Open Banking Account Verification Builds the ‘Foundation’ for Fighting Fraud

The benefits of open banking are multi-faceted, Ramesh Menon, group director, product management of LSEG Digital Identity/Account Verification and Fraud Solutions, told PYMNTS.

“Open banking, ultimately, makes life easier for consumers,” said Menon. “The different applications that FinTechs are developing are driving a lot of innovation — and consumers are getting access to better, more useful products. It also helps banks maintain positive relationships with their customers.”

He noted that open banking — where the use of open APIs gives third-party developers the wherewithal to build applications and services, with the bank at the center of it all — is in various stages of adoption with different drivers, depending on where you look.

In the U.S., he said, open banking is growing, organically, through market-led initiatives as opposed to government-led initiatives that are extant in other parts of the world.

But no matter the region, “what’s accelerating open banking,” he said, “is the shift toward faster payments and 24×7 operating models.”

The Shift Toward Open Banking

And, within that shift to always-on, speedier banking, consumers are demanding new types of financial products. The pandemic helped them pivot to their devices to use a broad range of applications to interact with their accounts and with the financial system at large. Many consumers, post-pandemic, are much more comfortable using open banking and credentials-based, permissions-based approaches to provide access to information that’s in their bank account.

Along the way, account verification, he said, opens up the ecosystem, expanding the types of accounts (at neobanks and other enterprises) that can be leveraged across a variety of use cases. Making sure that account owners are who they say they are — at all stages of the lifecycle — is critical.

The conversation with Menon occurred following the news that, as reported earlier this month, Mastercard and GIACT have joined forces to offer GIACT customers Open Banking Account Verification. Open Banking Account Verification uses consumer-permissioned authentication to create a secure, direct connection between companies and their customer’s financial institution. In doing so, GIACT’s customers will be able to more easily verify bank account data and reduce payments risk with minimal friction. (GIACT is owned by the London Stock Exchange Group [LSEG].)

The joint efforts, said Menon, “are primarily to reduce fraud and to make payments safer.” Account verification has to include, but not be limited to onboarding (a new insurance customer or payroll firm, for example), to ensure that regulatory mandates are being met and that, in Menon’s words, “you can be sure you are doing business with the good guys and not the bad guys.”

GIACT, he said, uses a database approach to verification, with several ways to verify account data with minimal amount of friction in the mix.

“We’re providing all of this in a single API,” said Menon, “which means that customers integrate once and get benefit of these multiple layers when it comes to the account verification.” As to the layered approach, account verification is the “foundation” to fighting fraud — ID verification and sanctions screening are additional layers that build up optimal defenses against risk.

In terms of the mechanics, Menon said that the joint efforts use permissioned authentication to create a secure direct connection between GIACT’s client firms and the client’s financial institution.

“By leveraging the Mastercard Open Banking network and GIACT’s existing solution, we make establishing an open banking connection easy,” said Menon. In the background and once that connection is in place, there’s an automatic exchange of the relevant bank account information to support GIACT’s customers’ verification process.

“The benefit of using this type of verification is that it includes the ability to manage payments risk for our customers, improve the customer experience for our clients, our customers clients … and maximize conversions by providing a more seamless user journey,” said Menon. The onboarding process is a particular point of friction, where traditional methods and non-optimal experiences have led to “drop-out” rates of as high as 80%.

The risks are growing, he said, lending to an urgency for account verification, and thus, partnerships like GIACT and Mastercard’s. The fraudsters are getting bolder, and the absence of face-to-face transactions makes it easier for fraudsters to impersonate legitimate account owners and have funds diverted to their own accounts.

“There need to be layers of fraud protection,” said Menon, “including identity verification, so you can layer in all of these [data points] to make a risk-based decision.” The partnership between GIACT and Mastercard, said Menon, and its multi-method approach, can be used to verify account information for more than 95% of U.S. deposit accounts.

“Our roadmap is to eventually get to 100% coverage of any market we are in,” he said, noting that both firms are global, “so we want to expand that coverage to other countries.”