Positive Pay: An Underused Tool for Fighting Check Fraud

The PaymentsJournal Podcast

Even though the number of checks written continues to decline, mail theft remains on the rise. Beyond the theft of checks directly from mailboxes, there have been instances of stolen mail trucks. The ease of modifying checks allows criminals to simply wash and modify the payee’s name.

Q2’s positive pay system, used by roughly 550 banks across the country, is on track to stop more than $2.5 billion in fraud this year. In a recent PaymentsJournal podcast, Bruce Dragoo, Manager, Solutions Consultant for Q2, and John Byl, SVP Product Development at Mercantile Bank of Michigan—a Q2 customer—discussed how to get people on board to combat check fraud with Albert Bodine, Director, Commercial and Enterprise Payments for Javelin Strategy & Research.

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Positive Pay: An Underused Tool for Fighting Check Fraud

PaymentsJournal Positive Pay: An Underused Tool for Fighting Check Fraud

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A Problem for Businesses of All Sizes

In 2022, around $720 million of fraud was identified and stopped by Q2’s positive pay system. Last year, that number doubled to $1.4 billion.

“It seems like it’s wider-reaching at this point and coming downstream to smaller businesses,” Byl said. “It had been historically viewed as a large corporate need, but it’s indiscriminate at this point—and it’s affecting everybody.”

A third of commercial payments globally are still made by check, which presents a huge opportunity for criminals. But only 30% of eligible businesses use positive pay, which matches the details on a check to the details on file with the bank to ensure its validity. Some related solutions cover just checks, and others cover ACH transactions, but they don’t address the gamut of everything a business may need.

“In some cases, having a great technology provider that can provide not only check but ACH positive pay, along with full reconcilement capabilities, can be a barrier to some of these institutions signing up for a full breadth of what they need,” Dragoo said. “It’s about being either reactive or proactive in regards to the financial institution selling positive pay. At some financial institutions what I’ll hear is that the only time that they sell positive pay to a customer is when they’ve had check fraud on their account and they’re reacting to the situation.”

Talking to customers before they open a checking account can be critical. If they are a small business or a corporate client, financial institutions can say, “We have a great solution for you that can help identify and stop check fraud before it even happens.”

The best value proposition for positive pay is stemming or eliminating the flow of funds out the door to fraud.

“We’ve gone through the evolution of being reactive and only bringing up positive pay when we’ve had check fraud or a customer’s asking about it,” Byl said. “What we’ve realized with this whole process is that many customers are not aware of what positive pay is, or why they might need or want it. We need to create awareness for our customers and help them understand how they go about implementing something along these lines.

“I’ve worked for institutions where we haven’t had a great solution in place, one that hasn’t been very user-friendly to work with. Thankfully, we have a solution today that is user-friendly and adaptive to our customers, so we can remove those barriers to entry for them and make it as an easier process as possible.”

Moving Beyond Legacy Systems

Some financial institutions are limited in how they can build out new revenue streams. Many of their resources go into supporting legacy systems. Having organization partners enables FIs to bolster the security of the products and services they offer.

“While 30% of the institutions we’ve surveyed are not charging for positive pay, of those customers that use it, 47% of them said they would pay for positive pay,” Dragoo said. “They understand the value of the solution itself in helping to stop any type of fraud that may be coming through their checking account. Several of our financial institutions actually have turned their treasury management team into a revenue generator just by selling positive pay at a nominal fee of $30 to $50 an account.”

Customers respond best to thinking of positive pay as a form of insurance against fraud. Q2’s approach has been not to nickel-and-dime their customers for each little tick mark that happens as part of the positive pay process but rather casting at it as a holistic product that can protect customers.

“It’s easy to build revenue models for positive pay, taking into account the mitigation of the fraud losses,” Bodine said. “Even if you’re partnering with somebody from the outside, it’s pretty easy to cover those transactional costs by eliminating those fraud dollars that are going out the door.”

Making the Case

Financial institutions can’t assume their customer base knows or understands what positive pay is and how it can protect them. Q2 has identified some essential items that financial institutions can use to increase the adoption of a good positive pay solution. Rolling out a solution that has check and ACH positive pay in it—and has great pay-name match reporting self-service for the customer—is a good first step.

Secondly, financial institutions should sell positive pay proactively by talking to customers at account opening. They should educate them on check fraud and what it looks like. Although some consumers may not have encountered fraud yet, they will understand the risks, especially when they hear a broader value proposition.

“Part of what where our successes come from has just been in helping our staff understand who our customers are and what sorts of fraud scenarios we’re seeing taking place in the market area,” Byl said. “We make it more real to people—this isn’t something that’s happening on one of the coasts. It’s happening around the corner where a mail truck has been robbed. Or these people dropped stuff in their mailbox and put the flag up and just walked away and didn’t realize people would have the audacity to just take that stuff out of there.”

Partnering with a dedicated provider is vital. “One of the strongest recommendations that we’re making at Javelin in the commercial enterprise practice area is that legacy bank structures are not really set up to do well moving forward,” Bodine said.

Q2 is looking at enhancing its pay-name match to make it even better. The company is also looking at embedding AI technology into the solution to help not only FI customers but also frontline bank staffers to sell positive pay to existing customers and prospects.

“As a Q2 customer, the biggest thing is having a partner who is willing to listen to you and engage in the conversation,” Byl said. “They listen to the feedback of their customers and make their product better. That’s been huge to know not just what’s happening in your neck of the woods, but how other FIs that they work with are implementing their best practices. Having that collective learning going on makes such a huge difference.”

Said Dragoo: “You’re the one that’s bringing us the ideas and bringing us what is happening in the market that we may not be seeing. We appreciate that partnership so that we can develop leading technology and make sure that we can help identify and stop fraud in the future.”

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