Bank account verification or penny drop check as is commonly referred to is a way to verify the authenticity of a user’s Bank Account. This is achieved by depositing a small amount (usually a penny and hence the name) – usually INR 1 (one rupee) in the Indian context – which returns the validated bank details along with the beneficiary name.
The penny drop checks are done for numerous reasons but mostly to verify that the user’s bank account is authentic and that it belongs to the user signing up for the service before transacting on it (e.g. depositing money or receiving money). Here’s how penny drop works, in the Indian context.
- Customer shares Bank Account Number and IFSC with the service provider
- Service Provider drops a penny (INR 1) into customer’s Bank Account
- Penny Drop request routed via NPCI between Banks
- Penny Drop succeeds or fails
- Additionally, once the penny drop verification succeeds, the service provider can compare the identity (KYC) details provided in the application form against the beneficiary details returned from the bank to ensure that the customer is who he says he is.
The vast majority of the penny drop checks are done by companies lending to businesses and consumers. The lender can verify that the KYC proofs submitted matches with the beneficiary details obtained as part of the penny drop check. Apart from validating that the KYC details belongs to the right user, it can help cut down on fraud and identity theft whereby the loan is taken on synthetic or stolen identity but the bank account belongs to the fraudster trying to defraud the lender. With just a penny drop, large scale losses can be avoided by the lender.
Penny drop verification is useful for businesses of all shapes and sizes. For example, an organisations with just a few employees can verify the Bank account details through a penny drop. This will ensure that the Account holder is the same person employed (you’d be surprised how many aren’t) before beginning to transfer salaries and expenses. Imagine salaries or expenses going to the wrong accounts or failing to be transferred and the resulting stress for both the employer and the employee.
Penny drop checks have found its way into the insurance industry to verify the bank account details of subscribers before premiums are paid on maturity. And more recently, in April 2020, SEBI (Securities and Exchange Board of India), that regulates securities and commodities market in India, in their recent KYC circular has specifically recommended verifying Bank Accounts using penny drop as part of onboarding investors by SEBI regulated intermediaries.
About: FRSLABS is an award-winning research and development company focussed on identity verification and fraud prevention solutions for businesses. We are building the next generation video KYC, OCR, face verification, identity verification and IRSF fraud prevention solutions to benefit a billion people.