How new tech (and Plaid) are making micro deposits instant
Banks and fintech apps have used micro deposits to verify accounts for ages. New payment rails and technology are making them faster, safer, and converting at higher rates.
November 28, 2023
Shaffer is a Product Manager for account verification. He's focused on designing the optimal onboarding and payment experiences for the wide-ranging use cases supported by Plaid.
Micro deposits have provided secure account verification for decades. Today, they are often seen as an undesirable backup choice when a user chooses not to verify their account using their bank details or is not currently covered by open banking. New technology is making them faster and more secure.
This article explores how micro deposits work and how emerging payment rails are making them more efficient and secure.
What is micro-deposit verification?
Micro deposits are small transactions, typically under $1, sent to verify that an account is valid and the user can access the account. This process is often used to connect accounts for payments and new account funding. It’s considered a secure way to verify bank account information and ensure transactions go to the correct account.
Here’s how it works:
Users are prompted to provide their account number and routing number.
Then, the financial institution or fintech app sends a very small amount of money in two deposits.
The user will then verify the amounts (or a code). If correct, this would allow the account to be connected.
Traditionally, the app would withdraw the amount deposited around the same time.
While micro deposits aren't new, they're gaining attention with the release of instant payment rails Real Time Payments (RTP) and FedNow. Plaid, for example, uses an instant micro-deposit tool that can verify accounts on RTP or FedNow in seconds. If those payment rails aren’t available, it falls back to same-day ACH, which is available to all US bank accounts.
→ Plaid’s Instant Micro-deposit flow has decreased the time to verify from an average of 24 hours to just seconds.
Are micro deposits still relevant?
Despite the rise of new authentication methods, micro deposits continue to be important.
Plaid’s Instant Auth coverage is extensive with over 95% of consumers with a supported bank account that can be instantly verified. However, some users prefer manual verification methods over instant authentication methods for data sharing sensitivity or simply cannot remember their banking credentials. Same Day Micro deposits also provide a universal method to verify accounts for institutions that aren’t connected to open banking.
When provided with a choice between micro deposits or instant authentication via their bank account, 10-15% of users will choose the micro deposits even though over 95% of accounts are covered by instant authentication.
Same-day ACH, RTP, and FedNow are bringing micro deposits into the 21st century. These new payment rails reduce the time for micro-deposit verification to within 10 seconds with RTP and FedNow or within a few hours with Same-day ACH.
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Micro deposits vs. other verification methods
When it comes to verifying account access, there are three primary methods:
Micro deposits: small transactions sent to verify that an account is valid and the user can access the account.
Credential-based authentication: where the user verifies with their bank account username and password.
Database validation: which checks the user's account information against proprietary data.
Micro deposits offer a reliable fallback option when the primary goal is to confirm access to the bank account. They are universally accessible, meaning this method can be used for accounts with all institutions.
There are some user experience challenges, such as if the user forgets to verify the transaction. There are also some fraud risks associated with micro deposits. For example, a bad actor may trigger them a thousand or more times to increase the account's balance, creating returns or overdrafts when attempting to pull back the deposits.
Credential-based authentication provides immediate access to account verification. The process takes less than a minute and provides access to additional account data. Apps and financial institutions use this data to assess risk, power lending, or tools such as budgeting and wealth management. As mentioned above, not all institutions can verify with credential-based logins, and some users may not want to use them.
Database validation uses a data source to provide instant confirmation of whether an account is valid and in good standing. The process is often completed in seconds, with a simple user experience, but gaining viable coverage across most US bank accounts is challenging. This results in apps taking on a higher risk of transacting with unverified accounts.
How technology is improving micro deposits
Some of the cons of micro deposits are being eliminated with RTP and FedNow. These payment rails enhance their usability and allow services to verify accounts in seconds. For institutions that aren’t connected to RTP or FedNow, same-day ACH can serve as a fallback option, taking four hours to one business day.
However, even with RTP and FedNow, micro deposits are only used to connect accounts for payments. Only credential-based authentication can link accounts to share data like transaction history, which many fintech apps need to provide services to their users.
Another technological improvement is automated micro deposits. These allow verification without user involvement. Plaid offers these to any bank where credential connection is supported. The user only needs to provide their account numbers; Plaid then sends a deposit and uses our Transactions product to verify the specific deposit has landed in that account.
Additionally, unlike traditional micro deposits Plaid only uses a single micro deposit of one cent and permits users to to verify with a code, rather than the amount. Using a code with a tiny amount disincentivizes fraudsters who attempt to spam micro-deposit flows and does not require the additional step of withdrawing the micro deposit.
How Plaid micro deposits increase conversion
Many financial institutions have built their own micro-deposit flows as fallbacks. Plaid's solutions for micro-deposit authentications convert better than in-house flows. They also do more to protect against fraud.
Plaid uses smart routing to send users to the highest converting and optimal payment rail (RTP, FedNow, or same-day ACH) for their bank. Also, the Reroute to Credentials feature nudges users back into credential-based verification. When prompted, 37% of users were successfully converted back onto credential-based verification. If the user chooses to proceed manually, Plaid will allow them to use instant micro deposits if their bank supports the instant rails.
The future of account verification is 100% instant coverage
In the evolving account verification and micro deposits space, Plaid is committed to providing 100% instant coverage and the best user experience. New instant payment rails create a micro deposit method that wasn't available before and fallbacks for credential-based authentication could take days. Now, the fallback can be instant or at least take place within the same day.
Instant payments and automation have transformed micro deposit's speed and reliability. We are on the road to 100% instant account verification coverage, no matter the path the user chooses.
→ Learn more about Plaid’s payment solution.