IBAN Explained: What Is It and How Do They Work?

Before IBAN, different countries had their own systems and standards for bank account identification (which includes information about the bank, branch, routing codes, and individual account numbers). Instead of having a specific method of information organisation, financial institutions were exchanging information on a case-by-case basis.

Because of this, it often led to additional routing between intermediary banks or financial institutions, which caused delays and extra costs.

To overcome this, the International Organization for Standardization (ISO) published the ISO 13616:1997. This system is commonly referred to as the first version of the IBAN, however, due to certain limitations, certain countries had difficulty adopting and complying with its rules. It wasn’t until 2014 that all national systems were abolished and replaced with the IBAN system.

What is an IBAN?

IBAN, short for International Bank Account Number, is an alphanumeric code that helps financial institutions identify the correct recipient of a payment. Although each country may have its own specific format for IBANs, they must comply with ISO’s standards and follow the same basic structure, which consists of letters and numerals, typically with a length between 15 and 34 characters.

For example, an IBAN at a UK financial institution looks like this: GB 29 NWBK 601613 31926819.

Breaking this down, the IBAN consists of:

• A two-digit country code – This country code is assigned to the country by the ISO. Each country that uses the IBAN system has its own code. For instance, the country code for Singapore is “SG” and the United Kingdom is “GB”. Here’s the full list of country codes.
• Check digits – Provided by the issuing financial institution using a specific algorithm. These are control checks, which act as a security layer specific to the bank. This helps to prevent errors and fraud while ensuring that the funds are transferred to the correct account.
• Bank identifier code – Better known as BIC. This set of characters identify the bank and branch where the account is held.

• Basic bank account number (BBAN) – The code that is linked to the individual account at the financial institution.

Although IBAN is originally developed for transacting between Eurozone banks, they’re now used in 70+ countries worldwide.

IBAN vs SWIFT Code

If you recall our article on SWIFT payments, this article must feel like Déjà vu for you because of their similarities — they’re both international systems that help standardise cross-border payments. However, a fine line is drawn between what these two methods aim to identify.

A SWIFT code refers to a specific financial institution in an international transaction, whereas an IBAN identifies an individual account and the country in which the account is held at.

The SWIFT payment system, which consists of 8 to 11 characters still remain as the predominant method of international fund transfers because it allows banks to share a significant amount of financial information¹. These include the status of the account, debit and credit amounts, and details related to the transaction. Wallex supports payments via the SWIFT network².

On the other hand, both SWIFT codes and IBANs are pivotal in our modern global payment system in that they ensure international payments and completed securely, accurately, and efficiently. Without either of these agreed-upon standards, international fund transfers would carry significantly higher risks of error.

How to find your IBAN?

Finding your IBAN number is relatively easy, as it boils down to three ways:

1. Bank statement: IBANs are typically printed on the bank statement, along with the account number and sort code.
2. Online banking: Most online banking platforms will provide the IBAN information under the account information section.
3. Contact your bank: If all else fails, and you’re still unable to find your IBAN, your financial institution should have access to your information quickly.

In addition to locating your IBAN number, there is also the option to use an IBAN generator. This is one of the benefits of having an internationally accepted coding system as tools like these can generate your IBAN using preset configuration. As long as you know the country, sort code, and account number, the tool will return you with your IBAN.

Before you proceed with the IBAN, be sure to validate the number with an IBAN checker. International payments or telegraphic transfers (TT) made using the incorrect IBAN will cause a delay and may incur additional cost to reverse the payment.

What are Virtual IBANs?

Apart from the traditional IBANs, there are Virtual IBANs (vIBANs) that are built to help businesses reduce cross-border payment costs, streamline high incoming payment volumes, or upgrade payment reconciliation processes.

Fundamentally, a vIBAN is a virtual account number issued by a financial institution or a payments provider, such as Wallex. It looks exactly the same — made up of a series of alphanumeric characters, but while the standard IBAN is matched 1:1 with a bank account, a vIBAN allows you to have multiple balances with one master account.

To put that in simpler words, think of vIBANs as linked sub-accounts that fall under the umbrella of one master account.

🔑 Read more: Remittances 101: Understanding How Money Moves Across Borders

Benefits of a virtual IBAN

Virtual IBANs offer the same fundamental capabilities as a traditional settlement account, such as facilitating the reconciliation process and transacting globally. However, they eliminate the complexity and reduce the costs involved.

Here’s what vIBANs can provide for your business:

Payment segregation

Virtual IBANs are great for simplifying payments with international suppliers.

To illustrate, imagine an international business that needs to send and receive funds from multiple suppliers simultaneously. If there is only one IBAN, the business will then need to issue additional reference information to distinguish the source of the payment. In this situation, this information becomes extra sensitive because any incorrect information may lead to a bottleneck due to the validation process.

However, if this business were to give each payee a unique vIBAN, there won’t be any necessary additional information because of the clear payment source. This account infrastructure automatically reconciles incoming and outgoing payments from both suppliers and customers.

Multi-currency support

International expansion is often the goal for many businesses; however, it comes with one unavoidable challenge — managing foreign currency exchange (FX) risks.

If a business only has a single-currency account, this means the company must incur an additional FX cost at the market rate and any bank charges on every payment. It adds up.

But with a vIBAN, you can hold multiple currencies within the account. This enables businesses to accept and send payments in local currencies using local payment networks. The only FX charges will be when these funds are converted into a different currency, rather than on every transaction. This method not only reduces the costs significantly, but businesses also get much faster transactions.

🔑Read more: Top 4 Ways To Make Overseas Payments For Businesses 2023

Wallex’s Virtual IBAN Account

Our virtual accounts allow businesses to collect and manage funds in multiple currencies. Not just that, there are also no minimum balance requirements and no hidden charges.

Check out the Wallex Virtual Account or click on the banner below to schedule a demo.

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Sources:
‍¹ SWIFT
‍² Wallex enables customers to perform SWIFT transfers via our network of banking partners.