Asset verification is a process that financial services use to confirm the existence, ownership, value, and authenticity of a person’s or entity’s assets and liabilities. An asset is anything valuable owned by a person or business, such as cash, property, or equipment, that can provide future economic benefits. A liability is a financial obligation or debt that a person or business owes to others. The asset verification process is part of financial activities including loan applications, wealth management, and regulatory compliance. The process ensures assets are accurately valued, manages risks, and mitigates fraud.

Below, we’ll explain how asset verification works, the benefits of verifying assets, the advantages of digital asset verification, and best practices to follow.

What’s in this article?

• How does asset verification work for lenders and borrowers?
  
• When is asset verification necessary?
  
• Benefits of asset verification
  
• Best practices for asset verification
  
• Advantages of digital asset verification
  
• How Stripe Identity can help
  

How does asset verification work for lenders and borrowers?

Asset verification manages risk for lenders and borrowers by ensuring that borrowers have the means to repay their loans. This is particularly important in situations when borrowers might need to liquidate assets to cover loan payments. In some cases, asset verification is also a regulatory requirement to prevent fraud and money laundering.

Here’s how asset verification works in the loan application process.

• Loan qualification: Often, borrowers must provide proof of assets and liabilities to qualify for certain types of loans, especially larger loans such as mortgages or business loans. This proof can include financial statements, bank statements, property deeds, investment records, or other documents that prove the existence and value of their assets. For secured loans, borrowers might need to offer assets as collateral. The verification process confirms that the collateral covers the loan.

• Document review: Lenders review the documents and balance sheets that the borrower provides. They might use third-party verification services for this process such as credit bureaus, professional appraisers, or automated valuation models for real estate. They might also use software and database systems to access real-time data feeds from financial institutions and other entities.

• Loan approval decisions: Based on the results of the asset verification process, lenders determine whether to approve a loan application and how much money they’re willing to loan. The results of the asset verification process also typically inform the terms of the loan (e.g., interest rates, repayment periods, down payment).

• Continuous monitoring: For ongoing credit facilities, lenders might review the borrower’s asset status periodically to manage their ongoing credit risk.

When is asset verification necessary?

Many different scenarios require asset verification to promote transparency, prevent fraud, and ensure financial dealings are conducted on a sound and legal basis. Here are some of the following instances when asset verification is necessary:

• Loan applications: For mortgage, auto, and personal loans, lenders require asset verification to ensure that the borrower has the financial means to repay the loan. Borrowers can also use assets as collateral to secure the loan.

• Investment management: Financial advisors and wealth managers verify assets to understand the scope of a client’s portfolio. With this information, they can create personalized investment strategies and manage risk based on the client’s finances.

• Real estate transactions: Asset verification confirms that the buyer has sufficient funds to complete the transaction. Sellers also use it to check that their property is being sold at a fair market value.

• Estate planning and inheritance: Lawyers and estate planners verify assets to accurately distribute an estate according to the deceased’s wishes. This information helps them prepare accurate wills and manage probate processes.

• Divorce proceedings: During a divorce, asset verification facilitates an equitable division of property and financial assets and liabilities between parties.

• Business acquisitions and mergers: Companies verify assets and liabilities to confirm the value and authenticity of another company’s assets before finalizing a merger or acquisition.

• Regulatory compliance: Financial institutions are subject to Anti-Money Laundering (AML) laws and regulations that require them to verify the origin of large asset transfers and the authenticity of financial assets to prevent illegal activities.

• Insurance underwriting: Insurers require asset verification before issuing policies and setting premiums. They also use it to limit potential fraud in claim situations.

• Government aid and subsidies: Asset verification confirms that recipients of government programs, such as welfare benefits, meet the financial criteria.

• Taxation: Tax authorities sometimes require asset verification to confirm that individuals and businesses are complying with tax regulations, accurately reporting their income and assets, and paying the appropriate amount of taxes. According to the IRS, a substantial understatement of tax occurs when the amount you owe is significantly higher than what you reported. For most corporations, it applies if the understatement is more than the lesser of 10% of the correct tax (or $10,000, if that’s more) or $10 million.

Benefits of asset verification

Asset verification provides a detailed look at a person’s or entity’s financial position, which has many benefits.

• Financial health assessment: Asset verification allows financial institutions to create more sophisticated risk models that predict financial behavior and resilience better than those informed by traditional metrics such as income or credit score.

• Strategic asset management: Asset verification allows wealth managers and institutions to better manage assets and liabilities using strategies such as tax-loss harvesting, asset location, and rebalancing based on verified asset values. Real-time verification allows portfolio managers to react quickly to market changes to capitalize on opportunities and manage risk.

• Legal and financial accountability: In legal scenarios such as divorce or estate distribution, asset verification ensures that all parties remain honest and adhere to legal standards. This mitigates the risk of hidden assets or undervaluation, which upholds the integrity of the legal process and leads to more equitable outcomes.

• Financial regulations: Asset verification provides regulators and institutions with data-driven insights into the flow of assets and their origins. This helps regulatory bodies understand market dynamics, identify patterns indicative of financial crimes, and develop targeted regulatory responses.

• Fraud prevention: Advanced verification technologies such as blockchain and AI-driven analytics enable real-time and continuous verification of assets. This prevents initial fraud and monitors for anomalies that might indicate fraudulent activities over time, such as the unauthorized transfer of assets or alterations in asset valuations.

• Risk assessment: In lending, integrating asset verification with advanced analytics allows for a more layered and granular risk assessment model. This type of assessment might differentiate between types of assets (e.g., liquid, fixed) to provide a more accurate picture of financial health and lending risk. For example, fixed assets such as land or buildings, are purchased for long-term use and are not likely to be converted quickly into cash.

• Taxation benefits: When a business verifies and depreciates eligible assets correctly, it can spread out the cost of those assets over several years, reducing taxable income in each of those years. This results in lower overall tax liability over time.

Best practices for asset verification

Here are some best practices for the asset verification process.

• Regularly update asset register: Your business’s asset register should be a living document that’s updated as needed with new purchases, disposals, transfers, and depreciation. Conduct periodic physical verification of assets to confirm their existence, condition, and location. This can be done through manual inspection or by using asset tracking software.

• Categorize and tag assets: Categorize assets based on their type, function, and location. Use asset tags, barcodes, or radio frequency identification (RFID) technology to easily identify and track each asset.

• Reconcile records: Regularly reconcile the asset register with accounting records to identify and rectify any discrepancies.

• Establish an audit trail: Maintain a clear audit trail for asset transactions including acquisitions, disposals, and transfers.

• Digitize the verification process: Use asset management software to make the verification process easier, automate data collection, and generate detailed reports.

• Assign responsibility: Designate specific individuals or teams responsible for asset verification. Establish procedures and guidelines to create a consistent verification process.

• Prioritize high-value assets: Verify high-value assets more frequently, as these pose a higher risk of loss or theft. Consider implementing additional security measures for these assets.

• Comply with industry requirements: Ensure that your asset verification practices comply with relevant industry regulations and accounting standards.

Advantages of digital asset verification

Digital asset verification is a faster, more accurate, and more cost-effective solution compared to traditional, manual methods. The benefits of digitizing this process include:

• Speed: Digital methods automate the asset verification process, allowing businesses to process large volumes of data much faster than with manual checks. Some technologies enable real-time or near-real-time asset verification, a key benefit in dynamic markets where asset values frequently fluctuate.

• Accuracy: Traditional methods are susceptible to human error during data entry, calculation, and interpretation. Digital asset verification minimizes these errors by using algorithms and databases that process data accurately. Advanced analytics can also identify discrepancies that might not be evident through manual review.

• Cost: While the initial setup for digital asset verification systems can be costly, these systems tend to lower costs over time by reducing the labor-intensive processes of traditional methods. Automated systems require less personnel and can operate continuously without breaks.

• Security: Digital systems often incorporate advanced security measures such as encryption, multifactor authentication, and secure access protocols.

• Scalability: Digital asset verification systems are typically more scalable than traditional methods. They can handle an increase in volume without a corresponding increase in errors or processing time.

• Transparency: Digital verification systems automatically generate records of every transaction and verification process, creating a clear audit trail. This transparency is invaluable for regulatory compliance, risk management, and in situations that require proof of due diligence.

• Global reach: Digital verification systems are not bound by geographic limitations. They can access and verify assets located anywhere in the world, provided there is digital connectivity. This is especially important for multinational organizations and businesses involved in international trade.

• Software integration: Businesses can integrate digital asset verification technologies with other systems such as customer relationship management (CRM), enterprise resource planning (ERP), or supply chain management systems. This integration allows information to flow across different departments, creating greater operational efficiency and a holistic view of the organization’s assets.

• Adaptability: Digital asset verification systems are well-positioned to adapt to emerging technologies such as blockchain, which can further improve the integrity and decentralization of asset verification processes.

How Stripe Identity can help

Stripe Identity is a suite of verification tools that allows businesses to quickly and securely verify customer identities, helping them fulfill their Know Your Customer (KYC) obligations.

Stripe Identity can help you:

• Onboard customers faster: Offer a seamless, automated identity verification process that reduces friction and increases conversion during onboarding.

• Mitigate fraud risk: Use advanced fraud detection capabilities to identify and prevent malicious actors from creating accounts or making fraudulent transactions.

• Improve operational efficiency: Remove the need to manually verify identities, reducing the time and resources required to onboard new customers.

• Configure the experience: Easily integrate Identity into your existing user experience and configure your verification methods and fallbacks.

• Scale with confidence: Stripe Identity’s robust infrastructure can handle high-volume verification requests as your business grows—without adding operational overhead.

Learn more about how Identity can help you onboard customers securely and easily, or get started today.