Check fraud remains a significant threat to businesses of all sizes. According to the Association for Financial Professionals' 2022 Payments Fraud and Control Survey, 65% of organizations experienced actual or attempted check fraud in 2022, with checks being the payment method most often targeted. The losses from these incidents can be substantial - the Great American Insurance group found the median loss reported was $1,988. That’s more than six times the median loss on all frauds tracked by the FTC.
One of the most effective tools for combating check fraud is a service called positive pay. According to Jack Herny, 83% of organizations use Positive Pay to prevent check fraud. Positive pay allows companies to electronically send their bank a list of all checks issued for a given disbursement cycle. The bank then matches each check presented for payment against this list of approved checks.
How Positive Pay Works
The positive pay process involves three main steps:
- Issue Checks - The company cuts checks and captures the check number, amount, payee name, and issue date for each check.
- Transmit Issue File - This information is transmitted in an encrypted file to the bank, usually through the company's cash management system.
- Match Presentments - When checks are presented for payment, the bank compares them against the issued check file. Only checks that match are paid.
Any checks that cannot be matched, either due to counterfeit checks or altered amounts, are flagged as exceptions for review by the company before payment.
Benefits of Positive Pay
A study by the Federal Reserve found organizations using positive pay experienced a staggering 66% reduction in check fraud losses per incident compared to those not using it. According to AFP data, 70% of companies with revenues over $1 billion use positive pay.
Other key advantages include:
- Prevents altered and counterfeit checks from being paid
- Improves cash forecasting through better visibility of outstanding checks
- Facilitates account reconciliation by pinpointing checks cleared
- Reduces costs by avoiding processing of fraudulent checks
- Shifts liability for any losses from the company to the bank if checks were issued and reported properly
Implementing positive pay requires some operational process changes, but the payoff in reduced fraud risk makes it an essential fraud prevention measure for any organization still issuing check payments. With check fraud showing no signs of going away, positive pay provides invaluable financial protection and peace of mind.