May 1, 2024—In April, the FedNow® News introduced its Innovation Spotlight series, this month covering the benefits of a powerful use case for instant payments—microdeposits. Microdeposits are small monetary transactions – typically under $1 – that serve to verify the validity of a bank account, its routing information, and its ownership. Financial institutions and fintech apps use microdeposits to connect accounts for payments, fund new accounts, and facilitate other financial transactions. They are important methods to reduce fraud.
Conventional microdeposits do not operate without points of friction, however. On conventional payments rails, clearing and settling of these deposits can take 1-3 days, within banking hours, and delaying next steps for both parties. As the article states, this can result in a negative customer experience, higher abandonment rates, and potential loss of business.
The advent of instant payments will play a crucial role in improving the security and efficiency of these micro transactions. The introduction of the FedNow® Service and The Clearing House’s Real-Time Payments (RTP) Network has revolutionized microdeposits. These instant payment rails allow immediate funds transfers between participating credit unions and banks. Imagine, for example, the convenience of linking your bank account to a verified digital wallet or to a loan payment platform. “Our customers constantly tell us that users who can quickly verify their external account are more likely to move money, apply for a loan or begin using the service, especially when compared to a user who has to wait several days to verify,” said Shaffer Bond, product manager at Plaid, a fintech referenced in the Fed’s article.
As payment rails continue to evolve, microdeposits will adapt alongside them. Financial institutions that embrace these innovations as the future of account verification will enhance user experiences and streamline their financial processes.