Bank Account Verification: What Is It and Why Is It Important?

In today’s digital landscape, fraud has become more widespread and sophisticated. Research by PwC discovered that 64% Of UK businesses have experienced fraud, corruption or other financial-related crime in the past two years. This pace of change shows no signs of slowing – technological advancements are moving more businesses and their operations online, increasing the scale, variety and complexity of financial transactions.

As a result, the growing complexity of digital transactions warrants robust security to protect companies from risk. Research by UK Finance suggests that payment fraud cost UK businesses £1.2 billion in 2022 alone - equivalent to over £2,300 every minute. Customers, in turn, expect a secure and immediate payment process. Meeting these expectations requires an efficient payment solution to facilitate secure and immediate payments, one tool being bank account verification. 

The need for pre-account verification emerged with the rise of mobile banking, as consumers often made payments using incorrect details without realising it. Recovering the lost funds is also a lengthy process, involving extensive collaboration between the banks and investigations taking an average of 28 days to return the funds, with cost implications of £50 - £60 per case.

Confirmation of Payee (CoP) powers Bank Account Verification (BAV) and is a digital process used to prevent accidental or fraudulent payments by confirming the validity of a bank account. It helps businesses identify fraud and prevent and mitigate losses across the customer lifecycle by ensuring that the account number, sort code, and other relevant information such as account type belong to the person claiming ownership. 

Bank Account Verification is designed to authenticate and validate the ownership of a bank account. It acts as an extra layer of security in the fight against Authorised Push Payment (APP) fraud and is a prerequisite for online payment transactions such as BACS (Banker Automated Clearing System). The goal is to confirm the validity of a bank account by cross-referencing key account details including sort codes and account numbers to determine if there's a match, partial match, or no match in real-time, alerting users to any discrepancies. This allows businesses to prevent costly payment errors, mitigate fraud and improve payment accuracy and efficiency all in a few clicks.

There are multiple verification methods available - all of which work in slightly different ways for various use cases. Here are the most common:

Open banking: Also commonly known as automatic bank account verification, businesses can partner with a third-party provider to verify the account details in real-time. The provider runs a check on account details against a database to confirm if there’s a match.  

Microdeposit: Microdeposit verification involves sending small monetary transfers to the customer’s account to verify the ownership.

Document verification: The customer is expected to provide the merchant with the necessary documents from their banking provider such as bank statements.

To verify a bank account using open banking verification, users must enter the payee details manually when setting up a new payee on their banking system before the third party validates the details in real time against a database to determine if there's a match.

1. The user enters the payee's bank details including account number, sort code, account name and type.
2. A basic check is performed to ensure the details provided follow the correct format
3. The payee details are then checked against an extensive database of bank account information. This step matches the details provided to the database details to confirm the legitimacy of an active account.
4. The details are confirmed in real-time by securely exchanging directly with the bank to ensure the account exists and is active, adding that extra layer of security.
5. Once the verification is complete the system determines if there's a match, partial match, or no match, alerting users before completing the payee setup. 

Bank Account Verification is a crucial tool given the increasing prevalence of digital transactions and sophisticated levels of fraud. It allows businesses to improve and safeguard their payment processes by implementing measures to enhance the safety and efficiency of financial transactions across each customer touchpoint.

Fraud mitigation: By validating bank account details, businesses can be sure they're always paying the right account, significantly reducing the risk of fraud and minimizing any financial losses.

Improved compliance: Regulatory frameworks require businesses to adhere to certain policies to safeguard consumers and businesses against any financial losses. Bank account verification fulfils regulatory requirements by enhancing existing compliance processes across KYC, AML and fraud prevention measures, avoiding legal penalties, and maintaining good standing with regulatory bodies.

Operational efficiency: Previous bank account verification methods were often manual and time-consuming, prone to human errors and delays. Automated bank account verification streamlines and speeds up the process by reducing human errors such as misdirected payments, saving both time and resources while enhancing payment accuracy.

Better relationships: Adding an extra layer of security to the payment process provides a secure and efficient payment experience, enhancing the customer experience by delivering a secure and seamless end-to-end payment process.

Accuracy: Validating bank account details before processing payments eliminates costly payment errors associated with recovery expenses, reducing financial losses and leading to fewer disputes and chargebacks.