What are virtual IBANs and why do businesses issue them?

Product

Posted on July 24, 2023
What are virtual IBANs and why do businesses issue them?
A virtual IBAN (International Bank Account Number) is a virtual account reference number allocated by a banking or payments provider to provide local payment.
OpenPayd Editorial Team
OpenPayd Editorial Team
July 24, 2023

Ever wondered what a virtual IBAN is? How is it built? What can it let you do? Then read on – we’ve got answers to all your questions.

Whether you’re aiming to reduce the cost of cross-border payments, handle high incoming payment volumes or upgrade back-office operations like payment reconciliation, virtual IBANs have a role to play.

So what exactly is a virtual IBAN, how can they help your business, and how do you issue them? We’ve got all the answers to your burning questions:

Virtual IBANs: our definition

A virtual IBAN (International Bank Account Number) is a virtual account number issued by a Banking-as-a-Service provider. It lets a business or individual send and receive payments using unique payment information.

To unpack that, it’s worth expanding what a regular IBAN is. “IBAN” stands for International Bank Account Number and if you have a bank account in the EU (and many other places in the world) you will already have one. It’s a unique code (up to 34 numbers and letters long) that allows a bank or payment provider to know where to send money when you make a payment. In the UK you would use an account number and sort code to make a domestic payment, an IBAN works in the same way, just with a few more numbers.

A virtual IBAN (or virtual International Bank Account Number, or vIBAN) functions in exactly the same as a regular IBAN: it lets people send and receive payments and is issued in the name of a business or individual. But while a regular IBAN is matched 1:1 with a bank account, with a virtual IBAN, you can have multiple unique vIBANs that all hold balances within the same underlying pooled account. Think of a vIBAN as a linked sub-account of a central master account, allowing payments to be easily routed and reconciled in different ways, depending on a business’ needs.

So what value does a vIBAN bring? Let’s say you’re sending and receiving lots of payments from lots of different people. If you only have one IBAN, then you’ll need to issue additional reference information when they make the transfer so you know where each payment came from. If your payee forgets to include that additional reference information or makes a typo, your operations team will have to reconcile the payment information. However, if you give each payee a unique vIBAN, the payee won’t have to enter any additional information and it’s instantly clear where each payment has come from.

For anyone making the payment, a virtual IBAN is identical to a conventional IBAN: it is a series of digits that identifies the account to which money should be sent. However, being virtual, their creation can happen in a matter of seconds, and this quick and easy set-up brings a number of advantages for businesses.

What does a virtual IBAN look like?

Virtual IBANs have such a long combination of letters and numbers they don’t look dissimilar to a WiFi password. However, when you break it down each piece of information tells a story. Let’s look at an example vIBAN that we have created (and anonymised, but we’ll get on to that):

Here’s what each piece of the puzzle actually means:

Virtual IBANs have such a long combination of letters and numbers they don’t look dissimilar to a WiFi password. It includes country code, check digit code, bank identifier code, sort code (branch code), account number.

  • MT: The first two letters are the country code. In this example it’s Malta, but for the UK it would be GB, for Germany it’s DE and for Mauritius it’s MU. Each country has one and they’re always two letters.
  • 80: These two digits are used to validate the IBAN before a transaction is made.
  • CFTE: The next four letters are the bank identifier code. Pretty simple to understand, it represents the issuing bank that created the IBAN. In our example, “CFTE” belongs to one of our underlying banking partners.
  • Sort code and account number: Next comes the account number, used to identify your individual account and necessary to enable others to transfer money to your account. The exact length will depend on the issuing country – a Maltese IBAN like this one will have 23 characters – the first five are the sort code, the next 18 are the account number. A British IBAN is shorter: just 14 numbers, six for the sort code and an eight-digit account number.

We’ve anonymised this example by replacing the final two characters with X’s, you won’t see those in a real-life virtual IBAN.

Is an IBAN different to a UK sort code and account number?

UK-based readers will have probably spotted that their bank account has a six-digit sort code (which is unique to each bank) and an eight digit account number. This is usually all the information required to make a domestic payment in the UK.

If you need to provide payment information in an IBAN format, your sort code and account number will match up exactly with the payment information you’re using for domestic payments. To make a full IBAN, you’ll also include the Country Code, Check Digit Code and Bank Identifier Code. Your bank or payments provider should provide all this information in the correct format.

So to keep it simple: every UK account has an IBAN. That IBAN will contain the sort code and account number that are used for domestic payments, along with additional information to identify the account for international payments.

What’s the difference between an IBAN and a SWIFT code?

SWIFT is the primary messaging network that banks use internationally to make payments between them. Because of its size and the number of participant banks, it’s the primary method for instructing international payments. Each bank in the SWIFT network has a unique SWIFT code, and this code is used by banks within the network to ensure each payment reaches the right end-point.

This means that IBANs and SWIFT codes fill a similar role in international payments – they’re both methods for ensuring a payment you make reaches the right recipient. There are currently 57 countries that use IBANs as their standard account format; the main benefit of a SWIFT code is for a payment that is going to a country where IBANs aren’t used. Even if the sending and receiving countries do use IBAN-formatted account information, SWIFT is often the only method for banks to communicate internationally, so a payment between them will still use a SWIFT code.

How could virtual IBANs help my business?

There is a range of benefits associated with virtual IBANs, and they have a number of major use cases.

Virtual IBANs are often used by companies that are receiving a lot of payments from individual users. They need an account infrastructure that is segregated from their day-to-day operations, and that can automatically reconcile incoming and outgoing payments from underlying customers. The larger the number of underlying customers, the greater value virtual IBANs can bring.

A classic example would be a company like a crypto exchange. An exchange will need a segregated account where they can manage their clients’ fiat balances separately from their operational funds. They’ll also have hundreds of thousands, if not millions, of underlying users making fiat payments into that account. Reconciling all those payments is resource intensive and their finance team probably spends a lot of time tracking down and reconciling payments for their users.

By issuing virtual IBANs, each of those underlying clients has a named virtual account that all their incoming payments are sent to. For bank transfers, having a vIBAN means they will have unique pay-in information, removing the need to supply reference information for the payment. But the virtual IBAN can also be used for every incoming payment from a user, regardless of source – if they top up via card payment or direct debit, each of those payments can pass through the same vIBAN and automatically update their balance.

Virtual IBANs can also be combined with multi-currency functionality to help businesses that are sending and receiving payments across multiple countries. If a company is sending and receiving payments in more than one currency, but only has one single-currency bank account, they will be incurring additional FX costs on every payment. A multi-currency account or virtual account will still have a single IBAN, but can hold multiple currencies. This means businesses and their users can hold a balance, accept payments and send payments in local currencies and also access local payment rails. The only FX charges will then come when a payment has to move between currencies, rather than being incurred on every single transaction.

Where do virtual IBANs fit in the context of embedded finance?

Embedded finance describes the full integration of one or more financial services into another business’s ecosystem, through the use of APIs. Embedded finance providers offer access to specific parts of the banking ‘stack’, for example accounts or card processing facilities, which businesses can ‘plug in’ to their product or service in a quick and simple way.

By allowing brands to embed financial services within their existing products and services, embedded finance is broadening access to financial services generally, and is enabling product-focused providers to build banking and payments services that fit specific or niche verticals or use-cases. This results in a much better experience for the consumer than that offered by a legacy financial institution.

Virtual IBANs are one of the financial services that can be embedded via API. Providers may offer virtual IBANs for any of the applications suggested above, and they are used by companies to build unique products, services and processes.

They are also emblematic of the benefits associated with the ‘platform’ model, in which an entire range of products and services are offered via a single point of access. Partnering with embedded finance providers is a highly effective way of ‘bundling’ financial services, by combining virtual IBANs with multi-currency functionality for example, removing the need for brands to contract with multiple providers specialising in different parts of the banking stack.

What virtual IBANs can OpenPayd offer?

At OpenPayd, we can issue both Euro and GBP single-currency virtual accounts. But that’s just the tip of the iceberg. Once you have that single currency account set up, we then offer multi-currency account functionality so you can add additional currencies to the same IBAN.

As a result, each IBAN and virtual IBAN that we issue for our clients can act as the single point of contact for incoming and outgoing payments across whichever major currencies our clients need. To see this functionality in action, you can check out our platform demo here:

View Our Demo in a new window

How do I start issuing virtual IBANs?

Virtual IBANs are increasingly common, and are gaining greater visibility thanks to the popularity of apps and services such as Transferwise’s Borderless Account. There are now many providers offering access to virtual IBAN services.

However, not all virtual IBANs are created equal. At OpenPayd, we offer an unlimited number of vIBANs for your business with a quick set-up time – when our clients have needed vIBANs running into the hundreds of thousands, they’ve been able to create them in a matter of hours. With this scale, your business can benefit from smarter, quicker reconciliation.

A single API integration ensures a fast and simple set-up regardless of your business’s tech capabilities. Aside from virtual IBANs, as a full embedded finance provider, OpenPayd enables companies to build their own bespoke account and payment solutions in a modular way.

Virtual IBANs offer an innovative solution to a genuine problem faced by thousands of businesses. They will go on to become the standard model for accepting cross-border payments, being an early adopter ensures your business is not left behind.