Bank Account Verification & IDV in Open Banking

Ensuring the accuracy and legitimacy of financial transactions is important in today’s digital economy. Businesses and consumers rely on secure and efficient methods to verify bank account and identification information, safeguarding against fraud and ensuring compliance with regulatory standards.

While identity verification (IDV) is a critical part of this process, it is not the only way to verify a customer. SEON complements traditional bank account verification by providing cost-effective methods to verify customers before reaching the IDV stage. By filtering out potentially destructive users earlier on, SEON can help companies reduce the need to IDV every customer, saving time and resources.

What Is Bank Account Verification?

Bank account verification is the process of validating customer account information to confirm that an account belongs to the person or business claiming to own it and that furnished details are indeed correct. Bank account verification is necessary for onboarding customers or conducting transactions across various sectors. Ensuring that accounts are appropriately verified is mandatory to comply with most Know Your Customer (KYC) and anti-money laundering (AML) legislation.

Bank account verification methods are becoming increasingly automated to improve the accuracy and speed of this step. Manually checking bank statements can take up to ten days, while checks completed via an automated service can happen nearly instantly.

What Is Identity Verification and Why Is It Critical For Open Banking?

IDV involves validating ID documents and frequently employs advanced technologies like biometrics or AI. These processes are vital in open banking, a financial services concept that grants third-party financial service providers open access to consumer banking, transactional and other economic data from banks and non-bank financial institutions through the use of application programming interfaces (APIs) for several reasons:

– Open banking facilitates sharing financial data through APIs, allowing third-party providers to access this information. This increased data sharing heightens the risk of fraud and identity theft.
– Robust IDV is essential in confirming that only authorized and legitimate users can access sensitive financial data, thereby protecting financial institutions and their customers.
– Strong IDV measures help financial institutions comply with regulatory requirements such as KYC and AML laws.

By implementing thorough IDV processes, open banking platforms can provide a secure and trustworthy environment for financial transactions, enhancing customer confidence and ensuring regulatory compliance. This can make the financial ecosystem safer for all participants.

Why Is Bank Account Verification Important?

Bank account verification is often a mandatory step before opening a new account, similar to a cellphone contract or a new credit card, as a safeguard against fraud.

Key reasons for the importance of bank account verification include:

• Fraud Prevention: Verifying a customer’s bank account can reduce bank account fraud
• Accuracy: Ensures funds are sent to the correct destination, preventing misrouted transactions due to incorrect account numbers. 
• Compliance: Helps companies comply with KYC and AML obligations.
• Risk Management: Can weed out illicit customers, with failed verifications triggering further checks or application rejections. =
• Customer Assurance: Stringent checks reassure customers that steps are being taken to protect their accounts. 
• Future Protection: Proper verification helps businesses combat chargeback fraud and other claims down the line. 

In the UK, for example, many banks use the Confirmation of Payee (CoP) framework, part of the open banking initiative. This system checks that the account number and sort code match the intended payee, allowing the account holder to halt the payment if they do not match.

While all banks must perform IDV on their customers at some point, they aren’t compelled to  IDV everyone immediately. By first filtering out potentially harmful users, banks can focus their IDV efforts on legitimate customers that require attention, saving time and resources.

What Is a Bank Verification Check?

Bank verification checks are often automated to confirm that bank details match expectations, such as that a company or individual’s account name matches that provided by the customer.

Bank verification checks can occur when setting up an account or at another stage of the customer relationship. For example, companies often undertake periodic KYC checks on existing customers if they detect suspicious activities or other undesirable behaviors.

How Do Businesses Verify Bank Accounts?

Businesses verify bank accounts using different methods depending on the country and organization. Traditional methods include manually submitting bank statements and micro-deposits, where companies send small deposits to the claimed bank account and ask the customer to confirm the amounts.

Micro-deposits and manual verifications can be flawed and time-consuming, though automated methods are gaining ground in the UK and Europe. The open banking initiative allows companies to connect directly to bank accounts (with permission) for verification. As of early 2023, over seven million UK consumers used open banking.

In the US, open banking is evolving but still requires more regulation. In the meantime, third-party service providers and credit reference agencies offer automated verification through APIs, enabling the seamless integration of verification checks into business processes while reducing customer friction.

How Long Does the Bank Account Verification Process Take?

When a company’s systems are integrated with services provided by credit bureaus and third-party providers, the bank account verification processes can be completed in seconds.

Protection Against Fraudulent Bank Accounts

To protect against the risks associated with fraudulent bank accounts, here are a few key steps: 

Deploy pre-KYC technology: Fraudsters often reveal themselves before the formal KYC process begins, such as logging in from blacklisted IPs or using VPNs. Using device intelligence and anti-fraud techniques, fraud prevention solutions can filter out suspicious customers early, saving time and resources.

Leverage digital footprinting: Email addresses, phone numbers and IP addresses can provide valuable insights about a customer. Digital footprinting can uncover data points like social media accounts linked to an email. API integration allows these checks to run in the background, assessing risk levels without disrupting the customer experience.

Use AI and machine learning: AI and machine learning are essential for modern fraud protection. They excel at pattern detection to expose suspicious transactions and account use. These technologies help proactively protect your organization from fraudulent accounts.

By being proactive, data-driven, and leveraging advanced technology, you can effectively safeguard your business against the risks of fraudulent bank accounts.

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