Virtual IBANs: Your Complete Guide

by 12 May, 2021Payments

Virtual IBANs are one of the many payment solutions that Clear Junction provides access to. Indeed, they rank among our most popular and readily utilised services and it is easy to see why: virtual IBANs help banks and financial institutions reduce costs, increase efficiency and widen reach. But what exactly are they? Here, we take a look at IBANs, virtual IBANs and the benefits they offer.

The banking and payments services and solutions that are available to businesses, banks and financial institutions has dramatically increased in recent years. Technological developments have given rise to a comprehensive portfolio of products that have been designed to serve different business requirements as and when they arise.

In an increasingly globalised world, there is a growing clamour for more simple and effective ways of sending and receiving frictionless cross-border payments – and virtual IBANs are one of the chief means of satisfying this need.

To understand what a virtual IBAN is, it makes sense to first focus on explaining what an IBAN is. IBAN is an acronym that stands for International Bank Account Number, one that is used by individuals, businesses, banks and other financial institutions to make and receive international payments.

An IBAN consists of a series of up to 34 letters and numbers that uniquely identifies a particular customer of a financial institution. The structure of an IBAN is composed of:

  • Two letters that identify the country code
  • Two check digits used for error detection
  • Up to 30 alphanumeric characters that point to a country-specific bank account number

The characters permitted in an IBAN are the digits 0 to 9 and the 26 alphabetic characters A to Z. Interestingly, this is the case even in countries that do not use these characters in their national language (which is born from necessity – all countries must use the same format as every other in order for the system to work as it should).

It is possible for anyone to calculate or convert an IBAN using their bank code (or sort code) and account number. This is a highly effective means of boosting the success rate and security of an international bank wire transfer.

So what then, is a virtual IBAN? Put simply, a virtual IBAN is a reference number that can be used to reroute incoming payments to a physical bank account. They are particularly useful for banks and financial institutions that have to process a significant number of international payments.

Let’s say that you are a business based in the UK and you have to process thousands of transactions in countries around the world. Without virtual IBANs, you would have to spend significant amounts of time and money setting up and managing different physical banking and payment accounts in multiple jurisdictions. As well as the time and effort required, manually overseeing all transactions would be virtually impossible (no pun intended). Then there are the multiple currency requirements your different customers might have.

With virtual IBANs, you can allocate a unique account to each of your customers – in multiple countries – and reroute them all to a master banking account. From the point of view of your customer, there is absolutely no difference between a virtual IBAN and a traditional bank account, but from your company’s point of view, everything can be automated, streamlined, sped up and simplified.

In addition to the benefits mentioned above, the other main benefit is the reduction in cost. For companies wanting to accept and send international payments, there is often a transactional fee involved. This might be fine for a few transactions, but for businesses, banks and financial institutions that need to send hundreds (if not thousands) of transactions on a regular basis, the costs can mount up and quickly become exorbitant.

Virtual IBANs do away with all of that, as they can be set up relatively cheaply, without any of the complexity of setting up and managing a full banking account. Then there is the fact that the entire reconciliation process can be automated, freeing up time, effort and money that would be better spent on other areas of your business. Virtual IBANs enable companies to conduct business on an international scale, in multiple currencies, without the need to establish and maintain multiple banking relationships, or even invest much time and effort internally.

The first step for any business, bank or financial institution wanting to utilise virtual IBANs is to open a correspondent or collection account. Such accounts are designed for companies dealing with account receivables and, importantly, they enable businesses to hold and maintain a monetary balance in their own name. In other words, this account can be seen as the ‘master’ account to which all payments made through virtual IBANs can be rerouted.

When collection accounts are combined with virtual IBANs, they become an effective tool for the automation and tracking of thousands of payments. In addition, when financial institutions access these tools through Clear Junction’s API, it is possible to receive automated notifications each time a payment hits their account. This immediately boosts efficiencies by stripping away the need to perform clunky and time-consuming manual processes – which are fine for the odd payment, but for those needing to process many transactions every day, automation is key to good business practice.

Theoretically, there is no limit to the number of virtual IBANs that can be issued per request, meaning businesses can allocate a segregated virtual IBAN account to each customer. This will help in-house by improving settlement and reconciliation processes.

The virtual IBANs that Clear Junction offers to customers are addressable within payment clearing networks in the EU and UK, including BACS, CHAPS, Faster Payments, SEPA Credit Transfer and SEPA Instant. This enables financial institutions to collect domestic payments in the UK and across Europe.

Often, payments can be settled on the same day – although this largely depends on the particular payment networks or rails you are connected to. Ultimately, virtual IBANs remove the need for businesses to spend time, money and considerable effort establishing and managing multiple banking relationships across different jurisdictions.

Clear Junction’s virtual IBANs enable you to bypass this process and assign individual accounts to individual customers, thereby enabling fast settlement, reconciliation and an improved customer offering. Partner with Clear Junction, utilise our virtual IBANs and accelerate payment processing and business growth.