What is positive compensation?
Positive Payment is an automated cash management service used to prevent check fraud. Banks use positive remuneration to match checks issued by a company with those it presents for payment. Any check considered suspicious is returned to the sender for review. The system acts as a form of insurance for a business against fraud, loss and other liabilities. There is usually a charge for using it, although some banks now offer the service for free.
Key points to remember
- Positive Pay is a fraud prevention system offered by most commercial banks to businesses to protect them against forged, altered and forged checks.
- The business provides the bank with a list of the check number, dollar amount, and account number for each check.
- The bank compares the list to actual checks, reports those that do not match, and notifies the company.
- The company then tells the bank whether or not to cash the check.
Understanding positive compensation
To protect against forged, altered and forged checks, the service compares the check number, dollar amount, and account number of each check to a list provided by the company. In certain cases, the beneficiary may also appear on the list. If these do not match, the bank will not clear the check. When security checks are not in place, identity thieves and fraudsters can create forged checks that can end up being honored.
When the information does not match the check, the bank warns the customer through an exception report, withholding payment until the company advises the bank to accept or reject the check. The bank can report the check, notify a company representative, and request permission to clear the check. If the business finds only a slight error or other minor problem, it can choose to advise the bank to clear the check. If the business forgets to send a list to the bank, any submitted checks that should have been included can be rejected.
Since banks are not responsible for fraudulent checks, businesses should carefully review the general conditions of the establishment.
Reverse Positive Pay vs. Positive Pay
A variant of the concept of positive payment is the reverse positive payment system. This system forces the issuer to check their checks themselves, making it the responsibility of the company to alert the bank to reject a check. The bank informs the company daily of all checks presented and deletes the checks approved by the company.
Generally, if the company does not respond within a short enough time, the bank will go ahead and cash the check. This method is therefore not as reliable and effective as positive remuneration, but it is cheaper.