What Is a Positive Pay System and How Does It Work?

A Positive Pay system is an automated fraud prevention service offered by financial institutions to businesses. Its objective is to safeguard bank accounts by verifying the legitimacy of outgoing payments before funds are disbursed. This system protects against unauthorized transactions, such as forged, altered, or counterfeit payment instruments. It functions by comparing payment details submitted by a business against items presented for payment at the bank, ensuring only authorized payments are processed.

Check Positive Pay: Core Process

Check Positive Pay combats check fraud by automating the verification of checks presented for payment. When a business issues checks, it electronically transmits a file to its bank containing details for each check. This file includes the check number, dollar amount, account number, and may also include the issue date and payee name.

Upon receiving checks for payment, the bank’s Positive Pay system cross-references the information on the physical check with the data in the business’s submitted file. The system compares the check number, dollar amount, and account number. If these details align with the information in the issue file, the check is processed for payment.

If a discrepancy arises during the matching process, the item is flagged as an “exception.” Common discrepancies include mismatched amounts, incorrect check numbers, or checks not originally listed in the submitted file. These exception items are reported to the business, usually through an online portal or a daily report.

The business reviews these exceptions and makes a pay or no-pay decision for each flagged item within a specified timeframe, often a daily deadline. If the business confirms the check is valid despite the discrepancy, the bank processes it; otherwise, the check is returned unpaid. This review process prevents fraudulent, altered, or counterfeit checks from being paid from their accounts.

ACH Positive Pay: Core Process

ACH Positive Pay extends fraud prevention to Automated Clearing House (ACH) transactions, distinct from its check-based counterpart. This service focuses on controlling incoming debit transactions or authorizing specific outgoing credit transactions, providing oversight of electronic fund transfers. Unlike checks, which rely on a list of issued items, ACH Positive Pay uses a system of filters and rules to manage these electronic payments.

Businesses establish predefined rules with their bank, such as blocking all unauthorized ACH transactions or permitting only those from an approved list of vendors or originators. These filters include specific transaction types, maximum amount limits, or expiration dates for authorizations. When an ACH transaction is presented, the bank’s system evaluates it against these criteria to dictate permissible electronic payments.

Any ACH transaction not conforming to predefined rules or an approved list is flagged as an exception. The bank notifies the business, typically through an online portal. The business decides whether to approve or reject the ACH transaction, often within a set timeframe. This approach prevents unauthorized debits or ensures only intended credits are initiated.

Additional System Components

Beyond the core check and ACH matching processes, comprehensive Positive Pay systems often incorporate additional features that enhance fraud detection and financial management. One such component is Payee Name Matching, which adds another layer of security to check verification. With this feature, the system not only validates the check number and amount but also compares the payee name on the physical check against the payee information submitted in the issue file.

If the payee name on the check does not match the record, the system flags it as an exception, helping to prevent fraud where a legitimate check is intercepted and altered to a different payee. Another variation is Reverse Positive Pay, which shifts the initial responsibility for review to the business. Instead of submitting an issue file beforehand, the bank presents all checks attempting to clear the account to the business daily.

The business reviews these presented checks against its internal records and instructs the bank which to pay or return. This method provides businesses with complete control over every check transaction, though it requires more hands-on daily reconciliation. Positive Pay systems also offer robust reporting and analytics capabilities.

These features provide businesses with detailed insights into transaction activity, exception patterns, and overall fraud trends, aiding in internal audits and financial planning. Many Positive Pay solutions are designed with integration capabilities, allowing them to connect with a business’s existing accounting software or enterprise resource planning (ERP) systems. This integration streamlines the process of submitting issue files and managing exceptions, reducing manual effort and improving data accuracy.