Corporate America and the IBAN
It appears that the international bank account number (IBAN) is one of the best-kept secrets in the US. Developed by the European Central Bank, the IBAN was introduced in 2001 to harmonize account number structures throughout the EU to facilitate greater processing efficiencies as the EU planned for the single euro payments area (SEPA). Use of the IBAN is now mandatory within the EU countries as well as Norway, Iceland, Liechtenstein and Switzerland.
Unfortunately, six years later, some in the US still see it as a purely European phenomenon with little or no impact on the US. This view is supported by much of the literature on the topic that tends to be highly EU-centric with lengthy references to legislative papers, such as SEPA ICP 2560/2001 and the recent European Payments Council (EPC) resolution on mandatory use of the bank identifier code (BIC) and associated IBAN for cross-border intra-EU/EEA customer payments in euros.
Many US corporations that make payments into the EU are simply unaware of the significance of the IBAN. If it is used at all, it is likely to be treated as an additional piece of reference data. Ignorance, however, is not bliss in this case. In fact, it can be costly.
What is lost in the blizzard of acronyms and legislative citations on the topic is the simple fact that the IBAN is (in some EU countries) and will be (for the remaining countries) the domestic account number for retail and commercial accounts in the EU.
When US corporates do not supply the IBAN on their payments into the EU, they are literally not providing the correct account number. Failure to supply the IBAN reduces the opportunity to process the payment straight through and may subject the corporation and its banks to repair charges or, potentially, return of the payment.
However, use of the proper IBAN for a US corporation’s EU counterparty is not enough to ensure full compliance with the straight-through processing (STP) requirements. That IBAN must also be associated with the BIC of the receiving financial institution. It is the unique combination of the BIC and the IBAN that allows for high levels of STP in routing payments automatically.
The rationale for the IBAN stems from European Community (EC) Regulation 2560/2001, which brought cross-border payment prices in line with domestic price levels within the EU. To compensate for this reduction in revenue, additional regulations were enacted to mandate use of the IBAN and associated BIC to increase STP rates and reduce processing costs. Hence, when European banks receive non-compliant payments they tend to impose repair charges to cover their additional costs.
As if that were not enough, under the EPC’s resolution, effective since 1 January 2007, banks also have the right to reject any payment that does not contain the IBAN and associated BIC. In practice, however, most banks have indicated they will not automatically reject payments. Instead, they will try to repair and execute them – for a fee, of course. So corporations making non-compliant payments into the EU could see their transactions delayed in this process and the cost increase if their banks decide to pass back the repair charges imposed on them by the European banks.
While these STP regulations were intended to apply to intra-EU/EEA euro payments, many European banks now apply them to any payment converted into euro including those originating outside the EU regardless of currency. While there is ongoing industry debate over this practice, the reality check is: repair charges are still being taken and this can add considerably to the cost of making payments.
While substantial work has been done within the EU/EEA to prepare for the full implementation of the IBAN, not much has been done to prepare non-EU/EEA countries for this change. This extends from the core payments infrastructures to bank proprietary systems to information programs for corporates. A recent informal poll of global banks in the US by the International Financial Services Association (IFSA) revealed that few have provided guidance to their US corporate customers on use of the IBAN and the associated BIC.
The structure of the IBAN can be a challenge. It consists of up to 34 alphanumeric characters and is designed to identify a customer’s account at a particular bank. The 34 characters are further divided into a two-character country code, two check verification digits, a bank code identifier for the domestic bank and the account number of the customer. Given this 34 alphanumeric standard for the account number, how prepared are non-EU countries in terms of their payments infrastructures, banks’ proprietary front-end and legacy processing systems to work with this new standard?
What can US corporates do to ensure their payments into the EU are not returned unexecuted and that they are handled quickly, without extra charges?
Here are several steps they can take:
At a recent payments conference sponsored by the International Financial Services Association (IFSA), a panel of payments experts all agreed much more needs to be done by the financial industry in the US and Europe.
In short, the panelists put out an industry ‘call for action’:
Hopefully, IFSA’s IBAN forum was just the first in a series of industry dialogues where the impact on the US of the changing payments environment in Europe will be discussed. There is an opportunity here for the US payments industry to take the initiative to analyze these changes and make the necessary payments infrastructure adjustments.
There is much more work to be done. The IBAN is an ISO standard that makes it a global standard for account number structure. Will other countries choose to adopt it? There is the challenge of XML payments messages, cross-border consensus on charging rules, and a challenge for vendors to help provide the tools needed to ensure high levels of STP for IBAN to BIC links, payment formatting tools, and IBAN to BIC validation. The time for action is now.