive pay is an approach used by companies to combat check fraud. It is a process that verifies the authenticity of checks presented for payment. Other approaches related to Positive pay are:

  • Reconciliation: This is the process of comparing two sets of records to make sure that the amounts that appear in both agree. This is often done in conjunction with positive pay to ensure that only valid checks are paid.
  • Dual signature authorization: This process requires two authorized signers on each check, which can help to ensure that all checks are authentic.
  • Monitoring of accounts: Companies can also use software and other technologies to monitor their accounts for any suspicious activity. This can alert them to potential fraudulent activity and help them to take preventative measures.

In summary, Positive pay is a useful approach for companies to combat check fraud and there are a number of additional approaches such as reconciliation, dual signature authorization, and monitoring of accounts that can be used in conjunction with Positive pay to further enhance security.


Positive pay — recommended articles
Signature card — Exception Item — Debit Note — Cheque requisition — Books of original entry — Nominal ledger — Void Transaction — Teletax — Subsidiary account

References

Author: Justyna Galon

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