Prevent ACH payment failures: open banking vs. account validation

As businesses increasingly rely on the authentication of bank account data for payments, new customer onboarding and risk management, two distinct approaches have emerged to acquire it: open banking and account validation. 

While both methods allow organizations to verify bank account data, they do behave through fundamentally different relationships to financial data. The right tool for you will depend heavily on the desired outcome, with unique advantages available from each depending on the specific needs of your ACH payments program. 

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Two methods, many more options

Open banking authentication: real-time data for the price of increased friction

Providers of open banking (often referred to as aggregators) use financial institutions’ APIs to build account connection experiences for their customers. These onboarding experiences provided by the aggregators then allow individuals to share their banking credentials through multi-screen authentication flows. Individuals are typically directed through a bank’s login experience after which they select specific accounts to connect and provide consent for ongoing data access.

This credentialed approach presents comprehensive financial insights including real-time balances, transaction history, account ownership verification, and ongoing transaction updates. However, it does come with the friction inherent to an individual providing their private bank info, which typically results in lower conversion rates for customer onboarding. Additionally, some smaller financial institutions are underserved by the open banking aggregators, meaning not all individuals will be able to successfully link their bank accounts, further dropping the overall conversion rate of open-banking-based account authentication. 

Account validation: User-not-present, credential free account verification, focused insights

Account validation platforms can authenticate with just a bank account and routing number, and some return additional insights and risk scores to help customers decide on what to do with a bank account. 

This approach is particularly interesting because it is credentialless and user-not-present, meaning there is significantly less friction that may cause drop off. Providers use consortium data sources to analyze historical account and transaction behavior, and some, like GrailPay, enhance initial findings with AI algorithms to layer on additional probabilistic insights. 

This user-not-present methodology prioritizes speed and seamless user experience while providing focused insights specifically designed for payment risk assessment.

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Open banking vs account validation: head-to-head comparison

Open banking or account validation? It depends on the business

When account validation makes sense

Account validation tools excel in scenarios where operational efficiency and user experience drive business decisions. 

For ACH payout operations for example, like vendor payments or high-volume account enrollment to ACH, the combination of higher bank account coverage, faster latency, and pricing typically pegged to individual API calls makes account validation a strong choice. The credential-less approach particularly benefits businesses where friction in the bank account enrollment process directly impacts conversion rates. 

When your primary need is confirming account operability for payment settlement rather than comprehensive insight to real time data, going with an account validation solution for focused insight is likely the best call. 

When open banking justifies additional investment

Open Banking tools prove valuable when data richness justifies increased friction and cost. Applications requiring income verification, cash flow analysis, or ongoing account monitoring benefit from the comprehensive financial insights these platforms provide.

The real-time balance verification and transaction history access become essential for lending decisions, credit assessments, or personal financial management applications where deep financial insights drive core product value.

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A third option: maximize coverage with the overlap

Progressive fintech companies and financial institutions increasingly recognize that optimal ACH payments programs often require both approaches to bank account management and strategically deploy both across different specific segments of user journeys within broader use cases.

A hybrid implementation might use account validation for initial payment enrollment to maximize conversion rates, then selectively deploy open banking for users requiring enhanced verification or ongoing monitoring based on their account validation confidence score. This approach optimizes for both operational efficiency and comprehensive risk management.

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Costs: what to expect

Pricing models for open banking and account validation typically reflect each approach's core value proposition. Open banking aggregators typically charge multiple API fees (Auth, Identity and Transaction) plus ongoing monthly user fees, making them prohibitively expensive for simple authentication. 

Account validation platforms usually charge single API call fees per validation, creating predictable unit economics that scale efficiently with increasing volume of bank accounts being enrolled to ACH. For businesses processing high volumes of ACH payments with high volumes of distinct bank accounts, this pricing structure often makes more sense. 

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Making the strategic choice of how to validate bank accounts

The decision between open banking and account validation ultimately depends on balancing three critical factors: user experience, the need for real-time data, and costs. 

Choose account validation when speed to bank account enrollment, account coverage, and minimal user friction drive business success, and when basic account validity assessment meets your risk management requirements.

Choose open banking when comprehensive real-time financial insights justify additional implementation complexity and user friction, and when ongoing account monitoring provides strategic value.

The future of ACH payment operations likely lies not in choosing between these approaches, but in strategically combining them to create payment experiences that optimize for both user conversion and comprehensive risk management across different stages of the customer journey.

Looking for an account validation solution? Get in touch!

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