RiskFinancial CrimeHow Positive Pay Deters US Check Fraud

How Positive Pay Deters US Check Fraud

Check fraud is a growing business with current estimates of losses fast approaching $15 billion per year in the U.S. Whether it is for Accounts Payable, Payroll, Claims or another payment process companies are exposed to potential losses from check fraud.

Positive pay filing is the best deterrent to check fraud available today. The positive pay process entails a daily reconcilement of a company’s issued checks to checks presented for payment to the bank to identify potentially fraudulent checks.

What is Positive Pay?

Positive Pay is a fraud prevention mechanism that reconciles checks being encashed against details of the checks issued by the account holder. Customer provides the bank with the details of the checks like Beneficiary Name, amount, date etc. When a check is encashed, the details of the presented check are compared against the check information as provided by the customer. In case of a mismatch, the checks are paid or returned after confirming with the customer. Normally, Positive Pay is used by corporate houses that handle a lot of checks during their daily activities.

Positive Pay Workflow

Check Issuance Information

Capturing information of the checks that are being issued by the company is the first step in positive pay. A Company issues the checks and sends the information of the checks to the bank providing positive pay service. The ‘Check Issuance’ file contains details like Check Number, Check Amount, Check Date and Beneficiary Name along with the account number from which the checks have been issued. This file is fed into the positive pay system at the bank. In cases of an emergency, the customer may issue a check and provide the issuance details on an ad hoc basis, over the phone, fax or through a web front-end of the bank.

Presentation Information

Capturing presentation information and reconciliation is the next step in positive pay processing. Checks may be presented in two ways – via inward clearing by the beneficiary’s bank or across the teller’s counter.

Inward Clearing Checks

In case of checks being sent via inward clearing, the check processing system generates the inward clearing file based on the checks received from other banks. The positive pay reconciliation engine matches this information against the information provided in the check issuance files. Matching is performed against the Check number, Check Date and Check Amount. Additionally, Beneficiary Code may also be used if the beneficiary details are always picked up from a pre-defined library. Checks that match are processed as per the normal inward clearing practice of the bank. Checks that do not match any of the criteria are marked as exception items.

Exceptions are classified into two types.

  • No Match criteria – One or more of the information provided in the check does not match with the issuance data.
  • Duplicate Match – Same check is being presented for the second time. Either the first presentment or the current check could be a fraudulent one.

For unreconciled checks, the bank sends the exceptions to the company with a time window for reply with in the same day. This information could be passed on over the phone, fax or a corporate front-end. The bank may choose to send the data to a treasury workstation if supported.

On receipt of the exception items, the customer verifies the details of the checks and decides to ‘Pay’ or ‘Stop / Return’ the checks. In case of a no match exception, mismatch identification becomes easier if check images are available for comparison. Duplicate exception occurs when a fraudulent check is presented to the system. A check with the same information as the one that has been paid earlier will make the system throw a ‘Duplicate’ exception. This information is sent to the client for a decision since the check that was earlier paid could have been a fraudulent check.

The ‘Stop / Return’ Decision will depend on the method in which checks are processed by the bank. If checks are posted before the positive pay reconciliation is performed then they will need to be ‘Returned’ and ‘Stopped’, if no accounting entries are passed prior to reconciliation.

If customer decision is not received within a specific period of time, the bank shall apply the ‘Default Decision’ and process the check accordingly. Default Decision is an agreed upon decision between the bank and the customer, to be used in cases where the customer does not decide within the specified time window.

Across the Counter Presentments

While the inward clearing checks can be processed based on a customer decision, across the counter presentments prove to be a difficult task since the beneficiary or their representative is waiting at the counter for the payment. These checks are processed via the positive pay reconciliation engine. If the presentment details match with the check issuance information, the check is paid. If there is a discrepancy, the default decision is used for processing the check. Since no time window is available for across the counter presentments, the decision is based on the previously agreed upon ‘Default Decision’.

Workflow

Positive Pay Transaction Workflow

Advantages of Positive Pay

Corporates
  • Daily reconcilement of Checks with those paid
  • Prevents fraudulent checks from being paid
Banks
  • Fee based income by using the existing process of check clearing

Deterrents to Positive Pay

  • Customer Attitude – ‘It won’t happen to us’. Customers are unwilling to pay this fee till a fraud takes place.
  • Customer expectation that this service should be provided free of cost as a part of check processing.
  • Check Issuance file formats – With a number of accounting software available with customers today, there are no standard file exchange formats that are defined.
  • Changes to existing systems on the bank side

Conclusion

While companies may try to employ a cost/benefit analysis in determining whether to use positive pay services, most companies will lack sufficient credible data to perform such an analysis. Companies without a history of check fraud losses, tend to understate the potential losses from check fraud while more accurate data exists for estimating the cost of implementing the service. Positive Pay is more like an insurance policy, if things are normal there are no tangible benefits but in case of an exception, it is a boon.

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