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Reducing friction, improving customer experience with microdeposits

As the FedNow® Service network expands, Federal Reserve Financial Services is introducing the Innovation Spotlight series to explore use cases that are changing the way businesses and consumers make payments. This series delves into insights and firsthand knowledge that demonstrate how participating financial institutions, certified service providers and ecosystem providers are innovating their products and services with these instant payment use cases in mind.

This edition covers the benefits of instant microdeposits, highlighting the experiences of Plaid (Off-site), a fintech organization enabling users to share financial data with third-party apps, and Modern Treasury (Off-site), a payments operation software company that helps customers integrate their systems with a variety of bank and credit union partners.

A small — but essential — transaction

Microdeposits are small transactions (usually less than $1) used to verify an account’s ownership and authenticity before transferring larger sums to that account. These critical transactions are used to reduce fraud risk, offering peace of mind that funds will be correctly routed for a variety of business-to-consumer (B2C), business-to-business (B2B) and account-to-account (A2A) transfers, including digital wallet funding, supplier payments and real estate title disbursements.

Despite their vital role, conventional microdeposits can be inconvenient and serve as a barrier to transferring funds on both sides of the transaction. They typically take one to three days to clear and settle and often are limited to traditional banking hours, delaying the transfer of funds.

According to Ani Narayan, product manager at Modern Treasury, this friction increases the potential for higher abandonment rates and lost business, resulting in a decidedly negative customer experience.

Thanks to instant payments, however, the microdeposit is evolving. Instant payment capabilities enabled by the FedNow Service allow consumers and businesses to verify their accounts instantly, alleviating the friction associated with traditional microdeposits.

Instant solutions with sizable benefits

With the FedNow Service, the clearing and settlement of microdeposits happens instantly. For example, a fintech company can offer instant microdeposits when linking end-user bank accounts with a third-party application, such as a digital wallet. This allows seamless account verification.

“Our customers constantly tell us that users who can quickly verify their external accounts 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.

Instant microdeposits can be particularly important in B2B-specific use cases, according to Modern Treasury’s Narayan. “In these scenarios, someone in a finance department may be less likely to allow access to their accounts via account verification products and prefer to rely on microdeposits instead,” Narayan said. “Speed is also an important factor for a range of time-critical use cases, such as disbursing working capital loans or handling real estate escrow, where any delays in customers’ account verification could negatively impact business.”

Instant microdeposits also can play a critical role in mitigating fraud risk. While traditional microdeposits help prevent fraud, the ability to make these transactions in real time further enhances fraud protection functionality, said Plaid’s Bond.

“With instant microdeposits, Plaid sends a transaction to the account and asks the user to verify that transaction specifically,” Bond said. “This does two things: confirms that the account is in fact open and active and also confirms that the user has access to that account. Both confirmations help reduce the risk that the customer will see any administrative or unauthorized returns from this account.”

A future shaped by instant payments

When considering the potential impact instant payments can have for consumers, businesses and the economy, it’s easy to overlook microdeposits as a key use case. Yet, microdeposits sent with the FedNow Service can reduce friction for businesses and consumers, lower abandonment rates and improve the customer experience, all while supporting fraud mitigation efforts. This is one of several ways the payments ecosystem continues to enhance the verification process and overall customer experience.

For Plaid and Modern Treasury, instant microdeposits are just one way these organizations are spurring instant payments innovation. Organizations innovating with the use-case agnostic FedNow Service can leverage instant microdeposits as one of many use cases tailored to fit the needs of their customers or members.

These transactions serve as an important reminder that solving for seemingly small points of friction can have a significant impact. How will your organization innovate with the FedNow Service?

For more information about use cases, explore the Use Case Arena (Off-site). To discuss how your organization fits into the instant payments ecosystem, contact your relationship manager.