Payments are a common pain point for businesses. For businesses operating internationally, those pain points are amplified significantly.
International Bank Account Numbers, or IBANs, have a vital role to play in addressing these challenges. They reduce risk and delays when making cross-border payments and transfers, helping businesses navigate the complexities of international banking.
In this blog, we will provide a comprehensive overview of IBANs, answering several key questions:
- What are IBANs and how do they work?
- Why are IBANs important?
- What are the differences between an IBAN and a SWIFT Code?
- What is the cost of cross-border transactions in Europe and how can IBANs help?
- How is BaaS enabling frictionless payments across Europe?
Understanding the Basics of IBANs
First established in 1997, an IBAN is a standardised system to uniquely identify the bank account of a customer at a financial institution and its country of origin. Put simply, an IBAN clearly tells a bank where to transfer money.
International Bank Account Numbers consist of up to 34 alphanumeric characters split into four main components:
- Country Code: Two letters identifying the country in which the bank account is held (for example, DE for Germany).
- Check Digits: Two additional digits are provided by the issuing financial institution, to validate the IBAN.
- Bank Identifier: A combination of letters and/or numbers used to identify the financial institution with whom the account is held. This may also include characters to identify the specific branch.
- Basic Bank Account Number (BBAN): Information about the account within that financial institution, such as a sort code and account number.
In addition to traditional IBANs, there are also Virtual IBANs, or vIBANs. While regular IBANs are matched on a one-to-one basis with bank accounts, vIBANs can process multiple payments into and out of a linked bank account.
Essentially, a vIBAN is an alias of a master account. A financial institution can issue multiple virtual IBANs to one account holder, creating digital accounts in different countries to remove the friction of cross-border transactions.
Read more: Getting to grips with Virtual IBANs
The Importance of IBANs
International Bank Account Numbers were primarily created to simplify and standardise transactions taking place between banks in different countries. As of March 2024, 87 countries were using the IBAN system, including the vast majority of Europe.
The value of IBANs comes from the way they accelerate the payment and settlement of transactions in a local currency via local payment schemes, thereby avoiding transcription errors, delays, or rejected payments. For businesses that operate in multiple countries (or have ambitions to), access to local IBANs is a must-have in order to operate efficiently in the specific market, particularly if the country uses a different currency.
Take the example of a German company that wants to begin selling its goods in Poland. It will need to trade in Polish złoty, but converting those revenues into euros could be costly. A Polish IBAN changes all that – it allows the German business to accept and process payments in złoty, without being encumbered by currency conversion fees or lengthy processing times.
IBAN vs. SWIFT Code: What are the Differences and When to Use Each
Like IBAN, SWIFT (Society for Worldwide Interbank Financial Telecommunication) is another major international payment system.
A SWIFT Code, which is often referred to as a Business Identifier Code (BIC), is shorter than an IBAN. Between eight and 11 characters, it contains less information – while the SWIFT Code tells a bank where the account is held (the country and bank), it does not include the identity of a specific bank account at that bank.
Both the IBAN and SWIFT systems aim to direct money more accurately and quickly to where it needs to go. However, IBANs are used primarily across Europe for transfers directly into the desired account, whereas SWIFT Codes are used globally to identify the correct bank and country for international transactions.
IBANs tell you who to pay, SWIFT Codes tell you where to pay.
SWIFT Codes are essential for identifying the recipient bank in international transactions. Almost all cross-border payments require a SWIFT code to ensure the funds are directed to the correct bank.
Here are three examples of when an IBAN or SWIFT code would be used, or both:
- Money transfer from the US to France – both systems are used:
- IBAN: To specify the exact recipient account in France.
- SWIFT Code: To identify the recipient’s bank in France.
- Money transfer from Austria to Italy – IBAN primarily, but SWIFT can also be used:
- IBAN: The primary identifier, as both countries use the IBAN system.
- SWIFT Code: Might be required to route the payment through the appropriate banking channels.
- Domestic payments within Germany – just IBAN:
- IBAN: Used to specify the recipient account within Germany.
The cost of cross-border transactions
In 2022, $150 trillion of cross-border payments were made, generating revenues of roughly $240 billion – this includes both transaction fees and foreign exchange (FX) revenues.
These figures highlight the costs involved in cross-border transactions. According to the World Bank’s Remittance Prices Worldwide report for September 2023, transferring money internationally in Q3 2023 had an average transfer cost of 6.3% of the total transaction.
The exact cost of cross-border transactions can vary widely, ranging from 2% to 15%. The cost will be based on several factors, including the method of transfer, the financial institutions involved, the currency and countries between which the transaction occurs, and the amount being transferred.
In the era of cross-border eCommerce, with international transfers becoming more commonplace, it is crucial that businesses consider their options for reducing the cost of cross-border transactions so as to remain competitive on price and maximise profitability.
Access to local IBANs and payment rails is therefore essential for businesses with operations across multiple markets and currencies.
How BaaS is enabling frictionless payments across Europe
With competition in the eCommerce space growing, brands are turning to Banking-as-a-Service (BaaS) to provide one-stop-shop payment solutions. These BaaS-powered solutions must make cross-border payments quick, secure and transparent for clients. In order to deliver this promise, the best BaaS providers provide the necessary technical infrastructure with the right bank licensing, which allows access to multiple payment schemes across different countries. 5
For example, Vodeno’s single API integration offers local and cross-border payment systems tailored to each client. Vodeno’s technology sits alongside the ECB licence of Aion Bank, with its home licence in Belgium and additional branches in Germany, Poland and Sweden – giving access to local IBANs and local payment schemes. The Vodeno Cloud Platform automatically chooses the most efficient payment rail for each transaction – including access to local rails when necessary – enabling a much quicker, frictionless payment journey that reduces the cost of sending and collecting money.
Additionally, as part of our Mass Payments solution, we offer our BaaS clients virtual IBAN solutions with the Master Account and virtual IBAN accounts offered in: EUR, GBP, USD, SEK and PLN.
The main functionalities we offer:
- Master account (safeguarding / settlement account):
- Main account for batch booking of all funds processed from/to the vIBANs
- Virtual IBANs:
- Visible to end customer and always linked to master account
- Identify incoming and outgoing payments
- Payments:
- All SEPA schemes (SCT, SCT Inst & SDD)
- Internal payments
- Local payments for PL & SE
- Cross-border international
Why does this matter?
With virtual IBANs, businesses can accept payments in the currency of the payer and receive them into a local-currency bank account – cutting out FX charges that come from converting every single international payment, or fees that are charged by corresponding banks.
One of our clients, a leading neobank, was not directly connected to the local clearing scheme in Poland. As a result, their users’ transactions would be treated as cross-border transactions by Polish Banks. Aion/Vodeno partnered with the client to offer Polish virtual IBANs, allowing their customers to use Polish local payment rails for domestic money transfers. This provided their users with a local Polish IBAN number in the app, and the solution was fully embedded into their branding and existing customer journey.
Aion/Vodeno were able to integrate the solution quickly with a Go-to-Market (GTM) as fast as six weeks for vIBANs and mass payments.
Aion/Vodeno’s vIBANs and mass payment solutions were developed specifically for financial institutions that want access to Aion Bank’s IBANs (in Belgium, Germany, Poland and Sweden). Additionally, the Vodeno Cloud Platform’s technology is able to connect all payment schemes via a single-call API solution, which automatically determines the fastest and most cost-efficient payment rail for each transaction.
To learn more about IBANs, vIBANs and what Vodeno can provide your business, arrange a call today.
