When navigating financial checks, customers often encounter terms like source of funds (SOF) and open banking. While they may sound technical, both play a central role in how banks verify transactions and safeguard the financial system.
According to SmartSearch, SOF checks are carried out whenever large sums of money are transferred or received. This involves banks investigating the origins of the funds to ensure they are legitimate. By law, financial institutions must conduct these checks as part of anti-money laundering (AML) measures designed to prevent illicit activity.
As part of the wider Know Your Customer (KYC) process, SOF verification requires individuals to provide proof of where their money originates. This can include payslips to confirm salary payments, invoices or company accounts for business income, property sale deeds, wills or legal documents for inheritances, or statements showing accumulated savings. Banks may also verify the identities of everyone connected to the transaction.
The importance of SOF goes beyond compliance. By ensuring funds are legitimate, banks protect both customers and the financial system from fraud and money laundering. These processes underpin customer due diligence requirements set out by regulators, and they offer peace of mind to account holders that their financial transactions are secure.
Open banking, by contrast, is a technology-driven system designed to give customers greater control over how their financial data is shared. Through open banking, consumers can securely connect their bank accounts to third-party apps and services, enabling activities such as budgeting, loan comparisons, or payments without having to manually provide documents or card details.
The system enhances convenience by automating data-sharing in a safe and regulated way. Customers can view multiple accounts in one place, disable open banking at any time, and decide exactly which services have access to their information. For banks and FinTech providers, it fosters a more competitive landscape by encouraging new services and innovations that directly benefit consumers.
The difference between the two lies in their purpose. SOF focuses on safety and compliance by verifying the legitimacy of funds, while open banking prioritises convenience and innovation by streamlining data sharing. Both, however, are closely connected within the KYC process.
KYC typically involves three stages. First, banks verify a customer’s identity using documents such as passports or driving licences, sometimes enhanced with biometric checks. Next comes SOF verification, ensuring funds are legally obtained. Finally, open banking provides the digital channel through which this data can be transmitted and verified instantly, removing the need for manual paperwork and speeding up approvals.
Together, SOF and open banking demonstrate how regulation and technology intersect to improve financial services. While one focuses on legal safeguards, the other promotes customer empowerment and efficiency. Both are key to building trust and protecting the integrity of the financial system.
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