What is bank account verification?

It may also be used to:

• Verify whether a bank account is active.
• Check if there are sufficient funds for a transaction, and
• Assess a loan applicant’s financial standing.

The process of verifying a bank account ensures the accuracy and security of financial transactions – particularly for payroll, direct debits and online payments.

With the rise of cross-border transactions and payment fraud, verification helps manage the increasing complexity and risk associated with financial systems.

Common bank account verification methods

In Australia, various methods are used to verify bank account details. Many are suited to specific contexts and applications.

Direct bank integration

Direct bank integration involves connecting with banks via secure APIs to verify account details in real time.

Financial institutions, payment gateways and fintech companies use this seamless and accurate method to confirm ownership of an account.

The verification process is embedded into the systems of the service provider and there is no need for human intervention.

When a customer makes an online purchase, for example, the eCommerce platform may use direct bank integration to verify the bank account details provided at checkout.

Instant verification

Instant verification is another method that occurs instantaneously.

It typically involves the user entering their bank account details into an app or related platform. Thereafter, the platform validates these details by communicating with the user’s bank.

In some cases, the user is prompted to log in to their online banking portal through a secure interface provided by the company that wants to verify the bank account.

Micro-deposit verification

Micro-deposits are another way to verify bank account information.

Suppose a user wants to link their bank account to PayPal to receive payments. After the user enters their details, PayPal makes two small deposits of less than a dollar into their bank account.

Once the deposits appear on the user’s statement, they return to the PayPal platform and enter the exact amounts to verify ownership.

Micro-deposit verification also assists with know your customer (KYC) and anti-money laundering (AML) compliance.

Document-based verification

In the case of document-based verification, an individual or entity is required to submit paper or electronic documents to verify ownership or account status. Typically, the document is a copy of a bank account statement.

This type of verification requires human intervention and is less common than digital forms of verification. It tends to be used in home or car loan applications where it is important to thoroughly assess the applicant’s financial position.

Why is bank account verification important?

Bank account verification has several obvious and not-so-obvious benefits for consumers, businesses and the broader financial industry.

Fraud prevention

Since bank account verification calls on the account holder to verify ownership, the process reduces the likelihood that a cybercriminal can obtain access.

Micro-deposit verification in particular is an effective way to prevent fraud since it relies on a form of two-factor authentication.

Bank account verification is also one component of real-time fraud prevention – a modern and proactive approach that strives to stop fraudulent activity before it occurs and not after it has caused harm.

What’s more, early detection of bank account misuse by AI and machine learning tech prevents cybercrimes such as identity theft, account takeover and fraudulent account creation.

Regulatory compliance

As touched on earlier, bank account verification helps Australian financial institutions adhere to various legislation and compliance requirements.

These include:

• The Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006 – to ensure that bank accounts are not used for nefarious purposes.
• Know your customer (KYC) – a key component of the AML/CTF Act that requires businesses to verify the identity of their customers before providing services.
• The Electronic Transaction Act 1999 – a key piece of legislation that sets out conditions for electronic transactions and ensures that Australia’s payment framework aligns with global practices, and
• The Corporations Act 2001 – which requires verification of corporate bank accounts and ensures they are linked to legitimate businesses.

Summary:

• Bank account verification is the process of confirming the legitimacy and ownership of a bank account before permitting transactions or setting up financial activities.
• The four common types of bank account verification include direct bank integration, instant verification, micro-deposit verification and document verification.
• Bank account verification prevents fraudulent activity through two-factor authentication and instant confirmation of a user’s details. Digital verification processes, in particular, improve the user experience and deliver cost savings to businesses.