When dealing with financial checks, many people encounter terms that can sound more technical than they really are. Two of the most common are “source of funds” (SOF) and “open banking”. Although these concepts are distinct, both play an important role in customer verification and financial security.
SOF is the process through which banks verify where money used in large transactions originates. This is a legal requirement aimed at preventing financial crime such as fraud and money laundering, claims SmartSearch.
Whenever a person makes or receives a significant payment, financial institutions must ensure the funds are legitimate. This is part of standard Know Your Customer (KYC) checks. Alongside confirming the origin of money, banks also verify the identities of the individuals or businesses involved.
A wide range of income sources may require documentation to prove legitimacy. Payslips or contracts can demonstrate salary income, while invoices or company accounts can support business earnings. Property sales can be shown with deeds or contracts, and inheritances with wills or gift deeds. Even savings may require bank statements showing accumulated funds over time. By verifying these documents, banks uphold compliance obligations while protecting customers from fraudulent activity.
The SOF process is more than just an administrative step. It safeguards both institutions and individuals by keeping illicit funds out of the financial system. For customers, it acts as a protective measure against fraudsters, while regulators rely on it to ensure transparency across financial markets.
Open banking, by contrast, refers to the secure sharing of financial information with third-party services. Traditionally, customers would have to send bank statements or manually fill out paperwork to prove their financial position. Open banking removes this burden by allowing apps or services to connect directly with bank accounts in a controlled and secure way.
Through open banking, customers can access budgeting tools, loan comparison services, or payment platforms without needing to provide extensive paperwork. It gives them full control over which apps access their data, with the ability to revoke permissions at any time. The technology not only saves time but also fosters competition in financial services by allowing FinTechs to innovate and offer tailored products.
The key distinction between SOF and open banking lies in their purpose. SOF focuses on compliance and safety, ensuring money is legitimate, while open banking prioritises convenience, customisation and efficiency. Regulators and banks benefit from SOF by keeping criminal funds out of circulation, whereas customers benefit from open banking by gaining greater control and faster access to financial services.
Although separate, SOF and open banking intersect through the KYC process. A typical verification journey begins with identity checks, often using biometric tools like facial recognition to confirm documents such as passports or driving licences. Banks then review the source of funds through supporting documents. Finally, open banking technology can streamline the process by instantly transferring financial data for verification. This speeds up onboarding, often cutting the process down to minutes.
By combining SOF and open banking, financial institutions are able to balance strict compliance requirements with customer-friendly innovation. Far from being obscure jargon, these terms represent the foundation of safer, faster, and more transparent banking.
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