Penny-drop fintechs: enough to prevent vendor fraud?

penny drop fintechs
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The penny drop, also known as the penny test, was introduced as a way to verify a customer’s bank account. It is a simple way to know who you are paying. In 2020, the Securities and Exchange Board of India (SEBI) advocated for penny drop verification as a way to verify bank accounts. Since then, many penny drop fintechs have been created to offer their services to larger companies.

Penny drop is useful but insufficient to wipe out fraud attempts. The ultimate solution is continuous account validation.

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Penny drop fintechs: what do they do?

These fintechs offer penny drop services. Penny drop is a verification method for legitimizing a bank account before it is paid substantial sums of money.

In practice, a minimal amount such as $0.01 would be placed in an account to check that the money finds a supplier or vendor well. Also, it ensures that the bank details are correct and that the bank account is legitimate.

So, how does the process work in practice?

  1. Penny drop provider given the customer’s bank account number and International Financial Services Code (IFSC).
  2. Service provider gives the signal to initiate penny drop.
  3. The service provider system puts a penny ($0.01) in the bank account of the customer.
  4. The outcome of the penny drop is either that the bank account is legitimate and it succeeds or if it’s closed, it fails.
  5. If it’s legitimate, the beneficiary name and account status is provided to verify the customer is who they say they are.

Penny drop fintechs answer a growing need for payment security, in the face of increasing fraud events.

Why are penny drop tests useful for businesses?

Confirmation of account

It confirms to a business that their new supplier – or prospective client – has an active bank account. Therefore, they can rest assured that it’s not frozen or closed.

In regards to customers, that ties in with Know Your Customer (KYC) – a process for organizations to identify and verify a customer. It also helps to prevent fraud and money laundering terrorist financing.

KYC requirements vary but it usually includes:

  • Full client name
  • Date of birth
  • Current address

Back in 2022, the Financial Crimes Enforcement Network (FinCen) penalized the USAA Federal Savings Bank $140 million for having poor money laundering controls.

They didn’t keep track of the customer’s suspicious activity even after having several warnings that their due diligence needed to get better.

Also, they didn’t set out or maintain an anti-money laundering (AML) program that would reach the minimum requirements set out by the US Bank Secrecy Act (BSA).

It is important to know your customers so that you aren’t funding money laundering campaigns without knowing. The same goes for suppliers: you don’t want to inadvertently pay a supplier on a sanction list or participate in terrorism schemes.

Increases chances that business doesn’t get ripped off

If businesses are paying a minimal amount such as a cent, losses are minimal. This is opposed to paying an invoice in the tens of thousands to a bank account controlled by a fraudster.

It is unlikely that organizations could get this money back and the losses both financial and reputational would be much greater. E-commerce company eBay offers the option of using microdeposits to verify bank accounts.

So, that means that sellers can receive payouts from the business, and that ensures that eBay is paying who they think they are.

Cheaper alternative

This penny drop solution is handy for businesses that are watching their pennies. It is cheaper than anti-fraud software, however, it doesn’t guarantee zero fraud like Trustpair does.

There will be a small charge per transaction which could add up. However, it is very unlikely to exceed a worthwhile investment like software.

What are the limits of penny drop fintechs?

Often one-time only

Usually, penny drops are one-time verification only, so they don’t offer continuous account validation. This leaves a business at risk if a supplier gets added to an international supplier blacklist after contracts are signed, for example, for bad practice or being fraudulent. Without the consistent nature of the validation process, you might not be aware.

Learn more about risk management in this article!

It isn’t 100% effective against fraud

Penny drop verification just verifies that the account is open and working. However, it doesn’t verify the account user details of the account holder. This means that if a fraudster already has access to the bank account – through account takeover -, penny drop won’t spot that and the criminal can still use the account.

Risk of error

When inputting the account data, there is a small risk of manual errors. For example, the bank account number or IFSC could be inputted wrongly, Therefore, this skews the results of the penny drop process. Also, human error can lead to delays in the verification process.

Account validation solutions, the best alternative to penny drop fintechs

Penny drop verification for fintechs is a helpful way to check that a bank account is active and working but it cannot guarantee zero fraud. The perfect solution to this lies with continuous account validation.

With our fraud prevention software, there are three levels of checks for consistent account validation. We check that the company exists, the bank account exists, then cross-check the pair. Our solution has access to many external sources to do this and the result of an account validation is usually complete in just 30 seconds. We offer penny drop testing if none of our surer account validation methods have worked.

Also, consistent account validation means consistent solutions. So, it is not just a one-time only answer and can continually support the battle against fraud attempts that our research found 96% of companies have been targeted with in the past 12 months. Download the full report below!

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Recap

Penny drop for fintechs may be a good single-use preventative control measure. But for the guarantee that you are paying the supplier you think you are every time and for consistent checks, explore software like Trustpair.

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FAQ
Frequently asked questions
Browse through our different sections and find the answer to your question.

The penny drop process is a digital verification method where businesses send a minimal payment (typically $0.01) to validate a user’s banking details.

During this automated process, the platform initiates the test transaction, verifies the account’s ability to receive payments, and confirms the account holder’s details through the banking system’s response.

The verification typically occurs during user onboarding or when account details change. Once the transaction is complete, the system generates a report confirming the account’s validity and matching details.

This security measure helps ensure payment accuracy while providing a streamlined experience for both businesses and users, though it should be combined with other verification methods for comprehensive protection.

Reverse penny drop is a verification method where users are asked to initiate a small payment to a specified account, rather than receiving one. This method enhances security by ensuring the user has full banking access and transaction capabilities.

Unlike traditional penny drop, this verification approach provides businesses with additional details about the payment origin and account holder’s identity through the transaction data.

Reverse penny drop offers better accuracy in confirming account ownership since it demonstrates the user’s ability to actively initiate payments from the account being verified. It’s the method used by the Trustpair platform

The penny drop verification method, while useful for basic account validation – during supplier onboarding for example -, has several key limitations. While it confirms that a banking account is active and can receive transactions, it only provides a one-time verification snapshot and cannot ensure continuous security.

The method lacks accuracy in confirming true account ownership, as fraudsters with account access can still complete the verification process. Additionally, waiting for payment confirmation can slow down the user experience and business operations.

For enhanced security, businesses should combine penny drop with automated monitoring platforms like Trustpair – and additional verification methods to ensure comprehensive payment security and compliance.