What is Bank Account Verification? Process & Solution in 2024

Research found that international credit card payments hit about 678 billion USD in 2022, this means that on average, about 1.87 billion transactions happen on a daily basis. What does this also mean? It also means that 77.4 million transactions occur each hour of the day, 1.29 million transactions each minute, and 21510 every second! Imagine that banks and financial institutions need to monitor these transactions manually, that would be impossible. So, how do these transactions get verified, and how does bank account verification work in this context?

With the rise of online fraud, it is very difficult for businesses to rely on customers to provide their account details so that the business can charge them or send them money. But account verification helps in confirming and validating that the provided account number is legitimate and valid and belongs to the individual or entity claiming ownership.

What is Bank Account Verification?

Bank account verification is a process used by not only financial institutions but also businesses and individuals to check the accuracy and ownership of the provided bank account details. This check makes sure the account is real, belongs to the right person, and has enough funds for transactions like direct deposits or automatic payments. This is especially important in online banking to cut down on fraud.

It's integral across various sectors, mandated by regulations such as Know Your Customer (KYC) and anti-money laundering (AML). Automation has streamlined the process, enabling instant verification compared to manual methods that could take up to ten days. This verification serves businesses in authenticating customer information and aids consumers in confirming payment recipients.

Read more: AML Vs KYC: The Difference and Importance for Sanctions Screening

Why Is Bank Account Verification Important?

Bank account verification is used to confirm the accuracy and ownership of bank account details provided by individuals or businesses. Confirming bank account details ensures secure transactions and prevents unauthorized access. It serves several purposes:

1. Confirming Validity

It ensures that the bank account is active and legitimate to reduce the risk of fraudulent transactions.

2. Verifying Ownership

It validates that the bank account belongs to the individual or entity claiming ownership to prevent unauthorized use of bank accounts.

3. Ensuring Funds Availability

It verifies that there are sufficient funds in the account for transactions such as direct deposits or automated payments to avoid payment failures due to insufficient funds.

4. Compliance Requirements

It helps businesses comply with regulations such as Know Your Customer (KYC) and anti-money laundering (AML) laws by verifying the identities of account holders.

5. Risk Mitigation

It reduces the risk of errors and fraudulent activities associated with incorrect or falsified bank account information.

Read more: The Best 10 KYC Software Solutions in 2024 Reviewed

How Does Bank Account Verification Work?

Bank account verification typically involves several steps to confirm the accuracy and ownership of bank account details. Here's how it generally works:

1. Information Collection

The individual or entity requesting verification collects the necessary bank account information from the account holder, including the account number, IBAN, routing number, and/or account holder's name.

2. Verification Request

The verifier submits the provided bank account information to the relevant financial institution or a third-party verification service.

3. Verification Methods

• Micro Deposits: Small amounts (usually less than $1) are deposited into the provided bank account. The account holder must confirm the exact amounts deposited to verify ownership.
• Pre-Note Authorization: A test transaction, or pre-note, is sent to the bank account, and confirmation of the transaction's success is awaited before further actions are taken.
• Bank Account Validation Services: Some companies specialize in providing bank account validation services, utilizing databases and algorithms to verify account information.
• Bank Verification API: Financial institutions and third-party providers may offer APIs that allow for automated verification of bank account details, streamlining the process for businesses.

4. Confirmation

Once the verification process is complete and the bank confirms the accuracy and ownership of the provided account details, the verifier receives confirmation that the account is valid and can proceed with transactions or other actions.

5. Compliance

For businesses, ensuring proper verification is often a requirement to comply with regulations such as Know Your Customer (KYC) and anti-money laundering (AML) laws.

AI And Instant Bank Account Verification

AI helps in the instant verification of bank accounts by automating tasks such as data extraction from submitted documents, swiftly identifying anomalies in bank account data to enhance security, and enabling real-time decision-making.  With predictive analytics, AI analyzes historical data to predict the validity of bank accounts, aiding in informed decision-making.

Also, machine learning continuously learns and evolves, improving the accuracy and effectiveness of verification processes over time. In combating fraud, AI conducts liveness tests during ID verification, detects deepfake videos, and assists financial institutions in recognizing patterns of fraudulent behavior.

How To Protect Your Bank Accounts from Fraud with FOCAL

FOCAL offers Confirmation of Payee (CoP), which is a product designed to bolster security and efficiency in financial transactions by cross-referencing sender-input beneficiary information with recipient details. It aids in fraud prevention by ensuring alignment between provided beneficiary information and recipient records, reducing the risk of misdirected payments.

Customizable verification criteria allow organizations to tailor settings to their specific needs, enhancing flexibility. By swiftly approving valid transactions and flagging discrepancies in real-time, FOCAL CoP minimizes operational delays, streamlining transaction processing. It benefits various organizations, including financial institutions, businesses, and e-commerce platforms, seeking to enhance transaction security and efficiency.

Conclusion

A rule of thumb is that verifying account information must take place before processing any money transactions. So, in any online activity like electronic transfers or ACH payments, you need to verify bank account details to make sure it is real and belongs to the right person, and you can do so by verifying the account holder's name, the account number, and the type of the account, that is checking or savings account.

Automating this process can save you time and effort and also increase accuracy while keeping risks minimal. We explained in this article how Confirmation of Payee solution verifies beneficiary details and spots fraud risks in real time. FOCAL platform effectively protects bank accounts from fraud through its advanced bank account verification system.

Frequently Asked Questions: Bank Account Verification

Q1. What Is A Bank Verification Check?

A bank verification check ensures that provided bank details align with expectations, verifying details like the account holder's name. It's vital for online transactions and other financial activities, aiming to prevent errors, fraud, and ensure transaction accuracy. Checks can occur during account setup or periodically during the customer relationship, such as for KYC compliance.

Q2. What Is A Bank Verification Letter?

A bank verification letter, also known as a bank verification of deposit (VOD), is a document provided by a financial institution confirming specific information about an individual's or business's bank account. This document is often requested by third parties, such as landlords, lenders, or government agencies, to verify the existence of the account, its balance, and other pertinent details.

The bank verification check typically includes the following information:

• Account Holder Information
• Account Details
• Account Status
• Balance Information
• Date of Verification

Q3. How Do Businesses Verify Bank Accounts?

Businesses verify bank accounts either via traditional approaches, including manual submission of bank statements and micro deposits, or alternatively, through automated methods, such as Open Banking.

While microdeposits are common, they have drawbacks like susceptibility to fraud and being time-consuming. Automated methods offer streamlined verification processes and allow direct connection to bank accounts with customer consent, reducing friction.

Q4. How Long Does It Take To Verify A Bank Account?

Bank account verification processes can be swiftly completed when automated, often in seconds. Likewise, initiatives like Open Banking enable rapid checks once authentication is finalized.