DEFINITION of 'Proof of Funds (POF)'

Proof of funds (POF) refers to a document that demonstrates a person or entity has the ability and funds available for a specific transaction. Proof of funds usually comes in the form of a bank, security or custody statement. The purpose of the proof of funds document is to ensure that the funds needed to fully execute the transaction are accessible and legitimate.

BREAKING DOWN 'Proof of Funds (POF)'

Some con artists planning a financial scam may request a proof of funds to make sure that they are concentrating their efforts on someone with significant financial worth. Therefore, it is important to make sure that you only give proof of funds to trusted individuals, whom you have thoroughly investigated.

Proof of Funds Versus Proof of Deposit

In commercial banking, proof of deposit is the financial institution’s verification of the dollar amount of a check or draft being deposited. To do so the institution will compare the amount written on the check to the amount on the deposit slip. (This is the second step in the check presentation for payment process, following the sorting of the checks by a reader-sorter machine.)

Both proof of deposit and proof of funds are methods that commercial banks use to secure the variety of transactions they process.

Proof of Funds and Commercial Banking

Commercial banks differ from investment banks in that they work primarily with individual, retail customers. Commercial banks accepts deposits, offer checking account services, makes business, personal and mortgage loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts.

In contrast, an investment bank specializes in large and complex financial transactions, such as underwriting. Investment banks may also act as intermediaries between a securities issuer and the investing public (in an IPO), facilitate mergers and other corporate reorganizations, and act as a broker and/or financial advisor for institutional clients.

Commercial banks make money by providing loans and earning interest income from those loans. The money they use to provide the loans in the first place comes from customer deposits. Net interest income is the amount of money a commercial bank earns via the spread between the interest it pays on deposits and the interest it earns on loans.

Some commercial banks, such as JPMorgan Chase, also have investment banking divisions, following the repeal of the Glass-Steagall Act of 1932 (passed during the Great Depression). At the time, the prevailing thought was that financial markets would be more stable if commercial banking and investment banking were kept separate.

RELATED TERMS
  1. Proof Of Deposit - POD

    Proof of deposit is a verification that funds have been deposited ...
  2. Deposit Slip

    A deposit slip is a small written form that is sometimes used ...
  3. Brokered Deposit

    A brokered deposit is a deposit to a bank that is placed by a ...
  4. Cleared Funds

    Cleared funds are the balance in an account that is able to be ...
  5. Deposit Broker

    A deposit broker places deposits at a a depository institutions ...
  6. Bank

    A bank is a financial institution licensed as a receiver of deposits. ...
Related Articles
  1. Personal Finance

    Retail Banking vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking refers to the aspect of banking that deals with corporate customers. Check out more on the differences between ...
  2. Personal Finance

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  3. Personal Finance

    Investment banking versus commercial banking

    Read an in-depth review of the differences between a career in investment banking and a career in commercial banking, including how to decide between them.
  4. Tech

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against their brick-and-mortar peers. Find out what internet banks have to offer and where they fall short.
RELATED FAQS
  1. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  2. What are the 9 major financial institutions?

    There are nine major types of financial institutions. Understand the major types of financial institutions that exist and ... Read Answer >>
  3. What is the difference between an investment and a retail bank?

    Learn the primary differences between retail banks and investment banks by examining the business activities, type of clients ... Read Answer >>
  4. How do investment banks help the economy?

    Learn more about the functions of investment banks in a modern economy and how investment banks have been treated differently ... Read Answer >>
  5. How long does it take a check to clear?

    It usually takes two days for a check to clear, but in some cases it may take longer. Discover how banks treat large deposits ... Read Answer >>
Trading Center