What are virtual IBANs?

Embedded Finance

Posted on 30th June 2021

A virtual IBAN (International Bank Account Number) is a virtual account reference number allocated by a banking or payments provider to provide local payment.

What are virtual IBANs

A virtual IBAN (International Bank Account Number) is a virtual account reference number allocated by a banking or payments provider to provide local payment.

Whether you’re aiming to reduce the cost of cross-border payments, expand into new territories, or streamline back office operations (including settlement and reconciliation), virtual IBANs could play a role.

These relatively new tools are a crucial element of the embedded finance landscape, and are a great example of how payment innovation can transform businesses.

So what exactly is a virtual IBAN, how can they help your business, and how do you get one?

Virtual IBANs: a definition

Let’s start by defining 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 have one, even if you’ve never used it. 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) looks exactly the same as a regular IBAN. 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 send payments into the same central bank account. Think of a vIBAN as a sub account of a central master account, allowing payments to be easily routed and received internationally. 

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, you’ll have to reconcile the payment information yourself. 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 a party making a payment, the 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.

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 most commonly used as a cost-saving measure for businesses that are transacting across borders. Sending and receiving international payments can be extremely costly (sometimes prohibitively so) for businesses with an international presence. With virtual IBANs, your business can instead accept payments in the currency of the payer, then receive them into a local-currency bank account. This cuts out the FX charges that come from converting every single international payment into your preferred currency. 

Virtual IBANs are also used by companies that are receiving a lot of payments from individual international users, for whom local payment details are required for doing business. For example, crypto exchanges and digital currency businesses need to enable users to add funds to their wallets using their local fiat currency. Reconciliation in general is resource intensive and finance teams spend a lot of time tracking down and reconciling payments. Using virtual IBANs, ‘accounts’ are segregated and reference information isn’t needed, eliminating these challenges. This same functionality is useful for marketplaces and any other platform business that is looking to scale internationally.

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. This is similar to Banking-as-a-Service, though goes further in terms of integration.

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. Providers may offer virtual IBANs for any of the applications suggested above, and they are used by both embedded finance providers and non-finance companies to build solutions for specific applications.

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. Virtual IBANs are a way to avoid the burden of negotiating relationships with multiple banking providers in multiple territories. In a similar fashion, partnering with embedded finance providers is a highly effective way of ‘bundling’ financial services, removing the need for brands to contract with multiple providers specialising in different parts of the banking stack.

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