From Should to Must
Mandatory use of BIC and IBAN comes a step closer
By Terry Dirienzo
A quiet revolution in banking standards is underway throughout Europe. So quiet in fact that news of the latest twist in European banking practice is only now slowly seeping out to many corporate banking customers who will become acutely affected by it.
IBAN and BIC
The 'facts' are straightforward. From 1st January 2006 European banks may levy higher bank charges on corporate customers whose cross-border transactions in Euros do not conform to BIC and IBAN data formats. From 1st January 2007 banks can reject such transactions and also charge customers for the return of the transaction less the fee levied. Although this move does not immediately make the use of BIC and IBAN data mandatory, many commentators believe this is clearly the intention and will be the net effect.
This may seem like a very minor change to current practice as banks, for sometime now, have been advising customers that they should use BIC and IBAN data on outgoing cross-border Euro transactions. In addition, beneficiaries of payments must provide this information to the payee. Countries like Luxembourg and some of the new European Union accession Member States such as Latvia already mandate the use of BIC and IBAN data in domestic payments. The decision to toughen up on a pan-European scale what is already good practice in some countries, signals the effective arrival of BIC and IBAN data as mandatory elements in cross-border Euro transactions. The cost impact of this initiative on corporate customers could prove to be very significant.
The move towards the mandatory use of BIC and IBAN signals the banks’ agreement to implement a European Payments Council (EPC) resolution dating back to May 2005. The resolution was designed to bring certainty of cost for cross-border Euro payments to users and banks, where at present there are many different policies and practices. This should benefit all who make and receive payments and result in an overall reduction in charges. This will be achieved by payments quoting BIC and IBAN coming within the scope of the EC regulation 2560/2001, which guarantees a “domestic” price for cross-border transfer and no hidden charges. Evidence that this decision has been taken, however, is hard to find; the EPC, which has the pursuit of SEPA as it core objective, does not publish its resolutions. Nothing is available on the website of the European Committee for Banking Standards (ECBS) which created IBAN, nor on the web site of SWIFT, the messaging and standards body responsible for BICs. Closer to home there is nothing on the APACS web site either.
A few vendors active in the sector are promoting this development such as Experian Payments in the UK. News of this impending change is also slowly seeping out to corporate customers via the banks. Whilst it may appear that the banks have been slow to take action, in reality they only became aware of the decision to implement the EPC resolution towards the end of 2005. Before being able to consider its impact on their customers, the banks had to first assess its internal impact and adjust their own systems accordingly. Education is the obvious next step and then an evaluation of how to take advantage of the change. The change is definite and will be almost certainly included in the two new pan-European schemes being developed by the EPC.
One bank that is already educating its customers is HSBC whose web site states:
"We strongly recommend that all your cross-border euro payments to be received within the European Union (EU) and European Economic Area (EEA), quote both a valid BIC and IBAN of your beneficiary with immediate effect."
Conformity: a cost or a benefit?
The cost to banks and corporates of effectively being required to use BIC and IBAN data remains unclear. The monetary cost can be estimated in two ways: (a) the potential cost of increased bank charges during 2006, and (b) the cost of making the necessary internal system adjustments by 1st January 2007 to accommodate the inclusion of BIC and IBAN data in cross-border Euro transactions.
In practice, corporate organisations may find that their own bank absorbs the transaction repair charges levied by the correspondent banks, especially until the banks themselves have made the necessary internal system adjustments to accommodate the inclusion of BIC and IBAN data.
Although the main focus of banks will be to maintain the profitability of payment services through more efficient payment handling, some banks may take the opportunity to offer their customers a value-added service. For instance, a bank could form the required BIC and IBAN data on behalf of their customers and at the same time avoid being charged by the Beneficiary bank.
Each bank will formulate its own policy with regard to bank charges and whether to levy these on its existing customers or only on the customers of other banks. Both a flat fee, of anything from €5-€100 per transaction, and a charge based on a percentage of the transaction value have been considered as possible models. If the former proves to be a typical per transaction charge, then the total cost to British business alone in a full year could reach several million Euros, believes Jonathan Williams at Experian Payments. “One bank has privately estimated that, at the end of 2005, over 80% of cross-border Euro transactions do not comply fully with the BIC and IBAN resolution. As there are 3.315m cross-border CHAPS Euro transactions generated in the UK each year, the total cost to British businesses during this period could run into the tens of millions of pounds.”
To maintain the profitability of payment services, European banks and their corporate customers will need to address the issue of the capability of their internal systems to handle BIC and IBAN data.
The cost of making such internal system adjustments is even more problematic to estimate than that of bank charges. This is because of the wide range of options available to the banks and corporate customers to resolve this problem.
The technical challenge is this: all payment Originators (whether banks or their customers) must convert IBANs and BBANs (Basic Bank Account Numbers) into IBANs and BICs. To do this, the user’s transaction application (possibly including corporate web sites) must accept IBAN, BBAN, IBAN+BIC and BBAN+BIC input and facilitate the validation of the information entered, supplying additional information where necessary.
There are three solutions to this:
1. Manual adjustment, transaction by transaction. For IBAN data there are numerous online tools available to assist in the creation of IBANs although these do not necessarily validate the domestic details used to create the IBAN or guarantee its legitimacy. For BIC data, users need to turn to a number of diverse data sources such as SWIFT (BIC Directory, BIC+ Directory), Accuity (previously Thomson Financial Publishing), CB.Net or Bankers Almanac. This manual approach may prove to be a satisfactory solution for organisations with very low volumes of cross border Euro transactions. However, it is not a practical solution for organisations that make frequent, cross-border Euro transactions.
2. Automation of existing transaction engine. Due to the legacy nature of many payment systems, especially those used by banks, the modification of an existing transaction engine is a very expensive and time-consuming operation. Whether this is possible by 1st January 2007 is also doubtful, with competing pressures on IT department resources. It also needs to be recognised that the modification of a legacy system rarely provides a ‘final solution’ but simply adds to the cumulative weight of historic code that may require modification for quite separate reasons at some point in the future.
3. The embedding of a third party solution within an existing transaction engine. Fully automated solutions are embedded within corporate and bank business systems and websites (or used as a tool to validate extracted data) with the capacity to create local IBANs and undertake modulus checking to validate the integrity of the account numbers and BIC data supplied from a variety of countries. A good automated solution will combine data from multiple national sources and ensure that local licensing requirements and other criteria are respected.
Bank account numbers can be re-formatted as IBANs according to internationally recognised formulae. BIC data is more diverse and complex. In essence there are three main pieces of BIC information and understanding this helps to illustrate the value of a fully automated and embedded solution.
(a) the BIC uniquely allocated to an individual branch. This covers around 100,000 branches worldwide. A branch may or may not be connected to the SWIFT network and may or may not support specific clearing systems (e.g. BIREL in Italy, STEP2)
(b) the BIC of the processing branch of the bank on the SWIFT network that will receive messages (payment instructions, reports, general data) on behalf of the branch enquired.
(c) the BIC to be used to pass messages to a branch specific using a particular clearing system. For example, in the UK specific BICs are used to route CHAPS payments in Euros to branches which can accept this type of transaction."
The essential information for corporate organisations is (a) and (b) as these enable a BIC to be returned for all branches. The routing information (c) is important for banks, but not essential as most banks already have some form of solution to provide routing information for an existing BIC.
Jonathan Williams urges corporate users to move ahead with their plans to automate their own internal systems as quickly as possible. “There are a number of strong indicators that suggest that the use of BIC and IBAN formats will become mandatory for all payments within a relatively short time-frame. The new SEPA Direct Debit and Credit Transfer schemes already use BIC and IBAN. The banks are up to speed with the implications of this for their own systems, but awareness amongst corporate users is lagging well behind. Furthermore this development also has implications for the Automated Clearing Houses. For instance APACS Standard 18 used by Bacs in the UK doesn’t currently accept IBAN. Invoice systems will also need to change to accommodate BIC and IBAN data.”
Where is all this heading? The current SEPA focus is inevitably on cross-border transactions in order to create the level playing field required of the concept. However, corporate organisations that do not transact in Euros cannot ignore the implications of BIC and IBAN altogether. Gertrude Tumpel-Gugerell, Member of the Executive Board of the European Central Bank, in a speech in September 2004 made it clear that IBAN will, before 2010, apply to all domestic transactions as well. Much more recently the European Commission has published a Directive on payment services in the internal market. This would create a New Legal Framework for payments throughout the European Union that would complement the self-regulation of SEPA with a broader legislative and regulatory framework.
Jonathan Williams believes 2007 may prove to be another year when the corporate sector is faced with a near constant level of change within the European banking sector:
“The implications of BIC and IBAN are considerable and widespread and reach far beyond the banking sector, which is the current focus for debate on standardisation within European payments. Corporate organisations must ensure they are aware of where European payment standards are heading. Every organisation will be affected in time and they will need to acclimatise to operating within a new banking framework.”
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