In another topical piece around cross-border payments, an article from Finextra covers the increasing use of International Bank Account Numbers (IBANs) in virtual form. IBANs are used as a common structure for exchanging funds between bank accounts in cross-border scenarios.
Members can assess our research on virtual account numbers, which are used to scale down on physical bank account numbers. Virtual accounts are a set of non-physical accounts, essentially sub-ledgers that shadow the actual bank account. Companies use virtual accounts to improve working capital management. In effect, virtual accounts are used for redirecting transactions to the underlying real account. Since these virtual accounts are not actual bank accounts, from a bank’s perspective they are treated as off-balance-sheet items. Multiple virtual accounts can be opened for a corporate and then mapped to a single real bank account. While virtual accounts are merely a reporting tool, each individual virtual account provides the same segregation of data, balance analysis, and transaction identification as a physical account. Virtual IBANs work in a similar way.
In a typical cross-border payment, banks will have to have accounts opened in each country/currency for which they want to exchange funds on behalf of themselves or a client. A virtual IBAN cuts back on that need and provides for some other benefits, such as reduced friction from errors, lower costs from lack of reprocessing (the article suggests that up to 5% of cross-border payments are subject to an inquiry or investigation) and fewer FX conversion fees and potential revenue boosts since offering more payment options can increase business.
The use of virtual IBANs promote borderless banking, cutting through many of the complexities associated with processing payments in multiple jurisdictions and payment formats. The piece concludes by stating that as global markets open up, more IBANs will be used, so legacy bank infrastructure will be less of a factor in delays and lack of transparency, which in turn provides a competitive advantage to those businesses taking advantage of the latest capabilities.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.
