IBAN stands for International Bank Account Number. It is a system used to identify bank accounts in different participating countries, and to facilitate communication and processing in international payments.
Until IBAN was developed, SWIFT (Society for Worldwide Interbank Financial Telecommunication) was the main facilitator of international payments. SWIFT had some drawbacks, such as the sending bank not being able to validate information prior to the payment being submitted, and the fact that there were no specifications for formatting transactions. A lack of consistency could cause confusion, misinterpretation and errors.
There was a need for more specific standardization to reduce errors and so the IBAN was developed in the late 1990’s. There have been several updates to the IBAN system since 1997, and it is an international standard published by the International Standards Organization (ISO).
The IBAN system makes international transactions easier and faster, with fewer errors.
What does an IBAN look like?
The IBAN consists of up to 34 characters and includes numbers and letters. If your bank uses the IBAN system, your IBAN will be unique to your bank account.
Let’s look at an example of an IBAN and break it down:
GB 12 ABCD 102030 12345679
GB = the country code for Great Britain
12 = a check code
ABCD = the bank code
102030 = the bank sort code, or branch code
123456789 = the bank account number
In our example the IBAN is 22 characters long, but it can be as long as 34.
What is the difference between SWIFT and IBAN?
While both SWIFT and IBAN play an essential part in the smooth running of the international finance industry, there are differences between the two.
The primary difference is that SWIFT does not identify the actual bank account of the recipient or sender, only the country, bank and sort code of that bank are identified by a SWIFT number. The IBAN includes the actual bank account number of the recipient or sender.
In some cases you will need both the SWIFT and IBAN details to make an international payment.
Who uses IBANs?
The IBAN system is not as widely used as SWIFT. The IBAN system was originally created to facilitate electronic payments between banks in the Eurozone, and has since been adopted by other regions and countries as well, but not all countries use it.
Some examples of countries that do not use the IBAN system are:
The United States of America
Making international payments to and from these countries is done via other systems, such as SWIFT.
How do I find out what my IBAN is?
Firstly you need to have a bank account in a country that uses the IBAN system. You will most likely find your IBAN by logging into your online banking platform, or by reading your bank statement. Alternatively you can contact your bank and ask them to help you obtain your IBAN.
What happens if I have the incorrect IBAN?
If you are sending or receiving money, it is very important that you check that the IBAN is correct for the recipient.
There are two scenarios for an incorrect IBAN:
1) The number is invalid and there is no such number in existence.
In this case the payment will be rejected by the system and the funds will eventually return to the sender. In all likelihood a penalty fee will be charged.
2) The number is valid, but it is not for the intended recipient.
An example of this is making a mistake and swapping digits on the bank account portion of the IBAN. There may well be a bank account with that number that exists, and the payment will be made to that account. Sorting this out could be very time consuming and difficult, and could also incur penalty charges. When you are making an international payment using IBAN, double check the number and inform the recipient when you have made the transaction. If the funds do not reflect in the recipient’s account after five days or so, contact your transferring bank.
What do international payments cost using IBAN?
The costs of international transfers will vary from country to country, from bank to bank and sometimes even between different types of bank accounts within the same bank. You may be charged a fixed fee, or a percentage of the transaction value, or a combination of these. There may also be additional administrative costs.
Also bear in mind exchange rates if you are transferring funds to a country with a different currency. If you are transferring in Euro from France to Luxembourg, for example, both countries use the Euro so there are no differences in exchange rates.
However, if you are transferring in Euro from France to the United Arab Emirates, you need to bear in mind the exchange rate from Euro to United Arab Emirates Dirham. Banks have both selling and buying rates for currencies, and they are not the same.
When you are sending payments internationally you should always be aware that the amount the recipient receives may vary from what you expect.
At Baer’s Crest we have been advising clients on cross border payments for decades. We understand the international requirements of both our large and small business clients. So talk to us about how we can help you with bringing your products and services to a global market.
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