A Penny Saved is a Penny Verified: How Penny Drop Secures Your Finances
What is Penny Drop ?
Penny drop verification is a method used to confirm the validity of someone's bank account details. It works by depositing a small, predetermined amount of money, typically a single rupee, into the account in question. This small deposit is used to verify that the account number, routing number and account holder name are all correct and that the account is active.
Why is it needed ?
Reducing the risk of fraudulent account takeover:
Fraudsters often attempt to steal account credentials or personal information to gain access to victims' bank accounts. By requiring a deposit to be verified before completing a transaction, penny drop verification makes it significantly more difficult for them to divert funds to unauthorized accounts. Even if a fraudster manages to steal account login credentials, they would still be unable to complete a fraudulent transfer without access to the recipient's bank account to confirm the penny drop deposit.
Minimizing the chances of accidental transfers to incorrect accounts:
Typos or other errors in manually entering account information can sometimes result in accidental transfers to unintended recipients. Penny drop verification helps to prevent these errors by ensuring that the provided account details are correct before any funds are sent. By requiring confirmation of a small deposit that only matches the intended recipient's account, penny drop verification significantly reduces the risk of accidentally sending money to the wrong account.
Catching typos and other data entry mistakes:
During manual data entry, typos and other errors can easily occur, especially when dealing with long account numbers, routing numbers, and account holder names. Penny drop verification acts as a safeguard by requiring an exact match between the information provided and the details associated with the recipient's bank account. Any discrepancies between the entered data and the actual account information will prevent a successful deposit and verification, alerting the sender of a potential mistake. This helps to ensure that funds are sent to the correct account and prevents the need for manual verification or error correction later, which can slow down the transaction process.
Eliminating invalid or inactive accounts:
Penny drop attempts will fail for invalid account numbers or inactive accounts. This provides immediate feedback to the sender, indicating that the provided account details are incorrect or the account is no longer operational. This prevents the sender from wasting time and resources attempting to send money to an invalid account and helps to avoid potential fraud attempts that might involve using deliberately fabricated account information.
Real-time verification:
Penny drop verification often utilizes automated systems that can complete the verification process in real-time, significantly faster than manual verification methods that may involve phone calls or physical documentation checks. For instance, traditional methods might require contacting the bank directly to confirm account details, which can be time-consuming and labor-intensive. Penny drop verification, on the other hand, can be integrated directly into digital platforms and workflows, enabling automated verification within seconds of initiating the deposit. This significantly reduces processing times and expedites the overall onboarding or transaction process.
Reduced back-and-forth communication:
By eliminating the need for additional communication to confirm account details, penny drop verification can expedite the overall transaction process. In traditional methods, discrepancies in account information might necessitate back-and-forth communication between the sender, the recipient, and the financial institution to resolve the issue. This communication can be time-consuming and can lead to delays in completing the transaction. Penny drop verification, by requiring upfront confirmation of a small deposit directly from the recipient's account, eliminates the need for such communication and streamlines the process.
Penny Drop Process
Initiating the Penny Drop:
Step 1: Company initiates the verification process:
The company or organization trying to verify the account information will trigger a request through a penny drop verification service. This service will typically be provided by a third-party financial technology (fintech) company that specializes in account verification solutions.
Step 2: Service securely transmits information:
The penny drop verification service will securely transmit the recipient's bank account details (account number, routing number, and account holder name) to the recipient's bank. This transmission will utilize secure communication protocols to safeguard sensitive financial data.
Step 3: Bank verifies account details:
Upon receiving the verification request, the recipient's bank will verify the accuracy of the provided account information against their internal records. This verification process will confirm that the account number, routing number, and account holder name all match the information on file for the recipient's bank account.
Step 4: Bank initiates micro-deposit:
If the account details are verified as valid and the account is active, the bank will initiate a micro-deposit into the recipient's account. This micro-deposit will typically be a very small amount of money, often around ₹1. The exact amount may vary depending on the specific penny drop verification service being used.
Verifying the Deposit:
Step 5: Recipient receives notification:
Once the micro-deposit is successfully completed, the recipient will typically receive a notification through their preferred communication channel, such as email or SMS text message. This notification will inform them about a small deposit being made into their account and will provide instructions on how to verify the deposit amount.
Step 6: Recipient logs in to bank account:
The recipient will need to log in to their online banking account or mobile banking app to access their account activity.
Step 7: Recipient confirms deposit amount:
The recipient will then be required to locate and confirm the exact amount of the micro-deposit within their recent account transactions. This confirmation step serves as verification that the recipient has legitimate access to the bank account and can view its transaction history.
Completing the Transaction:
Step 8: Verification service transmits confirmation:
Once the recipient confirms the deposit amount, they will typically be directed back to the penny drop verification service to complete the verification process. The verification service will receive a confirmation signal from the recipient's bank, indicating that the micro-deposit was successfully verified.
Step 9: Company receives verification status:
The penny drop verification service will then transmit the verification status (success or failure) back to the company that initiated the verification request.
Step 10: Company proceeds with transaction:
If the verification is successful, signifying that the account details are accurate and the account is active, the company can then proceed with the intended transaction. This transaction might involve sending a payout to the recipient, setting up direct deposit for future payments, or any other financial activity that requires confirmed bank account information.
Where is it used ?
Financial Services:
Penny drop verification can be used by financial institutions to verify account ownership during tasks like setting up new accounts, linking external accounts for transfers, or verifying accounts before issuing loans or credit cards. This helps ensure the security of these actions and prevents unauthorized access to financial products.
Money Transfers:
When sending money electronically, whether between individuals or through a money transfer service, penny drop verification can confirm the recipient's bank account details before sending the funds. This minimizes the risk of accidentally sending money to the wrong account due to typos or errors, and helps prevent fraudsters from diverting funds to unauthorized accounts.
E-Commerce Purchases:
During online shopping, penny drop verification can be used by e-commerce platforms to verify a customer's billing information before processing a purchase. This can help reduce fraud associated with stolen credit or debit card information, protecting both the e-commerce platform and the customer.
Bill Payments:
When setting up automatic bill payments, penny drop verification can be used to confirm the accuracy of the payee's bank account information before initiating recurring payments. This ensures the bills are directed to the correct recipient and avoids potential delays or errors in bill payments.
