What Is Positive Pay and How Does It Work?

Positive Pay is a banking service designed to help businesses combat payment fraud, which remains a persistent concern despite the rise of digital transactions. This automated cash management solution acts as a protective layer, scrutinizing outgoing payments to ensure only authorized transactions are processed. Its purpose is to safeguard a business’s funds by identifying and flagging potentially fraudulent checks or electronic payments before they clear. This proactive approach helps businesses mitigate financial losses and maintain financial integrity.

How Positive Pay Operates

Positive Pay functions by comparing details of payments presented to the bank against a list of authorized payments provided by the business. Businesses typically transmit a file, often daily, containing information for all issued checks, such as the check number, dollar amount, and account number. The bank’s system then uses this information as a verified record to validate incoming payment requests.

When a check or electronic payment is presented to the bank for processing, the Positive Pay system performs an automatic match against the submitted file. If all the details—such as the check number, amount, and account number—align, the payment is cleared for processing. This automated verification reduces the chance of unauthorized payments clearing an account.

Should any discrepancy arise, such as a mismatched check number or an altered amount, the payment is flagged as an “exception item.” The bank notifies the business, often through an online portal or email alert, to review the suspicious transaction. The business then has a limited timeframe, typically less than 24 hours, to decide whether to approve or reject it.

This exception process is key to Positive Pay’s effectiveness in preventing fraud. By putting the decision-making power in the hands of the business for questionable items, it ensures that only payments the business has explicitly authorized are ultimately processed. A swift response from the business is important, as failure to act within the bank’s specified window can result in the item being processed or returned by default.

Types of Positive Pay

Positive Pay services are tailored to address different types of payment fraud, primarily focusing on physical checks and electronic transactions. Check Positive Pay is a common form, designed to protect against fraudulent paper checks. With this service, businesses provide their bank with details of every check issued, including the check number, amount, and account number.

The bank then compares these details against checks presented for payment, identifying any discrepancies like forged signatures, altered amounts, or counterfeit checks. Some versions, like Payee Positive Pay, also include the payee’s name in the verification process. This additional scrutiny helps prevent fraud where the payee’s name has been altered on a legitimate check.

For electronic transactions, ACH Positive Pay offers similar protection for Automated Clearing House debits and credits. Instead of matching specific check details, ACH Positive Pay allows businesses to set up predefined rules and filters for electronic payments. These rules can specify approved originators, maximum transaction amounts, or specific transaction types allowed to debit or credit the account.

Any ACH transaction that does not conform to these established parameters is flagged for review by the business. This enables companies to control which electronic payments are permitted, thereby preventing unauthorized electronic withdrawals or deposits from their accounts.

Implementing Positive Pay Services

Businesses interested in implementing Positive Pay services begin by contacting their financial institution to inquire about the available options. Commercial banks offer Positive Pay solutions as part of their treasury management services. The bank will outline the specific requirements and onboarding process, which may include signing service agreements.

Once enrolled, businesses submit payment data to the bank. For Check Positive Pay, businesses regularly upload a file containing details of all checks issued, often daily, through the bank’s secure online banking portal or via a secure file transfer protocol. This “issue file” includes information such as the check number, dollar amount, and date.

For ACH Positive Pay, businesses establish their authorization rules and parameters with the bank. This involves creating lists of approved vendors or setting limits on transaction amounts and frequency. Managing these rules and ensuring they remain current is an ongoing responsibility.

When an exception item is identified by the bank’s system, the business receives an alert, usually through email or within the online banking platform. Authorized personnel must then log into the bank’s portal to review the flagged item and decide to approve or reject the payment. This decision must be made within a short window, often by a specific time each business day.