What is a penny test in banking? A complete guide to penny drop verification

Penny tests are ubiquitous in the banking and finance world—particularly popular in India—and serve as a way to verify a bank account before processing large transactions. While all businesses can benefit from penny tests, they are especially valuable for companies with a high volume of customers or vendors.

In this article, we’ll guide you on the meaning of penny drop verifications, their importance, benefits, and how to perform these tests. But first, let’s make sure we understand the basics of penny tests.

What is penny drop verification?

A penny test verifies a bank account’s validity by depositing a small amount of money (usually a penny) into the bank account. You can also run a penny test as debits, withdrawing a penny from an account instead of depositing it.

By depositing or withdrawing a small sum of money, you can prove that the transaction from payer to payee works before initiating more significant transactions.

Financial institutions, specifically fintech companies, use penny drop verification to ensure that the accounts used for financial transactions—like loans, insurance payouts, and salary payments—are valid. For fintech firms in the digital lending and payment space, penny drop verification is a key method to maintain compliance with Know Your Customer (KYC) regulations and deter fraudulent activities.
The process of checking to see if a test was successful is pretty simple; you’ll just need access to your online bank account.

How to check penny drop verification

To check penny drop verification, you’ll follow these steps:

1. Collect bank account details from the other business.
You’ll need the:

• Account holder name.
• Bank account number.
• Bank’s IFSC code (or equivalent routing code, e.g., ABA/SWIFT/BIC).
• Bank name.

2. Initiate the penny drop. Use your payment processing system to initiate a small transfer to the recipient’s bank account.

3. Verify the recipient details. Many banks and payment systems will return account details associated with the recipient bank account, such as the account holder’s name. Compare the returned information with the recipient business’s details to verify authenticity.

4. Check the transfer status. Confirm whether the payment was credited to the recipient’s account. If the penny drop verification fails, verify the recipient’s account details and/or investigate potential errors.

5. Request confirmation. If your bank doesn’t confirm the transaction, ask the recipient to confirm whether they received the amount.

6. Reconcile the penny drop. After verifying the account details, record the transaction in your financial records. You can also reverse or deduct the penny drop amount from the next payable transaction.

7. Maintain compliance. Ensure the penny drop verification process aligns with relevant compliance or anti-money laundering (AML) regulations in your jurisdiction. Keep records of the verification in case of audits.

There are several reasons global companies go through the trouble of conducting penny drop tests.

Importance of penny drop verifications for businesses

Verifying bank account details is critical for companies to ensure:

• The bank account exists: The penny test confirms that the account number belongs to a legitimate and operational bank account.
• Account ownership: Confirm the account owner’s information using the identity details provided.
• Fraud prevention: Make sure the business sends payments only to verified accounts to reduce the risk of fraud.
• Reducing errors: Penny verification tests affirm that the funds
• Quick recap: Penny drop verifications assure businesses that they are engaging with legitimate customers, vendors, or employees, avoiding failed transactions, financial losses, fraud, and more.

Next, we’ll explore other advantages of this test.

Benefits of penny drop verification

There’s a reason why this test remains the norm in countries like India: penny-drop verifications achieve the following:

Preventing failed transactions: If the transaction fails, businesses know right away.

Reducing fraud: Penny drops ensure secure financial transactions by confirming account ownership.

Streamlining vendor and employee onboarding: Affirming the correct account details from the beginning creates smoother processes and reduces the need for corrections later on.

Real-time KYC compliance: Penny drop verification is a part of the KYC process that helps businesses comply with regulatory requirements regarding financial transactions.

Cost-effective verification: A penny is all it takes to confirm an account holder’s information. This test saves businesses hundreds of thousands of dollars.

Penny drop tests are a simple and effective way to reduce fraud and failed transitions, but they have some downsides.

Penny drop cons

There are a few limitations to this test. Let’s go over them.

First, the test is a one-time verification. It can’t promise continuous security, meaning there’s no guarantee of fraud protection.

Second, the method isn’t 100% accurate in confirming the account owner’s identity, as criminals can access the account and verify the transaction.

Third, manually inputting the account data can cause errors. This can skew the results of the penny drop process and delay verifications.
Finally, businesses must wait for payment verification, which can slow down their operations.

That said, many countries regularly use penny tests to keep transactions secure.

Are all countries allowed to do a penny drop verification task?

Many countries use penny verification tasks, although some use them more than others. For instance, in India, the Pension Fund Regulatory and Development Authority (PFRDA) made penny drop verifications mandatory for exiting or withdrawing funds from the National Pension System (NPS) and for changing the subscriber’s bank account details. Penny drop verifications in India are also popular in finance and tech industries.

Canadian banks also use penny drop verifications. Although Canada officially retired the penny, the Bank of Montreal (BMO) conducts an external account validation process using trial deposits. This process works just like a penny drop. When businesses see the deposits in their account, they can log into their BMO Digital Banking account to validate the deposits.

Hong Kong banks, on the other hand, does not use penny testing to verify bank account details. The region doesn’t have specific regulatory requirements for using it but relies on other verification methods like identity documents and online banking authentication to check account details.

Learn more on how to pay in or from Canada or pay in or from Hong Kong

Which industries use penny drop verification?

Penny drop verification is primarily used in financial services, but plenty of other industries use this test, too, including:

1. Digital payment services (e.g., employee payroll platforms).
2. Vendor and supplier onboarding.
3. Financial services and fintech.
4. Mobile payments (e.g., UPI-based transactions).
5. E-commerce and online marketplaces.
6. Government agencies.
7. Insurance companies.

While penny drop tests help verify bank accounts, their limitations mean other methods are required to monitor transactions and compliance – especially when it comes to fraud prevention.
Papaya’s payment solution offers unmatched speed, accuracy, control, and visibility for workforce payments. With best-in-class security, a multi-layered data control system, and AI-driven compliance validations, we ensure all payments are accurate and protected from fraud.

Papaya Global’s payment services are offered through Azimo, Papaya’s licensed payments arm. Azimo is a payment services provider regulated in five Tier-1 jurisdictions. These licenses allow Papaya, together with its partners, to provide workforce payments worldwide. For further information on Azimo’s licences worldwide, check our licensing page
To learn how Papaya’s payments can ensure secure global payroll processing, book a session with one of our payment experts today.