In its 2015 Payment Fraud and Control Survey, JP Morgan reported that simple low-tech paper checks were the most widely used payment fraud method in 2014.

In spite of the fact that overall paper check usage continues to decline each year, check fraud remains high. Paper checks are an easy target for criminals. Since they’re passed hand-to-hand on their way to payment, they can easily be stolen, duplicated, altered, or cashed illegally.

Organizational risk & fraudulent checks

As if that wasn’t enough, organizations are taking on more risk for fraudulent checks. In 2016, the liability for a bad check can quickly shift to the check issuer and away from the bank that accepts an altered deposit. There are several situations where organizations can be prevented from seeking restitution from a bank that pays a fraudulent check, especially if the organization did not exercise “ordinary care” in issuing checks (see this page from the National Check Fraud Center for some examples where an organization may be liable for a fraudulent check).  This means an organization can’t count on a bank making them whole after accepting a fraudulent check.

All of which calls for a better solution to catching fraudulent checks as they occur.

One of the better ways to protect your organization from altered checks is to implement Positive Pay technology, which is available in many IBM i check printing packages, including my own SecureChex software.

What is Positive Pay?

Positive pay is a fraud prevention system offered by most commercial banks to protect against altered, forged, and counterfeit checks. It checks the accuracy of a check’s account number, date, and dollar amount when the check is presented for payment. The concept is as easy as closing a door, and involves the following steps.

1. Bank customers send a check register file containing check numbers, dates, and amounts to their bank for checks the customer has written.
2. When a check is presented for payment, the bank compares the presented check against the customer’s previously transmitted check information for that account.
3. Where there’s a discrepancy between a presented check and check file information, the bank notifies their customer through an exceptions report and withholds payment until the customer tells the bank to accept or reject the check.

Positive pay is a simple but effective way to prevent check fraud. It stops criminals from cashing fraudulent checks using stolen account numbers. It also catches bad checks where the check amount has been altered or the check has an invalid date.

Where Positive Pay isn’t enough

Here are a few things to watch out for when using Positive Pay.

Over-the-counter fraud – Some banks don’t offer over-the-counter verification, where tellers at a retail banking location can verify incoming checks at the banking counter, using your check file.  When instituting Positive Pay, make sure your bank verifies check information against all check-cashing scenarios, not just when checks are transmitted or scanned.

Payee verification – Payee Positive Pay offers a higher level of fraud protection than traditional Positive Pay. Traditional Positive Pay only includes comparing check numbers, dates, and amounts. It does not include payee verification, to insure the payee name has not been altered. Many banks provide Payee Positive Pay as an added feature to Positive Pay, and that may include additional fees. If you need payee verification, make sure that your software and your bank both support it.

File formats – There are several different transmission formats in which check data can be submitted to a bank. Not all banks use the same transmission format. And some banks use different formats in different divisions. If your organization is programming Positive Pay as an IBM i DIY project, you may have to account for several different check file formats. Keeping up is easier if you implement Positive Pay through a third-party check writing package that produces check registers in the correct format for your banks.

Positive Pay does not detect all check fraud

While Positive Pay detects mismatches in check data, it doesn’t identify when someone forges a signature on a stolen check. If you’re using standard Positive Pay without payee verification, checks can slip through because the bank is not verifying on payee name.

Positive Pay is a great way to institute check fraud protection, stopping bad payments and reducing liability when dealing with fraudulent checks. But while Positive Pay is an effective way to catch check fraud, it is not foolproof.

Related Reading

 2015 Payment Fraud and Control Survey, JP Morgan

Check Fraud – Who is Liable, National Check Fraud Center

 

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