Analysis Of Account Ownership Verification

I'll be co-presenting with Yodlee at the upcoming NACHA payments conference in Orlando in a few weeks, and wanted to share some of the slides I've been working on. For background, we have a successful partnerhip with Yodlee in which we integrate their account verification technologies into our online account opening application. This enables us to verify ownership of the held-away account when processing the initial deposit transfer.

For example, say I'm opening a new account at one bank, and funding the initial deposit by transfering funds from an existing account at a different bank. The new bank is going to want to make sure that I actually own the existing account from which I'm withdrawing the funds. Unlike in the credit and debit card world, those capabilities are not readily available in the traditional infrastructure of the interbank transfer (or "ACH") world. This has opened up an opportunity which Yodlee has solved, and we have integrated their solution.

The focus of my presentation at the NACHA conference is analyzing the impact of ACH account verification on the online account opening transaction. We'll be reporting on some very interesting stats, some of which I wanted to summarize here.

The first effect is transaction size. In summary, banks who verify account ownership are more comfortable allowing large transfers, which as you can see in the graph above, consumers readily welcome and utilize. The data shows that, in February, our average opening deposit with verification was over $16,000, versus just shy of $4,000 without verification. This unmistakable difference points to the enormous value of verification. And on a related point, this ability to support larger transfers through verification has become increasingly important recently as the credit crisis has caused household savings rates to increase, and therefore caused our banks' opening deposits since December to skyrocket. Both these effects are shown in the slide above. Another effect of verification I'll be highlighting is on abandonment. It makes sense that the more steps you impose in the account opening process, the more people will drop out before completing. Account verification, and funding more generally, is one of the primary places where people tend to abandon, so I wanted to try to quantify how big an issue this is.

For background, we define an "abandoned" application as one where the applicant is approved based on the bank's rules, but chooses not to complete. We then define the "abandonment rate" as the number of abandoned applications divided by the number of overall attempts (failed + abandoned + completed).

Additionally, I should explain that we offer two approaches to verifying account ownership. The first is called "Instant Account Ownership" which leverages Yodlee's account aggregation technology to verify ownership in a single session by validating the user's online banking credentials at the external institution. The second method is a more traditional approach referred to as "Trial Deposits" where two small deposits are made at the external institution, for which the user has to then come back and verify the amounts in order to prove ownership. As opposed to the instant approach which can be easily completed in a single session, the trial deposit process can take 2-3 days (thereby encouraging higher abandonment). Of our financial institution customers requiring account verification, nearly all offer trial deposits as an option, while 60% also offer the instant approach.

As you might expect, the banks who do not require any funding at all see the lowest abandonment rates at only 3%. Next are banks who allow funding but do not require verification, who see 10% of their applicants abandon. Then there are the banks who require account verification. Those who offer a choice of Instant Account Verification and Trial Deposits see abandonment rates of 16%, while those offering only Trial Deposits see a higher rate of 23%. This gradual progression from 3% to 23% makes intuitive sense as you can see the impact of greater and greater intrusiveness in the process.Lastly, I thought it would be interesting to highlight some additional miscellaneous stats about our experience with account verification.

As the slide above indicates, when given a choice of the instant or trial deposit method, 59% of users choose the instant approach. The fact that 41% still choose challenge deposits, despite the inconvenience and delay, indicates that some people are still not comfortable sharing their online banking credentials at other institutions, which should not be surprising.

The next point above shows the penetration we've seen among our customer base for account verification. A year ago, when our partnership with Yodlee was still relatively new, only a very small percentage of our funding transactions (0.1%) involved verification. By the middle of last year, as our financial institutions started recognizing the value of verifying account ownership, penetration rose to 13% of overall transactions. And by the end of least year, the trend continued as the share of verified transactions grew to around 27%.

And finally, the last point below is designed to demonstrate the accuracy of account verification. It takes on average 1.5 verification attempts to process one ACH transaction. This is primarily caused by (a) the effect of abandonment, as a small number of users will abandon even after verifying, and (b) some inaccuracy in the instant approach, as it may take several attempts with your online banking credentials to get the verification right.

In summary, the data points to pros and cons from account verification, with the pros of higher balances and lower risk generally outweighing the cons related to higher abandonment. I think all these findings are intuitive, but I thought it would be helpful to try to quantify some of these effects. If you're planning on being at the NACHA conference in a few weeks, the folks from Yodlee and I will have lots more detail to share on these findings, and I hope you'll stop by and say hello.