Processing IBAN Payments: the Issues and Challenges
With the inception of the international bank account number (IBAN), implemented through EU Regulation 2560/2001 and the European Committee for Banking Standards (ECBS), financial institutions have been forced to change the way they originate and process payments. Because of these regulatory changes, financial institutions are raising expectations of the payment instructions corporate clients must provide. In order to keep payment STP rates high and processing costs low, corporates are now being pressured, through higher repair fees, to provide more complete payment instructions to their financial institutions for payments within the EU. Conceptually, this is sound, but there are a number of problems corporate treasury specialists encounter when trying to provide complete payment information to their financial institutions. While an organisation may know it is required to provide an IBAN, obtaining the valid IBAN from the correct source can be challenging. Also, a valid IBAN alone is only one piece of the puzzle.
The ECBS website states the following: “Generation of the IBAN shall be the exclusive responsibility of the bank/branch servicing the account.”1
For corporates, this can present a significant challenge, as their vendor databases may not have previously stored IBANs. Furthermore, they are not allowed to ‘create’ an IBAN from the known bank branch code and a beneficiary’s legacy account number (it is important to note that some banks have used the IBAN assignment regulation as an opportunity to re-number their client accounts to help prevent fraudulent activity). As a result, corporations must now collect an IBAN from all of their beneficiaries (vendors, employees, and any other regular beneficiaries) in order to create STP-compliant payment instructions.
Mergers and acquisitions can also cause problems. As various bank branch codes are retired or added, IBANs change accordingly. This puts further strain on the corporate treasurer that must deal with updating the beneficiary account information.
In addition to having an IBAN, a SWIFT MT103+ payment message must also contain a SWIFT-connected bank identifier code (BIC) for processing to ensure STP. Banks have begun providing their BICs on all statements sent to their account holders, but many are not aware of the need to provide the BIC along with the IBAN to the payment originator. Unfortunately, there are many instances in which the BIC provided is a non-connected BIC. This, by definition, requires intervention and correction by the processing bank and incurs non-STP fees for the originator.
Smaller financial institutions can present unique challenges due to the fact that many do not have a SWIFT-connected BIC. For example, there are 51 countries and territories that participate in IBAN and more than 200,000 bank branch codes. However, approximately 15 per cent lack a SWIFT-connected BIC at the same location.2
To complicate matters further, some banks have specifically defined certain connected BICs that are to be used for the processing of IBAN payments. These banks are attempting to centralise the processing of their IBAN payment traffic to streamline operations. This is not universally known by most corporate treasury operations. It raises the question: ‘Is this the correct BIC for this IBAN?’ Left unaddressed, the payment STP rates will remain lower than desired.
Alarmingly, many banks have begun to charge their corporate customers for providing incomplete payment instructions or non-STP compliant messages. This is contrary to the EU’s intended goal of reducing costs.
From a corporation’s origination of a payment instruction all the way through to the final beneficiary receiving their funds, the payment process should be completely automated. This is payment straight-through processing and it can be successfully achieved at a very high rate for IBAN payments for those organisations that adhere to all of the requirements. Understanding the regulations and requiring beneficiaries to provide both an IBAN and a SWIFT-connected BIC are the most effective ways to ensure STP from the originator’s viewpoint.
From the bank’s viewpoint, the preference would be to simply validate the information received in the payment file from their corporate client and incorporate it into a SWIFT MT103+ message format for processing. The SWIFT MT103+ message format is the third and final piece to processing IBAN payments within an STP environment. This message format is created by the financial institution and includes the payment information acquired from the corporate. If the bank receives a validated IBAN, with the proper SWIFT-connected BIC for IBAN and then sends the payment instructions via an MT103+ message format, the payment will occur in a completely automated process.
EU regulations require financial institutions to provide a valid IBAN and SWIFT-connected BIC for all EU cross-border payments. If a corporate customer provides a valid IBAN alone, the corporation is likely to encounter higher fees, as the financial institution will need to research additional information in order to ensure the payment message includes a SWIFT-connected BIC. Therefore, a corporation that provides both pieces of the puzzle, up front, will experience a reduction in fees from their financial institution for all EU cross-border payments.
However, collecting all of the necessary information and knowing the requirements is not enough. In order to achieve the lowest costs and the highest payment STP rates available, corporate treasurers must go beyond simply obtaining an IBAN from their beneficiaries. Procedures need to be implemented to validate an IBAN once it is collected from a beneficiary and to identify the proper SWIFT-connected BIC, even if one is provided.
There are tools available to corporations that can be used to identify the correct SWIFT-connected BIC for a bank branch code. These same tools can also provide correspondent bank information in the event that the financial institution does not have a SWIFT-connected BIC of their own. This research and validation should occur prior to sending a payment file to the financial institution. Any incomplete payment instructions will prevent STP from occurring and may result in repair charges for the corporate.
The EU created these regulations as part of an ongoing commitment to creating the single euro payment area (SEPA). IBAN is an important piece of the puzzle in helping SEPA become a reality. Corporate treasurers can play a significant part in improving payment STP and keeping costs at a minimum by providing complete and valid payment instructions to their financial institutions. By having proper procedures and processes in place that ensure the validity of payment information, all parties involved can see a more efficient payment flow with fewer errors and repair fees.
1EBS204 v3.2 – August 2003; www.ecbs.org
2Accuity Global Payment Data
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