Many businesses are responsible for handling financial transactions, which automatically means one thing — identity verification and robust fraud prevention measures before the user is able to open an account. Since many companies now operate digitally, industries like banking, crypto, e-commerce, or insurance need to implement Know Your Customer (KYC) and Anti-Money Laundering (AML) measures. This might seem easy in theory, but in practice, risks like global operating markets, jurisdictional differences, cross-border transactions, and other risk factors all add a layer of complexity for those who are responsible for their business and their financial security.
However, with growing regulatory requirements, the demands from the customers are also reaching new heights, so companies simply need to prioritize a robust onboarding process, which often consists of multiple security checks that are done by the user and the internal compliance team. Customers now also care about data security and want to make fast and secure transactions. To meet these expectations, companies need to both validate documents and extract identity information, which also consists of verifying their bank account and financial background. This process is known as bank account verification.
In this blog post, we look into the main challenges businesses face when scaling and ensuring regulatory compliance and how bank account verification can help maintain security while enabling quick, seamless payments.
What is Bank Account Verification?
Bank account verification is the process of confirming if a user’s bank account is valid and if it really belongs to the owner, who is a legitimate customer. This process verifies that the bank account is valid, active, and belongs to the person claiming ownership, supporting compliance with KYC requirements. Bank account verification also checks if the account has sufficient funds for transactions like automated payments or deposits. Many fintech platforms and similar services use this process to help reduce fraud.
In general, the goal of the bank account verification process is to:
- Confirm a client’s account ownership.
- Verify their eligibility to open a new account.
- Check personal details (such as the account holder’s name, account number, and savings).
- Ensure that customer’s transactions are accurate and legitimate.
- See if the customer is eligible for further financial services (for example, stricter checks are conducted on investment platforms).
When opening a new account, customers are often required to complete identity verification (using ID documents and cross-checking with external databases like a credit bureau) or provide proof of account ownership, such as a recent bank statement, which is an additional check and can be considered a bank account verification measure.
When is Bank Account Verification Required?
This process is vital for any platform that handles online transactions and is required when the business first transacts with a new customer. It’s used for online transactions, such as electronic funds transfers and similar financial activities. The main benefits of implementing this check is to prevent errors, protect the user from fraud, and ensure the overall accuracy of transactions.
So, like with a standard identity verification check, which is often the process of asking the user to upload a photo of their government-issued ID document or a selfie for biometric verification, bank account verification can be conducted at both the onboarding stage and updated periodically (if there are concerns about the user’s intent or signs of risky financial behavior).
How Does Bank Account Verification Work?
Bank account verification requires account holders to provide information to confirm their bank account (to know that it’s valid), typically through an app or online banking. It works both for individual accounts and business accounts, verifying that the banking info, such as the IBAN, is legitimate.
So, in other words, bank account verification works by confirming the account holder’s name, their account number, as well as the routing number through internal/external databases or other secure systems. Alternatively, many fintechs rely on automated third-party software providers, often for both identity and account verification, using real-time data via API services.
Other popular approaches for bank account verification include:
- Using multifactor authentication to confirm the customer’s identity.
- Asking the customer to verify their account by logging in through their bank.
- Requesting the customer upload a document, like a bank statement, to prove account ownership.
- Sending small deposits to the customer’s account and asking them to confirm the exact amounts.
Related: KYC in Banking Explained
Common Bank Account Verification Methods
There isn’t a one-size-fits-all approach to this process, as financial institutions can tailor bank account verification according to their internal risk assessment and protocols. The main idea here is that this process should check the account number’s structure, verifying the account’s status. Consequently, verifying bank account data helps businesses guarantee that transactions are authorized and that customers provide accurate banking information.
We look into some popular bank account verification methods that businesses like to use in a more detailed manner.
1. Document-Based Verification
In general, document-based verification or document verification involves confirming the document’s authenticity to ensure that it’s accurate and genuine. In bank account verification, the account holder is asked to upload a bank statement or a voided check so that the system can automatically check it and confirm the account status, either approving or denying access to financial services.
Documents that can be accepted for bank verification include bank statements, letters from the bank, online banking screenshots, or cheques, as well as deposit tickets. However, handwritten notes, edited documents without personal information or a date, emails with sensitive info such as new credit card details, and email screenshots that aren’t approved by the bank are not accepted.
Customers are often asked to upload a document for KYC verification as well, which can be a passport, driver’s license, or ID card. Using this approach, the customer’s identity is verified to confirm that their name and account number match the provided personal data. Alternatively, some companies also have an in-house compliance team responsible for double-checking the software’s results. This means they manually assess banking and KYC documents to ensure accuracy.
Some use-case examples include:
- Crypto exchanges need bank account verification to enable users to buy and sell cryptocurrency or facilitate conversions.
- Lending platforms need to review documents and check the applicant’s financial background to ensure they’re eligible for a loan.
- Insurance firms must also review documents, especially before large claims, to ensure secure payouts to their customers.
2. Micro-Deposit Verification
This method is exactly as it sounds. When the account holder links their bank account to complete the verification, they’re sent a small amount, such as $0.15. After the micro-deposit is sent, the user is asked to enter the exact deposit amounts and activate their account. Investment platforms, payment service providers like PayPal, P2P apps, or some traditional financial institutions use this method because it’s reliable and helps them comply with KYC/AML requirements.
Companies choose this option because:
- It’s a less invasive method. The end-user is asked to check their transaction history, but it doesn’t require uploading any documents.
- It’s easily applicable. Many financial service providers can use this method in their particular use case.
- It’s a familiar routine. This method is known and trusted by the user, like other similar-styled methods, such as phone verification.
3. Database Verification
This method cross-references the client’s account details with a database, such as a credit bureau. In general, government-official databases provide reliable information, including credit accounts and payment records, which are valuable details used for bank account verification. Database verification uses the data pulled from the credit bureau and compares the customer’s account details with the existing data to find a match.
Often, companies implement AI-powered tools that can handle large data volumes and that already have multiple databases synced into their systems. This helps maintain a good user experience and quickly build a better, more accurate picture of the user’s financial history.
Some advantages why companies use this method are:
- Better fraud prevention. Since financial institutions juggle high-risk operations, like handling large transactions and personal information, fraud prevention measures are vital. With database verification, users are confirmed swiftly, reducing crimes like identity fraud or ATO fraud.
- Multi-layer approach. Cross-referencing information is considered to be a more strict security measure than, for example, a standard document check because documents can be forged, altered, and manipulated by fraudsters. To minimize fraud, companies combine various methods, such as KYC document checks (like passports or SSNs) and credit bureau checks for bank verification.
Why is Bank Account Verification Important?
Bank account verification is the number one process that online payment processors need to build alongside ID verification in order to have a proper onboarding process. Through it, companies can verify their users and their banking information quickly while mitigating risks, such as identity theft or, even worse, money laundering and other financial crimes. This is a vital process in many industries that process payments, including e-commerce, personal finance apps, and more.
Automated Digital Payments
Bank account verification ensures the validity of the user’s data. If done right, the process is simple and secure, minimizing abandonment rates while ensuring regulatory compliance.
This is an important factor since many financial institutions need to find a way to integrate these security measures and collect/verify necessary information to maintain a user-friendly process. Incorrect user data can create a backlog, resulting in the need for lengthier manual checks and fees, along with additional disruptions to the business that handles automated bill payments, online purchases, direct debits, etc.
Minimized Chances of Financial Crime
Since multiple data points are checked through the digital onboarding process, such as name, address, financial background, sometimes credit report, or tax ID, the risks associated with the user are identified.
This information helps assess the user’s risk level, determining whether they’re approved or denied access to the financial services they’re applying for. The same principle applies to bank account verification. Businesses can keep track of accurate client risk profiles and prevent costly financial irregularities.
Related: Customer Risk Assessment — How to Do it Right
Ensured Regulatory Compliance
Bank account verification is one of the measures that is part of the KYC and AML framework. These regulations require companies to verify customers’ identities and bank account details before establishing a business relationship and to maintain transaction records to report any suspicious activity.
However, there are other measures, such as Customer Due Diligence (CDD) and assessing the risks associated with a customer, including continuously monitoring their accounts after they’re onboarded to the financial platform. Other country-specific regulations, such as the Bank Secrecy Act (BSA), require regulated entities to verify the source of funds and monitor account activity to detect any unusual behavior.
How iDenfy Can Help
We’ve developed a fully automated Bank Verification solution that helps companies confirm the ownership and validity of a client’s bank account, ultimately verifying if they’re eligible to open a new bank account.
Our open banking API helps swiftly analyze your customers’ transactions while verifying personal details, like the account holder’s name, account number, and other info, such as current savings, ensuring that transactions conducted by the customer are accurate and legitimate.
With our expertise in document verification, biometric verification, and now this comprehensive financial background check, our RegTech platform can help you ensure complete KYC/AML and KYB compliance, including a custom approach to your unique use case, such as adding features like Risk Assessment or Ongoing AML Monitoring.
Using our Bank Verification, you can:
- Verify and onboard users in real-time by matching their bank login details with onboarding information.
- Access detailed transaction logs for each customer, including dates and amounts, ensuring full transparency.
- Grade customers based on their financial health.
- Automate proof of funds verification using extracted bank statements.
- Connect to 2,500+ banks in 29 countries with a single integration for streamlined onboarding.
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