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What is a penny test?

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A penny test bank transfer, also known as a micro deposit, is a method used by banks, financial institutions, and payment service providers to validate the authenticity of a bank account.

Essentially, a penny transfer involves transferring a miniscule sum to another bank account to ensure the validity of that account. It’s a way to mitigate the risk of losing large sums to unspotted errors – akin, in a way, to throwing a small piece of onion into a pan and waiting to hear a sizzle before tossing in the rest.

In payroll, penny transfers may be used to minimize any errors in payroll processing – especially when it comes to cross-border payments, where each transfer can get quite expensive.

How does a penny test bank transfer work?

Penny transfers tend to follow a fairly straightforward process, mirroring a regular transfer, initiation, verification, and confirmation.

Here’s how penny transfers may come into play in payroll:

  • A newly onboarded employee provides their bank information to the employer.
  • Before depositing the first pay check, the employer initiates a penny transfer to ensure the bank information they received is accurate.
  • Once completed, the employee is asked to verify that their account received the transferred amount.
  • If anything is amiss, the employer makes the necessary changes.

Are there alternatives to penny transfers?

Depending on which country you’re transferring funds into, there may be a number of alternatives available to penny transfers, each with their own benefits and drawbacks. Here are a few examples:

  • Bank account tokenization. This refers to a tokenized version of a bank account to prove validity.
  • Direct debit mandate: In some countries where direct debit is common, one may give a business permission to draw funds directly from their account. By setting up the mandate, the bank validates the account.
  • Third-party verification services: There are third-party providers that offer API-backed services which ensure the validity of a bank account. They do this by integrating with a network of FIs and in this way are able to deliver a quicker validation process.

How does a penny test bank transfer work on a global scale?

On a global scale, penny transfers function very much like they do locally. Nonetheless, there are some unique considerations when it comes to these penny transfers because they’re being transferred across different countries. Some examples include:

  • Regulatory differences
  • Increased likelihood of delays
  • Deeper risks of fraud
  • Multiple fees
  • Complex privacy considerations
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