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What is bank account verification?

 

October 18, 2024 (Investorideas.com Newswire) Bank account verification is something many of us don't think all that much about, but it's absolutely core to making sure a bank account is valid and belongs to the rightful owner. It's at the center of all banking security.


Bank account verification involves a few things, from confirming that the account is active to checking the name of the person who claims it. Another check is making sure there are enough funds for agreed transactions, like direct deposits.

This process is particularly important today, where online banking and electronic payments are hegemony - many of us cannot remember it any other way.

By verifying bank accounts, we can help stop fraud and meet legal requirements. Both businesses and individuals are protected from financial risks, even if it can sometimes come at the cost of customer experience in other ways, like delayed onboarding or frozen accounts.

The Process of Bank Account Verification

Bank account verification involves a few varying methods to check if a bank account is valid and truly belongs to the person claiming it. One common way is through micro-deposits. So, a small amount (usually under $1) is sent to the account. The account owner then verifies the amounts to confirm their ownership, or what's written in the transaction reference.

Another approach is instant verification, which uses relatively new API technology. Customers log in to their online banking through a third-party service, allowing for quick confirmation of account details. This method does help speed up the verification process.

Another option is automated bank account validation. This is where customers input their account information and a third party checks the account and routing numbers against a database to ensure the account is real. This is more common for offline payments and B2B transactions.

Document-based verification is the traditional method, but it requires the account owner to go through some bureaucracy and provide documents like a voided check or bank statement. While dependable, it can be time-consuming.

The Importance of Bank Account Verification in Fraud Prevention

Bank account verification is the be all and end all of stopping financial fraud. Worrying, it's something that is a growing problem, not a shrinking one.

The 2024 UK Finance Annual Fraud Report shows that although overall fraud losses slightly declined, unauthorized fraud losses still reached £708.7 million in 2023. In the US, trends are similar, and it really cements the notion for strong verification measures.

A trend highlighted in the report is the rise in card identity theft. It went up by 53% from 2022 and has increased by 200% since 2021. Fraudsters are now focusing on stealing card identities directly before using them for fraudulent transactions. Bank account verification helps prevent these attacks by confirming that the person behind a transaction is indeed the account owner.

The growth of mobile banking has introduced many new risks. While losses from unauthorized web banking fell, mobile banking fraud rose by 62%. With more than 85% of traffic at some top banks coming from mobile devices, these platforms have become prime targets for fraud.

One consideration is how much easier it is now to send money than before, pioneered by companies like Revolut. If one's phone is unlocked or the pattern is discovered, it's exceedingly easy to send money from mobile banking accounts to a new account. Sometimes, a recipient's phone number is all it takes, often with a biometric or password confirmation (1 factor, though).

Regulatory Compliance

Bank account verification is closely under the thumb of regulatory compliance, especially regarding Anti-Money Laundering (AML) regulations. The Financial Action Task Force, which sets global standards for AML practices, stressed the importance of Customer Due Diligence during its October 2023 guidance.

AML rules require financial institutions to have strong verification systems to identify and manage risks associated with their customers.

The process generally includes three main steps:

  1. Customer Identification Program (CIP): Collecting basic personal information.
  2. Customer Due Diligence (CDD): Evaluating the customer's risk level.
  3. Enhanced Due Diligence (EDD): Adding extra checks for high-risk customers.

Failing to follow AML regulations can lead to heavy fines, as well as dangerous outcomes for society. In 2023, several major banks faced penalties exceeding $5 billion for not complying with AML rules. Just because the regulation is there, it doesn't mean that the results are always as intended. These fines help deter noncompliance, but they seldom eradicate mishaps entirely.

Advancements in Bank Account Verification Technology

The growth of open banking has transformed how bank account verification works. It's now faster and more secure through API integration, as well as being far more customer friendly.

Open banking allows third-party providers (TPPs) to access customers' bank account details securely, so real-time verification of account information can take place in a secure environment. TPPs like Prometeo use APIs to quickly confirm that the customer-provided details match their bank records.

TrueLayer's Verification solution takes this a step further in fact. They use a name-matching engine which removes the need for businesses to manually review raw data for account ownership checks.

Providers like Prometeo help simplify the process to keep a smooth customer experience, which is key to staying competitive while complying. It's especially important in e-commerce where fast and hassle-free verification is everything.

The integration of artificial intelligence (AI) and blockchain technology is also weighing in. AI has the potential to help by automating data extraction and spotting irregularities. Blockchain can provide secure and unchangeable record-keeping, but it's yet to be fully integrated into mainstream banking as there are still reservations.


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