Why isn’t IBAN used in all countries?
Let’s say you want to make a payment to someone in another country.
Within your banking app you complete the details for the recipient and how much you want to send.
You’re then prompted to enter an IBAN.
Looking back at your payment request you realise you haven’t been provided with an IBAN. Instead you have an account number, bank sort code and SWIFT/BIC code.
This can cause confusion when trying to make a simple payment.
You might be wondering why we can send money across the globe in seconds, but we can’t have a standardised bank account format.
The truth is international payments aren’t as straightforward as they sound.
What is an IBAN?
IBAN stands for International Bank Account Number.
IBAN’s are used to identify bank accounts. They are standardised so it’s easier to identify them during payments, especially international payments and IBAN enabled payment systems.
IBAN’s usually contain the country code, check digits and the structure of the bank account for that country. Depending on the country they will also include details of the bank, branch and local account.
An example of an IBAN is:
GB29 NWBK 6016 1331 9268 19
The first two letters show the country. The next two numbers are check digits, which help to identify any errors. The rest of the characters follow the structure for that country.
This means there is a standardised format.
However, it does not guarantee that the account exists, it belongs to the right person and will be successful.
Let’s take a look at why not all countries use IBAN.
Why not all countries use IBAN?
On the surface a standardised account number seems like a good idea.
It makes international payments appear much easier as everyone will follow a standardised structure. Businesses will find payments easier and customers won’t have to enter confusing information.
However, banking systems vary globally.
Some countries will have a local account number, bank and branch code whilst others will have a national payment reference, routing number or other.
They have been set up with their specific requirements in mind.
Introducing IBAN might mean banks need to change their database, payment apps, validation and customer data. Businesses will also need to update their software.
This could be costly in countries with an established local system.
Although a standardised format can make international payments easier, it would need to be coordinated across the entire financial system.
This won’t be an easy task.
Different Banking Systems in Different Countries
Trying to make international payments can feel like a game of translation.
One person might ask for the account number, another person might want a routing number and another person may want an IBAN.
They are all trying to get the same information (where should the payment go) but in a different format.
Many countries in Europe use an IBAN to make payments. Most payments in the United States will be made using a local routing number and account number. In India payments will often be made using a reference, such as an IFSC code and account number.
They don’t have to be incompatible, just different.
You will need to know what information the bank/payment provider requires. Once they have this they can validate and send to the correct system.
Depending on the countries, currencies, banks and payment methods there may be further requirements.
This is why international payments can be more complex.
How international payments operate behind the scenes.
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Let’s say you’re a small business in India and want to make a payment to a supplier in Europe.
You’ll enter the supplier’s bank details and make the payment.
From your perspective this seems simple.
However there may be a few steps.
Your payment provider will need to understand the account details. Your bank may need to verify what payment instructions, currency and regulations are required. The payment will need to be sent using the correct payment method. This may involve intermediary banks.
If there is not enough information or the information is incorrect the payment may be delayed, rejected or investigated.
Even if there is the correct account details there may be other factors that affect the payment. This could be down to processing times, currency conversion, compliance and payment methods.
Whilst an IBAN will standardise the account details it doesn’t mean all banks, countries and payment systems will be the same.
The account number is only part of the puzzle.
This is often not seen.
Why not have a universal IBAN?
A universal IBAN may be beneficial for businesses that operate internationally. They will know they will have an easier time of capturing the account details, validating payments and making payments to supported markets.
However it would need to be agreed and implemented.
Countries would need to consider the costs of updating their systems, what their local payment systems require, regulations and compatibility.
Even if all countries used an IBAN the banks will still have to deal with different currencies, payment regulations, settlement methods, fraud and legal requirements.
A standardised account will reduce some of the friction, but not completely.
Improving global payments isn’t just about having a single number.
It’s about improving the systems.
Will global banking become more standardised in the future?
The financial industry are always looking to improve interoperability. Schemes such as ISO 20022 provide a standard for financial messages.
However, IBAN isn’t a universal account number. It helps provide a structure for the payment details so financial institutions can provide more detailed and standardised information.
New developments are being made to improve payment networks, beneficiary validation, fraud detection and transparency for cross border payments.
Payment providers are looking to reduce the complexity by providing a seamless payment. Customers won’t need to know all the different identifiers for banks. A well designed payment will help them along the way.
Ultimately we may not be looking to make all banking systems the same.
But we are looking to make all systems talk to each other.
This could reduce errors, make instructions clear and create a smooth payment process for customers.
This could also reduce manual processes, make reconciliations easier and reduce delays for businesses.
There is a lot to do but it doesn’t need to be done by making all countries follow the same account number.
It needs to be done by making the systems understand each other.
Final Thoughts
We can talk to people on the other side of the world in seconds. We can buy products from international businesses with a few clicks. Thanks to digital payments we can feel closer than ever.
However sending money across borders can cause confusion due to different account formats, banking regulations, currencies and payment systems.
IBAN can help overcome this issue by standardising the identification of bank accounts.
However the real issue is getting the infrastructure to work together.
Perhaps the future of international banking isn’t about making all countries speak the same language.
Perhaps it’s about making the systems understand each other.
Customers shouldn’t have to know everything about the banking system to successfully make payments abroad.
The technology should do the hard work so customers have an easy experience.
What do you think? Should all countries follow a universal bank account standard or should we focus on making current systems work together better?
