Meeting the Challenges of the IBAN Standard

Unfortunately, the SEPA countries have numerous basic bank account number (BBAN) systems. Cross-border, intra-EU payment transactions are inherently challenging and susceptible to handling charges or rejections. Regulation 2560/2001, however, was aimed at standardizing pricing, not creating efficiencies. To sustain necessary margins in their payment operations, banks asked the European Central Bank (ECB) to address process efficiencies and help ensure 100% payment STP rates. The response was the international bank account number (IBAN).

With the inception of the IBAN, financial institutions have been forced to change the way they originate and process payments. Because of these regulatory changes, financial institutions are raising their expectations about the payment instructions that their clients must provide. In order to keep payment STP rates high and processing costs low, bank customers 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 that customers might encounter when trying to provide complete payment information to their financial institutions. While an organization may know it is required to provide an IBAN, obtaining the valid IBAN from the correct source can be challenging. And, a valid IBAN alone is only one piece of the puzzle.

Creating an IBAN

An IBAN is a string of characters and numbers that easily identifies a bank/branch code and account number for a beneficiary. The IBAN consists of an ISO country code, a check digit and up to 30 account-specific alphanumeric characters that contains the bank/branch code as well as the account number. Each country’s banking authority is responsible for defining the length of this last portion of the IBAN, which is called the BBAN.

The ECB’s Web site states the following:

“Generation of the IBAN shall be the exclusive responsibility of the bank/branch servicing the account.”

This can present a significant challenge, as bank customers may not have a mechanism for storing previously used IBANs. Further, 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, organizations must now collect an IBAN from all of their beneficiaries (vendors, employees and any other institution to whom they wish to send payments) in order to create SEPA-compliant payment instructions.

Mergers and acquisitions can also cause problems. As various bank branch codes are retired or added, IBANs change accordingly.

The BIC Component

To optimize the performance of IBAN payments, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) requires the use of the MT103+ payment message. This message format is intended to minimize manual intervention at the bank, maximize efficiency and reduce the costs associated with the payment. 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 almost 60 countries and territories that participate in IBAN. In this “Euro-zone’, there are more than 200,000 bank branch codes. However, approximately 15% lack a SWIFT-connected BIC at the same location. 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 centralize the processing of their IBAN payment traffic to streamline operations. It raises the complexity of the payment transaction and necessitates the question, “is this the correct BIC for IBAN?” Left unaddressed, the payment STP rates will remain lower than desired.

The Financial Impact of Non-STP Payments

These challenges have prompted some of the largest financial institutions in the world to seek out new solutions and mechanisms for improving IBAN payment straight through processing. The financial impact of reduced payment STP can be easily seen in the following example:

Let’s say a bank has a daily volume of 5,000 IBAN payments. With about 260 business days per year, the annual payment volume for the bank would be:

5000 x 260 = 1.3 million

Now, let’s say that the above issues with IBANs have reduced the bank’s payment STP rate to 85%. That means that the total number of errors per year would be:

1.3 million x (1 - .85) = 195,000

Recent studies have indicated that the average non-STP charge for IBAN payments is approximately €7.50. In our example, that would mean non-STP IBAN payments could cost a bank approximately €1,462,500 per year. The trend is for banks to absorb such costs in order to protect their highly valued customer relationships. Therefore, such costs are not recouped by virtue of “repair fees” charged back to customers and, instead, impact the bank’s margin on the transaction. With costs of that magnitude associate with non-STP payments, it’s understandable that banks are looking for solutions.

An IBAN STP Case Study

The following case study highlights one such institution. In this case, Accuity’s customer is one of the 10 largest European financial institutions providing services to customers in over 50 countries. Facing some of the challenges mentioned above, the bank began a search for a solution that would allow it to maximize its payment straight through processing in conjunction with the use of IBANs.

The Bank’s Key Challenges

In a review of its processes, the institution discovered that, in many instances, its customers were not providing accurate and/or complete payment instructions for IBAN payments. Oftentimes, the beneficiary’s BIC was not accurate, if it was provided at all. And if it was provided, the BIC was often not SWIFT connected or was not the preferred BIC of the beneficiary's bank.

Due to this incomplete and inaccurate payment information, the bank's STP rates were declining. In addition, the bank was unable to take full advantage of the low rates for straight through cross-border payments within EU countries – one of the key benefits provided under SEPA.

To maximize payment STP and reduce its expenses associated with IBAN cross-border payments, this large European institution sought out a solution that could be easily integrated into its existing payment processes, enabling it to correctly identify the connected SWIFT/BIC for any IBAN.

The Solution

After rigorously studying the different options and working closely with Accuity's product management and sales teams, the bank determined that the IBAN File by Accuity best met its business needs.

The bank was able to deploy the IBAN File by Accuity in two areas. First, the bank deployed the file in its customer-facing applications used to create payment instructions. The bank's Web-based banking platforms, its branch applications and its operator-assisted customer service operations used the data in the IBAN File in drop-down menus to improve the manner in which the payments were created. This served to remove keyed in errors and ensured the SWIFT BIC field was populated with the appropriate routing code. Second, the bank utilized the file to filter, enrich and re-route (as necessary) payment instructions sent to the bank from corporate customers using ERP systems for payment initiation, bypassing the bank's front-end applications. These two points of deployment guaranteed that all outbound payments created with or without the bank's systems were made IBAN compliant and that the correct SWIFT BIC was used for routing.

The IBAN File by Accuity also allows the bank to find the corresponding bank details and other points of information including bank names, branch addresses, national clearing codes, ISO county codes and other contact details associated with the beneficiary bank. Having such information readily accessible delivers value for the bank by improving the efficiency of any manual research that must be conducted related to an IBAN payment.

The Results

Upon integrating the IBAN File by Accuity with its processing system the bank realized a significant increase in payment straight through processing rates for outgoing foreign EU payments and reduced both the end-to-end processing time of cross-border transactions as well as its transaction fees. As an added benefit, the bank has been able to reduce the amount of internal resources expended on manual payment processing repairs.

Using the file, the bank can provide a SWIFT-connected BIC in its payment instructions, thus achieving much improved payment STP and maximum processing speed and efficiency. The bank confirms that the benefits and returns realized from implementing Accuity's IBAN File very quickly – in fact, in a manner of weeks – surpassed the investment made.