Payments fraud is nothing new—but neither is one of the best tools for combatting it: positive pay. Yet some banks still do not offer a positive pay program to their commercial customers—and even some of those that do offer positive pay do not market it well to their customers. In response to both of these facts, I ask, “Why on earth not?”
What is positive pay?
Positive pay is pretty straightforward, both conceptually and operationally. Each day, commercial customers enrolled in the program submit to their bank a list of checks the customer has authorized. The bank then compares payment orders received each day against the authorized list—any that are listed are paid without issue, while any that are not listed are flagged for follow-up. Customers can work with their bank to select default actions for exception items. Popular options include automatically paying items unless the customer objects within a certain time, automatically denying items under the same logic, or automatically paying items under a certain dollar threshold and denying those above it. Some positive pay programs will match not only the check number and check amount to the customer’s authorized list, but also the payee name (sometimes for an additional fee). And more frequently, positive pay services are being expanded to include reviews of ACH entries.
How do we start a positive pay program?
Implementing a positive pay service is not overly burdensome. Some positive pay programs are run manually, with bankers personally checking authorized item lists and communicating with customers regarding any exception items. Others are more automated, running through vendor software that compares items and produces exception reports. Assess your institution’s personnel bandwidth, technology, and the volume of positive pay reviews expected, and make a strategic choice on implementation.
Also key to a positive pay service is an appropriate customer agreement. This agreement is typically short and sweet and can easily be added to an existing cash management program. But because the point of positive pay is risk management and liability apportionment, and because the processing of checks and ACH payments are governed by the UCC, it is important to have in place an agreement that clearly lays out the rights and obligations of both parties, as well as makes clear who holds the liability in certain circumstances. Critical terms include:
- How and when authorized item lists will be delivered by the customer.
- What information will be reviewed and compared by the bank (including whether ACH items will be reviewed).
- How and when exception items will be reported to the customer.
- What the bank will do with the exception items and on what timeframe.
- Appropriate limitations of liability and indemnification for the bank for following the customer’s instructions.
- Appropriate security procedures.
- Other terms necessary to align the agreement with the bank’s other applicable deposit account, cash management, and online banking agreements.
How do we convince customers to enroll in positive pay?
The easiest customers to sell on positive pay are those who have already suffered through a fraud incident. Knowing there is a simple (and usually affordable) tool in place to prevent that headache from happening again brings easy peace of mind.
Those who have not experienced a fraud incident can be tougher to convince, but often the missing piece is awareness. Naturally, customers will be reticent to pay for an additional service if they do not perceive it to add value. Consider discussing positive pay with commercial customers at account opening or when enrolling them in other cash management services. For existing customers, mailers or social media posts can help highlight the benefits of a program they might not have previously considered. Or perhaps take the time to discuss with customers at their next cash management risk review. The horror stories of other customers (shared anonymously, of course) can be convincing!
Positive pay programs tend to run $25-75 per customer, per month. While this does not seem prohibitively expensive to some budgets, it can be a meaningful amount to the bottom line of a small business. By the same token, if fraud has become of heightened concern for your institution or a particular customer, perhaps offering positive pay service free of charge (even if only temporarily) would be beneficial.
Will enrolling in positive pay foil all attempts at fraudulent payments? No. There will always be clever swindlers out there finding new ways to skirt fraud detection measures, and there are certain types of fraud that simply cannot be detected through positive pay. That said, positive pay is one of the single most effective tools against some of the most common types of commercial payments fraud. With a solution so simple, why wouldn’t everyone take advantage of it?