Understanding IBAN: Your Guide to International Bank Account Numbers

The International Bank Account Number – typically referred to as IBAN – is a system of identification for bank accounts that is used across national borders. Internationally agreed upon, the IBAN system acts as a facilitator for communicating and processing international transactions, helping to reduce errors in transcription.

Summary: 

• The International Bank Account Number (IBAN) is a system of identification for account numbers to ensure that international transactions go smoothly.
• There were several versions of the IBAN system – put out by the International Organization for Standardization (ISO) – before a finalized version was created; the final version was split into two parts.
• IBANs are important because they enable international transactions to occur easily, and significantly help to cut down on transactional errors.

Structure of the International Bank Account Number

The International Bank Account Number contains the following information:

• Country code – A code that is specific to a certain country
• Check number – A two-digit code used as a redundancy check to detect errors on identification numbers
• Bank identifier – The unique identifier for the domestic bank
• Account number – The bank account identifier

Source

History of the International Bank Account Number

Before the creation of the IBAN system, there were different standards among countries when it came to identifying bank accounts (their branch, bank, account number, and routing codes). This led to a large amount of confusion when it came to international transactions. Important routing information, specifically, was often missing when payments were being made.

The ISO 9362 (otherwise known as the BIC code or SWIFT code) made no specifications for formatting transactions, so each party in a transaction needed to come to an agreement regarding transaction types and identification of accounts. There was a lack of consistency with international trade and resulting confusion.

Then, in 1997, the International Organization for Standardization (ISO) published the ISO 13616:1997 proposal, which was so flexible that it was deemed unworkable by many. They cut the proposal down then, stating that each IBAN must be a fixed length and must only include upper case letters. After much backlash, the ISO withdrew the proposal and created a new one, ISO 13616:2003. This proposal – created in 2003 – was updated again in 2007 and was basically split into two parts – SWIFT and IBAN.

SWIFT System

ISO 13616-2:2007 is officially known as SWIFT (Society for Worldwide Interbank Financial Telecommunication), a network that allows financial institutions around the world to both send and receive financial transaction information securely in a standardized (and therefore reliable) way. SWIFT is not responsible for assistance in making transactions. Instead, it sends payment orders that must be analyzed and settled between the involved accounts. In order to utilize SWIFT, all transactions must be between banks or entities closely associated with banks.

Importance of the IBAN System

The IBAN system provides a flexible yet standardized format that is used to identify accounts, validate transaction data, and create a filter that catches data errors. Routing information is always included; it allows one bank (or financial institution) to send a payment to another. Key information about each bank account is also included, as mentioned above. (The information includes branch codes, country codes, as well as check digits, which are designed to spot errors or completely validate an account number.)

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