IBAN (International Bank Account Number: ISO 13616) is a European standard published by ECBS (European Committee for Banking Standards) and ISO (International Organization for Standardization) to assist professionals identify account number and banks. Banks in each country is identified in different ways and with IBAN, we can manage and handle payee details, banks and account numbers in the same way, regardless of the geographical locations. Proper uses of IBAN avoid problems related to cross-border payment transaction. Each IBAN is consisted of unique country key, check digit and account numbers specific to each country. Put simply, an IBAN represents specific bank details, which allow people to uniquely validate an account.
Before the use of IBAN, people from small and medium enterprises (SMEs) were often confused with many identification variations for bank accounts such as account numbers and codes for bank, branch and routing. In many cases, some important routing information was missing. Additionally, the previous standard (ISO 9362) didn’t contain check digits and it was quite possible for simple transcription errors to go unnoticed. There was no way for sending banks to validate routing information before the payment is submitted. Payment delays and extra costs were typical results of routing errors, which affects all involved banks, including sending, intermediate and receiving banks.
IBAN was originally released in 1997 and revised twice, in 2003 and 2007. In 2007, the standard was split in two parts and the newer ISO 13616-1:2007 only specifies elements of an IBAN used in international financial data processing between industries and it doesn’t provides guideline for file organization techniques, internal procedures, languages, storage media and others. IBAN uses a flexible format which contains adequate information for validation to avoid transcriptions errors. In systems where IBAN is used properly, international money transfer error rates never exceed 0.1 percent of total payments.
Professionals may obtain all the required routing information needed to identify account properly, such as Bank Identifier Codes (BIC) or also known as the SWIFT code. Validation is performed using check digits and a specific algorithm. This particular algorithm cover the whole use of IBAN and it prevents the transposition of each digit. The recognition process is performed in two parts; IBAN starts with 2-letter country code defined by ISO 3166 and this should be a straightforward way to identify the country in which the account resides. The “national account identifier” is an integral part of IBAN and the ISO standard implicitly states that bank must be identified ambiguously.
When used properly, IBAN and BIC allow us to enable the STP (straight through processing), thus making the older manual intervention unnecessary. However, there are still issues related to the STP; in some cases, bill payments using BIC and IBAN are not possible for salary payments.
Another component of IBAN is “check digits” and it allows sending banks to perform sanity checks of the account numbers and routing destinations during the data entry. This should prevent unwanted occurrences such as characters being transposed, mistyped and omitted. When represented on printed media, the IBAN is expressed in groups of four characters, separated with a single space. But, IBAN isn’t considered valid when it contains spaces during an electronic transmission.