virtual IBAN

Understanding Virtual IBANs

What is IBAN?

An IBAN (International Bank Account Number) is a standardized format used to identify bank accounts internationally. It was introduced to facilitate international money transfers and improve the efficiency of cross-border transactions. In recent years, the popularity of virtual IBANs has increased as a cost-effective means for international business to transfer money.

IBAN Overview

The purpose of the IBAN is to provide a unique identifier for each bank account across the multitude of financial institutions, making it easier to process international payments accurately and efficiently. When sending money internationally, the sender must provide the recipient’s IBAN to ensure the funds are directed to the correct account. IBANs are primarily used in countries that participate in the International Organization for Standardization (ISO) standard for bank account identification. In the US, financial institutions overwhelmingly do not issue IBANs (despite the US being a member of the ISO), rather relying on SWIFT (Society for Worldwide Interbank Financial Telecommunication) code or the correspondent bank’s details to facilitate the transfer of funds.

On the other hand, IBANs are the standard for transactions across Europe and the Middle East.

What are Virtual IBANs?

A virtual IBAN is a concept that refers to a temporary or surrogate IBAN assigned to a customer or entity for specific purposes, such as receiving payments or segregating funds within a financial institution’s infrastructure. Unlike a traditional IBAN, which corresponds to a specific physical bank account, a virtual IBAN does not represent a unique, dedicated account. Instead, it is linked to the customer’s primary account or typically a master account maintained by the financial institution. Payments made to a virtual IBAN are directed to the associated primary account or master account, allowing for easy tracking and segregation of funds.

A virtual IBAN is linked or mapped to the customer’s primary account or a master account held by the financial institution. Payments made to the virtual IBAN are automatically directed to the associated primary or master account. When a payment is made to the virtual IBAN, the financial institution’s systems identify the virtual IBAN and route the funds to the corresponding primary or master account. The financial institution processes the payment as it would for any other transaction. If the virtual IBAN is used for fund segregation purposes, the financial institution maintains a record of the virtual IBAN and the specific purpose or category it represents. This allows for easy tracking and segregation of funds within the primary or master account.

In order to begin issuing virtual IBANs, a financial institution needs to have the necessary infrastructure and systems in place to handle IBAN issuance and related banking operations. This includes maintaining banking software, transaction processing systems, and security measures to safeguard customer information. Moreover, financial institutions need to comply with the International Organization for Standardization (ISO) standards and guidelines for IBAN implementation. This includes adhering to the defined structure and format for IBANs and ensuring compatibility with international banking systems.

Notably, the primary challenge for financial institutions wanting to issue virtual IBANs is establishing connections with the relevant clearing systems or payment networks that handle IBAN-based transactions. This allows them to participate in the automated clearing and settlement processes associated with IBANs. The largest IBAN clearing institutions include:

  1. Single Euro Payments Area (SEPA): SEPA is a payment integration initiative within the European Union (EU) that allows for the efficient processing of euro-denominated payments across participating countries. SEPA Credit Transfers (SCT) and SEPA Direct Debits (SDD) are commonly used for IBAN-based transactions within the SEPA region.
  2. TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System): TARGET2 is the real-time gross settlement system for the Eurozone countries. It facilitates large-value, cross-border payments in euro and is often used for IBAN-based transactions within the Eurozone.
  3. SIC (Swiss Interbank Clearing): SIC is the clearing system used in Switzerland for the settlement of domestic and cross-border payments in Swiss francs (CHF). It supports IBAN-based transactions within the Swiss banking system.

For a financial institution to become a partner of one of more clearing institutions requires not only the proper regulatory licensing but also an extensive application and due diligence processes with such clearing institutions.

Popularity of Virtual IBANs

Virtual IBANs have become increasingly popular as the speed and cost effectiveness of international settlements have become a priority for international businesses. As such, many financial institutions have began offering virtual IBANs to customers nationwide. It is particularly popular among many US-based businesses given the lack of US banks that offer IBAN transaction capabilities.

The advantages of virtual IBANs include:

  1. Fund Segregation: Virtual IBANs enable businesses to segregate funds for specific purposes, clients, or departments. This helps in maintaining clear records, simplifying financial management, and ensuring compliance with regulatory requirements.
  2. Simplified International Payments: Virtual IBANs can be particularly beneficial for businesses engaged in international transactions. By providing local or regional account identifiers, virtual IBANs allow companies to receive payments from foreign entities without the need for physical bank accounts in multiple countries. This simplifies cross-border payments and reduces associated costs.
  3. Payment Aggregation: Virtual IBANs can aggregate payments from multiple sources into a single primary account. This simplifies the management of incoming payments, improves cash flow visibility, and enhances financial control for businesses.
  4. Cost Savings: Virtual IBANs can potentially lead to cost savings for businesses. By centralizing funds, reducing the need for multiple physical accounts, and simplifying payment processing, businesses can achieve operational efficiencies and potentially reduce transactional costs.

Virtual IBANs can be obtained directly from participating banks, certain regulated payment institutions such as electronic money institutions, and certain regulated payment service providers. The requirements for obtaining a virtual IBAN will vary based on the nature of the issuer. In most instances, for small to medium-sized businesses or individuals, the most logical option is to obtain a virtual IBAN from an electronic money institution. The UK in particular has licensed a number of EMIs that offer virtual IBANs. You can expect to the cost for obtaining a virtual IBAN to include one-time setup fees, transaction fees such as surcharge and currency conversion and annual maintenance fees.

Conclusion

As the rate of international settlements continues to increase dramatically, financial institutions ranging from banks to fintech companies have determined that offering a robust array of international payment options at a low cost to the marketplace becomes necessary. Virtual IBANs fill that niche given the speed and cost efficiencies associated therewith.

As always, be sure to reach out to me with any questions or book a meeting here.

About Adam Tracy

Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.

Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.

In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.

Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, CoinDesk, and Bitcoin Magazine.

Find Adam: https://linktr.ee/adamtracy

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