While International Bank Account Numbers (IBAN) take the banking industry a giant leap towards consistent STP (Straight Through Processing), there are some misconceptions about just how reliable they are. Here, we explore the purpose of IBANs and how the best possible validation at formation is still an essential step in their use.
The International Bank Account Number or IBAN is one of the key building blocks of the recent initiatives to improve cross-border payments within the European Payment Zone (EPZ) and beyond. With the use of IBANs, the goal of error free Straight Through Processing (STP) comes within reach and cross-border payments need be no more difficult within the EPZ than domestic payments.
In the face of an increasing volume of cross-border payments within the EPZ over recent years, the European Banking Industry has identified two key challenges - reducing the end-to-end processing time of cross-border transactions, and reducing the cost to the customer. Their answer to these challenges was a specification of standards for such payments, building on existing national and international payments systems and based on concepts now known by three key acronyms - STP, IPI (International Payment Instruction), and IBAN.
End-to-end STP is the basic model created for payments. With STP, the ordering bank pays the beneficiary bank directly by a credit transfer, the Beneficiary bank pays a standard fee to the ordering bank, and both banks create reports for balance of payments purposes. The transaction takes place with no need for human intervention, to achieve maximum speed and efficiency.
For STP to work, the two key items of information required are an IPI and an IBAN. The International Payment Instruction contains, in summary, the account of the ordering customer, the account of the beneficiary and the amount to be paid. At present, the IPI requires the beneficiary's bank to be specified using a standard Bank Identifier Code (BIC), (which is also known as the SWIFT code), to facilitate routing of the payment message to the beneficiary. The details of the account to which the payment will be made at the beneficiary bank is expressed as an IBAN.
An IBAN is based on the BBAN - the Basic Bank Account Number. The BBAN is the number by which most people know their bank account(s), and within a country is a unique identifier. However this does not necessarily mean it is unique internationally. To ensure that a domestic bank account number becomes a unique identifier internationally, additional fields are required in a standard format and so the IBAN was devised.
The format of the IBAN is:
- a 2 digit alpha country code, using the ISO country code, always in upper case
- a 2 digit check digits field, computed as the last field to validate that the number has not been corrupted
- between 11 and 24 further alphanumeric characters that express the domestic account number
Clearly the format of domestic account numbers varies country by country, and each country has been required to devise their own implementation of this. For most countries, the domestic account number is composed of the account number, a number identifying the bank and the branch, and one or more check digits. For some countries an extra bank identifier is included.
The result is that different countries, with their different historical formats for identifying domestic accounts, banks, and branches, have differently formatted IBANs. The total length of an IBAN according to the specification can be 34 characters, but to date they vary from 15 characters (Norway) to 28 characters (Poland, Hungary), as the table of current implementations below shows:
Evidently the standard, when implemented, appears as a rather non-standard, unfamiliar string of letters and numbers when compared across countries, and there is no easy way to scan it by eye for validation. The length of the numbers clearly varies widely. Some numbers contain alpha characters in their domestic account number section, but most do not. Finally, the relationship of the IBAN to the domestic account number in terms of the number of characters varies by country. A French IBAN is only four characters longer than a domestic account number, but a Dutch IBAN is eight characters longer than the domestic account number.
Continuing with the issue of number validation, there is of course the check digit field of two characters that ensures the number is not corrupted after its formation. But herein lies a basic misunderstanding of the validation process of the IBAN. The check field can only validate that the number has not been corrupted by transmission and transcription errors. It is not a check that the IBAN was correct at its formation. It is perfectly possible to create an IBAN using an invalid domestic account number, using, for example, a correctly formatted but invalid UK sort code. Most of the available software that validates IBANs will happily create such an IBAN, including valid check digits, that will pass all the tests. For this reason it is dangerous for any organisation, other than issuing banks, to generate an IBAN.
IBANs may be formed, checked and corrected by the payment initiator - there are typically no corrections at any other stage of the payment process. To balance this, it is generally the initiator who pays the price for an incorrect IBAN; an incorrect IBAN will prevent STP and the processing bank or Automated Clearing House (ACH) may charge appropriate fees from the Originator to compensate for the extra costs. It is for this reason that the IBAN formation and validation process must be managed as carefully as possible.
The best validation software for IBANs runs checks to validate the content - the domestic element - as well as the format and integrity of the IBAN. Because of the inherent dangers of generating seemingly accurate but flawed IBANs, they should only be formed when the domestic account details have been stringently verified against up-to-date bank information by reliable software. Such software needs both modulus checking and a database of valid numbers and therefore comes at a higher price than the free web-available IBAN formation packages. However, IBANs are just one of the areas in banking transactions where the cost of getting it right is insignificant compared to the cost of getting it wrong.
For further informatio, please see Bank Wizard - BIC and IBAN validation