What Is Proof of Funds?
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 execute the transaction fully are accessible and legitimate.
Understanding Proof of Funds
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 the payment process, following the sorting of the checks by a reader-sorter machine.)
Both the 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 accept deposits; offer checking account services; make 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.