Using Positive Pay to Prevent Check Fraud

In a world where money can travel at digital speed through the cloud, the use of paper checks as a payment method continues to decline as it has for more than a decade. Yet, according to the American Bankers Association, attempted check fraud has been increasing. In 2018, attempted check fraud rose to $15.1 billion – up from $8.5 billion in 2016 – and now accounts for 60% of attempted fraud against deposit accounts in the U.S.

This alarming trend should not come as a surprise because, with the increasing security of digital payments, paper checks have become low-hanging fruit for fraudsters. They can be more easily stolen, duplicated, altered, or cashed illegally.

Businesses Share Liability for Check Fraud

It gets worse for the victims of check fraud. Since 2016, the liability for bad checks has shifted away from the bank to the check issuer. For a business to seek restitution from a bank that pays a fraudulent check, it has to demonstrate it exercised “ordinary care” in issuing the check. Even though banks must also exercise ordinary care when paying on checks, the courts have placed a more substantial burden on the check issuer.

Positive Pay is the Technology Solution for Check Fraud

Not wanting their customers to fall victim to check fraud, banks now offer a technology solution that can catch fraudulent checks before they become a problem. By using positive pay technology, banks can protect businesses against altered, forged, and counterfeit checks. Positive Pay is a fraud prevention system that checks the authenticity of a check’s account number, date, and dollar amount when it is presented for payment. The system provides business customers with the opportunity to reject a check if it is deemed fraudulent.

How Does Positive Pay Work?

When checks are presented to a bank, positive pay works in the background to verify their authenticity and then notifies the customer when it uncovers any inconsistencies. There are essentially three steps to the process.

  1. You send a check register file to the bank that includes check numbers, dates, and amounts for checks you have written.
  2. When a check is presented for payment, the bank’s electronic systems compares it with the information in your check register file.
  3. If a discrepancy or inconsistency arises between the presented check and the check register file information, the bank notifies you through an exceptions report and holds up the payment until you tell the bank to accept or reject it.

Payee Positive Pay for Added Security

While positive pay is an effective way to stop criminals from cashing a fraudulent check using stolen account numbers or altering the amount or date of a check, it does not include payee verification to ensure the payee name hasn’t been altered. Payee Positive Pay adds a layer of protection through an optical comparison of the payee name in the check register file to the payee name on the check presented to ensure increased accuracy. If the name appears to be altered, the bank includes the check on the exception report presented to the customer.

With check fraud on the rise in the U.S., it is now essential for businesses to be able to track checks issued to suppliers and other payees. The costs to businesses in terms of bank fees, overdrawn accounts, rejection of other payments, and angry payees can never be justified when a technology solution is available to prevent them. Positive pay is readily available at any bank that caters to business customers.