If your company sends or receives money from your users, you are most likely required to verify their bank accounts, either because you are required by Anti Money Laundering (AML) regulations or because you need to avoid fraud or future problems and minimize risk.
Who, what, and why?
You might be wondering what we’re talking about exactly and if bank account verification is important for your business. We’ll keep our answer short and sweet: if you pay or collect money to and from your users using a bank account, it affects you.
Let’s start from the beginning: what is bank account verification?
Bank account verification is the process to check that the owner of the bank account is who you expect him to be.
We shouldn’t confuse this with account number or IBAN validation. Validation normally refers to the validation format of the bank account number, it does not verify its ownership or state as verification does.
The companies that need to verify their users’ bank accounts can belong to a variety of industries. Of course this includes everything in relation to lending, but in general you could say that any company that sends or receives a large sum of payments via wire transfers or direct debits needs bank account verification.
Some examples of companies that might need bank account verification could include:
- A utility company that collects money from their customers using direct debits might decide to verify their customers’ bank accounts before providing their service.
- An insurance company might want to verify their customers’ accounts before paying the claims of their customers or charging them the cost of their policies.
- Public Agencies paying grants or subsidies or B2B internet services, whose large amounts or types of customers require using bank accounts.
And why do these companies need to verify a bank account? Most people relate account verification to AML and KYC (Know Your Customer) regulations. That’s a good reason, but it’s not the only one. Many companies perform bank account verifications to avoid or minimize fraud.
With most methods you will have two main benefits:
- You will know that the account belongs to your user, or at least that they have access to a bank account (for example a corporate account). This is required in most cases before sending money.
- You will know that the account is active, which is even more important if you are using direct debits to collect money from your customers. You could verify the bank account before providing the service and reduce fraud.
In the end…
Financial crime and fraud is bigger than ever. Transactions are conducted more and more remotely and instantaneously so any opportunity to reduce the risk should be taken into consideration always, when you are required by regulation and even when not. This is why bank account verification is crucial to the relationship to many companies and customers.