Small businesses are vulnerable to check fraud and are prime targets for fraudsters because they frequently have limited resources and fewer robust financial controls in place than larger enterprises. By understanding the many types of check fraud and their distinctive characteristics, taking the necessary precautions, and remaining attentive, companies can prevent check fraud from damaging their finances and reputation.
Fraudsters use various techniques to access the funds of a business, such as altering checks, forging signatures, and creating counterfeit checks. To prevent this type of fraud and safeguard their finances, companies must implement effective cash management practices.
One solution to counter check fraud is to use “positive pay,” an automated cash management service offered by most banks that detects fraudulent checks and prevents them from being paid. Positive pay is an important tool for preventing check fraud, losses, and other liabilities. This service often comes with a fee, although some banks now offer it for free.
HOW POSITIVE PAY WORKS
With positive pay, the issuing company electronically sends its bank a list of the most recent check run, detailing the check numbers, amounts, payees, and check dates. When a check is presented to the bank for payment, it’s compared against the information submitted by the issuer for matching.
When there’s a difference, the bank flags the check, notifies the customer via an exception report, and gives the check issuer a choice to accept the check or not. When the company fails to review a flagged check within the specified time frame, the check is returned to the issuer.
ACH POSITIVE PAY
Automated clearing house (ACH) positive pay is effective in preventing unauthorized ACH debits by allowing businesses to set up permission for certain vendors to withdraw funds from their bank accounts and also block some other transactions. The Association of Financial Professionals states that ACH debit fraud comes in second place to check fraud.
Scammers can obtain a company’s ACH information from its paper checks and make unauthorized ACH debits. Businesses have a limited time window to take back an unauthorized ACH transaction. Without having ACH positive pay in place, it’s particularly critical for small businesses to keep an eye on ACH transactions on a daily basis to avoid fraudulent ACH debits.
REVERSE POSITIVE PAY
Reverse positive pay is a variation of the positive pay concept except that it’s less effective. On a daily basis, the bank sends the company information about checks that are presented to the bank for payment. If the company doesn’t reject the checks within a fixed time frame, the bank will allow the checks to be cashed.
The main difference between positive pay and reverse positive pay is in the reviewing authority and liability. In reverse positive pay, when the company fails to review a flagged check within a specified time, the bank will process the check.
BENEFITS OF POSITIVE PAY
Positive pay provides several benefits, including convenience, easy access to the exception approval process, consistent account monitoring, fewer human errors, and less labor cost. Other benefits include the following:
Fraud detection. By comparing the checks presented for payment with the list of authorized checks provided by the customer, any discrepancies can be quickly identified. This includes alterations to the payee name, the check amount, or unauthorized checks altogether.
Reduced financial losses. By catching fraudulent checks before they’re paid, positive pay helps clients avoid financial losses. It provides an opportunity to review and reject questionable checks, protecting the company’s funds from being disbursed to fraudsters.
Enhanced security. Positive pay acts as a deterrent for potential fraudsters, making it more difficult for them to successfully execute check fraud schemes. This can help protect both businesses and individuals from financial harm.
Customizable parameters. Positive pay allows small business clients to tailor the level of control by setting specific parameters for verification such as check number, payee name, and check amount to ensure that only authorized checks are processed.
Streamlined reconciliation. Because only authorized checks are paid, the need for extensive manual reconciliation is reduced. This saves time and effort for accounting departments and helps maintain accurate financial records.
Peace of mind. It instills confidence in the check payment system and helps build trust with financial institutions.
LIMITATIONS OF POSITIVE PAY
Positive pay also brings with it some unique challenges, which companies should review and resolve or rule out before any implementation plan is in place.
Implementation and maintenance. Setting up positive pay may require initial effort and coordination with the bank. Small businesses need to provide the necessary information and maintain accurate records of issued checks to ensure effective fraud detection. It’s crucial to train staff members on how to use the new system correctly and adhere to specified security measures and workflows. Employees may require extensive training to understand the importance of following established security protocols.
Potential false positives. There’s a possibility of legitimate checks being flagged as fraudulent due to discrepancies, leading to delays and inconvenience for both the business and the payee. This can require additional verification steps to ensure accurate processing.
Reliance on the bank’s system: Positive pay relies on the bank’s system to compare and verify checks. If the bank’s system experiences technical issues or failures, it can disrupt check processing and delay payments.
Cost and fees. Some banks may charge fees for implementing positive pay services. While the cost may be outweighed by the potential savings from preventing fraud, businesses should consider the financial implications.
Limited protection. While positive pay is effective in detecting and preventing check fraud, it may not cover other forms of payment fraud or unauthorized transactions. Small businesses should employ additional security measures to protect against different types of fraud.
It’s important for small businesses with limited resources to weigh these pros and cons when considering the implementation of positive pay and assess its suitability based on their specific needs and circumstances. But for companies wishing to safeguard their finances and enhance their general financial health, automated cash management systems are a sensible investment due to their advantages, which include improved fraud detection, increased efficiency, and long-term cost savings.
August 2023
