What is an IBAN? … and why would I need one? Jonathan Williams, Director, Mk2 Consulting Standardisation is generally a good thing, at least that’s what ISO – the International Organisation for Standardisation – believes, and this applies to financial transactions more than most. The International Bank Account Number – pronounced “eye-ban” in the UK and US and “ee-ban” pretty […]
What is an IBAN?
… and why would I need one?
Jonathan Williams, Director, Mk2 Consulting
Standardisation is generally a good thing, at least that’s what ISO – the International Organisation for Standardisation – believes, and this applies to financial transactions more than most. The International Bank Account Number – pronounced “eye-ban” in the UK and US and “ee-ban” pretty much everywhere else – has big shoes to fill: it’s a standard (ISO13616) which aims be the only bank account format you’ll ever need. It’s used in Europe and internationally and is the common format to represent any account in any country, and it does a pretty good job in almost all cases.
If you’re in Europe you’ll probably have been asked about IBANs when making a payment to the EU, but they have broader adoption, including in Brazil. Here are six key facts about IBANs:
- They’re not all the same length
- The country code at the front determines the format of the rest of the IBAN
- There are check digits to prevent errors creeping in … but IBANs with a valid check-digits can be incorrect
- They are comprised of both alphabetic characters and digits
- They’re not always bank accounts
- It’s easiest to find yours from your bank statement or online banking
The advent of the Single Euro Payments Are has meant that IBANs have superseded domestic account numbers in many European countries, but they have been in use for international payments for almost 20 years, generally alongside the BIC (Business Identifier Code, previously Bank Identifier Code).
The easiest way of thinking about IBAN is as a fully qualified, standardised address for a payment, and a BIC is the associated postcode: a BIC will get your payment to the right bank, but an IBAN will get it to the right account. It’s possible to work out the BIC from an IBAN reliably for almost all accounts.
IBAN Format varies by country
Since every country’s banking system is different, it must agree its own IBAN format, which has to be mapped to the existing account numbering system. Different countries have a different number of components including bank and branch codes and bank group identifiers. When they’re printed IBANs tend to have spaces every fourth digit (or letter) to make it easier for humans to read. The longest IBAN is from St Lucia – 32 characters – which recently overtook Malta – 31 characters.
IBANs must build on what was there before. Prior to IBANs becoming the default, German accounts had two components: an 8-digit branch code (Bankleitzahl) and a 10-digit account number (Kontonummer). This meant that when the Single Euro Payment Area (SEPA) standardised on IBAN as the only account format, all old account data needed to be replaced or converted.
|Country Code||Checksum||Branch Code (Bankleitzahl)||Account Number (Kontonummer)|
|DE89 3704||0044||0532 0130 00|
But every country is different and each has unique circumstances. We’ll look at two examples to see where some of the complexity comes from.
Case study: Netherlands
The old Netherlands account format had only one variable: the 10 digit account number, without reference to the bank. It was also possible to migrate account numbers between banks without change, in the same way a mobile phone number can be ported.
When the Netherlands banking community decided on their own IBAN format they decided it would be good to include a reference to the bank. The Netherlands format contains a [Bank Identifier] which looks just the same as the first four characters of the associated BIC. “ABNA” is the relevant identifier for ABN Amro. Account numbers are ten numeric digits. So NL91 ABNA 0417 1643 00 is a good example IBAN.
When the Netherlands was migrating to SEPA, businesses needed to update their databases and the Netherlands Banking Association decided to create an initiative to help with which I was involved when I was at Experian. The IBANBIC service, available to consumers and businesses, had a list of all the accounts from the clearing house, Equens, and could reliably form the IBAN for an account.
Case Study: United Kingdom
The UK’s banking and clearing system still relies on branch codes (sort codes) and account numbers. Ehen the UK format (with the ISO country code “GB”) was defined, it included both of these components and the [Bank Identifier] used in the Netherlands.
Therefore a UK IBAN example is GB29 NWBK 6016 1331 9268 19. “NWBK” is the National Westminster Bank, part of RBS Group and 60-16-13 is the sort code.
So the UK’s fairly simple? In theory but not in practice. There are a few complicated cases.
The UK banking system didn’t allow building societies to operate sort codes so payments to them used to have to be sent to so-called collection accounts, These receiving accounts distinguished which customer account they were for by using the [Reference] field also called the roll number in this situation. But that doesn’t fit into the UK plan, so when IBANs were brought in, building societies were advised to obtain sort codes for those accounts or not have IBANs. In most cases older accounts remain using reference numbers but some progress has been made on new accounts. Credit Unions are in a similar position.
Secondly, account number weren’t agreed to be eight numeric digits and some account numbers could be longer (in some cases 12 digits) or have alphabetic characters (which Bacs, the clearing system, was not designed to handle). So rules had to be devised to convert them to 8-digits, in some cases mapping them to more than one sort code; rules were available to around 20% of the accounts in the UK according to research I ran for the Payments Council in 2009. These accounts could then have IBANs, but the original core banking systems still processed their accounts mostly in the old format.
Finally, there were some banks which did not have a need for a BIC, issued by SWIFT, and so they couldn’t have a UK IBAN because they didn’t have a code like “NWBK” or “BARC”. These represented very few accounts and I would expect vanishingly few now.
In some cases, IBANs don’t map one-to-one to a bank account. Virtual IBANs – where an account is specific to a customer of a non-financial institution and map in groups to a single “real” account – can be issued. This is common practice for collecting utility payments in some countries – you make a payment to an IBAN which specifies not only the recipient, the electricity company, but your customer account with the electricity company. This can help improve reconciliation and reduce mis-keying or missed reference fields.
Problems with IBANs
Even though the IBAN format has check-digits, it doesn’t mean the IBAN is valid, or that the account or even bank is genuine, or that the IBAN has the right number of characters or digit, but this is the basic check that most pieces of software apply.
Over-reliance on the check-digits can cause problems. Research during SEPA migration in 2012 suggested that 2% of IBANs had correct check digits, but contained incorrect information.
In addition, since IBANs are normally used in conjunction with a BIC, potential mismatches can cause problems. In theory the bank should know the BIC of the destination bank, like a post office can work out the postcode of an addressed letter without one, but sometimes this doesn’t quite work.
In addition, an issue in the core payments systems of some banks caused problems for FinTech companies. The systems assumed that the country code of the IBAN and BIC must be the same: if you’re sending a payment to a French account why would the BIC be for a different country? But this was legitimate and meant that euro accounts operated for UK FinTechs in other countries could not receive payments from some large banks.
Finally, there is an underlying assumption about payments which disregards the rule of the Single Euro Payment Area that it should not matter where I am making a payment from or to. Some businesses assume that if they operate only in, say, Germany, that the accounts will all be German and the IBANs will start ‘DE’. This is not a sensible assumption but it right in probably 98+% of cases. As a result, the ‘International’ in IBAN has some implications for how businesses deal with their domestic customers.
What of the future?
It’s widely assumed that introduction of the new standard for payments messaging, the ISO20022 data dictionary and associated messages, will require IBANs. While IBANs will help, ISO20022 is so flexible that it can cope with other references for accounts, so it’s not mandatory.
And in the UK, while issues of non-IBAN accounts at building societies still remain, it will still not be 100% IBAN-ready. It will be interesting to see whether adoption of the ISO20022 standard, for example in Canada, will also drive adoption of IBAN.
So how has the IBAN done?
On the surface the IBAN standard is successful and 77 countries have adopted it. But Australasia and North America have not yet and while the US, Russia, India and China are not yet on board, the vast majority of transactions remain in the legacy format. Whether they can be persuaded that the investment is worthwhile depends largely on the cost legacy systems, both inside banks and in corporations.