Brief history of IBANs and current Fintech challenges

“It is not enough not to be a racist, you have to be an anti-racist“. The last week has shown us, that we as humans still have a long way to go. Three black members of our society have died because they are black. The size and intensitity of demonstration have also shown us that these are not exceptions. What makes things even worse, there are way too many videos full of hate and way too many statements that talk about “they“ and “us“. We should also keep in mind that this is not a pure US problem. It might be less extreme in EU, but also we have a lot to do. I have already seen a few initiatives growing support in Berlin and rest of Europe. I am not sure what we as a society have to do to overcome this, but I will personally support initiatives that tackle this issue. I hope you will too.

In the last weeks I have worked on a few projects that were somehow related to International Bank Account Numbers (IBAN). If you are living in EU, you will use them regularly, probably not remember them fully and will have the benefit of its introduction in one way or another. Also you might wonder why I am writing about such an boring topic?

A few facts about IBANs

• International Bank Account number is a unique number to identify a specific bank account at a specific bank (BIC or SWIFT code on the other hand “only“ identify the bank but not the account)
• A IBAN can be up to 34 alphanumeric characters: Two letters for the country code, two digits as check digits followed by a maximum number of 30 alphanumeric characters as Basic Bank Account Number (BBAN)
• Thanks to the two check digits any party can validate an IBAN and thus reduce risks of using incorrect IBANs (IBAN checker website and Github)
• The BBAN is country specific and thus varies in lengths and follows different rules
• IBANs have different lengths in different countries: Shortest in Norway with 15 characters and longest in Malta with 31 characters (Nordea)
• 69 countries have adopted IBANs in Europe, Africa, Latin & South America and Asia (Wikipedia)

Before IBANs were implemented in the Single Euro Payments Area (SEPA; 36 countries incl. EU countries), bank transfers relied on different national standards. This caused delays and problems during international transfers, since the sending bank could not check if the provided account details were correct and often the payer provided wrong account details due to missing knowledge.
Thus, the standardization of IBANs was started in 1997 by the International Organization of Standardization (ISO). With some delays, IBANs were first used in 2008 and have become mandatory for every bank transfer within SEPA in 2016. It should be highlighted that this implies also to domestic transfers and not only international transfers. The adaptation of IBANs has reduced errors in payments under 0.1% in IBAN-countries

As a European you might remember the introduction of IBANs. I have actually worked at a small Sparkasse in the North of Germany between 2006 – 2009 and thus remember the introduction and confusion by some customers in 2008 very well. Most complains were around the fact that the IBAN in Germany is 22 digits long and many people claimed they will not be able to remember their IBAN. However, IBANs were an important step not just to reduce the errors in transfer but were also the ground work to speed up international transfers: Online bank transfers within SEPA have to arrive at the recipients bank account within one bank working day.

Fintech challenges with IBAN

But enough with glorifying IBANs and coming back to the question why I am writing about such a boring topic. Startups want to expand fast, especially in Europe where each country often has only a limited market size. Expanding to another country can be challenge for any type of company, but regulation makes it often a little harder for companies offering Financial Services. Luckily, through the process of passporting a license granted in a certain EU country can be transferred to another EU country, and thus the license holder only needs to apply for a license in one country. This applies also to Banking-as-Service (BaaS) providers, thus, a non-licensed startup working together with a BaaS provider can benefit of passporting if the BaaS provider passported its license to another EU country.

As I pointed out at the beginning, an IBAN can be used in whole SEPA to make a bank transfer or direct debit payment. Each IBAN starts with a country code and this country code depends on the local registration of the regulated financial service provider. As an example: when N26 started to expand outside of Germany they offered German IBANs in other European countries since they were regulated in Germany. What should work easily in theory, did not work out that well in reality. Firstly, consumers were reluctant to use an IBAN form another country. This might be because they were used to their own country code and never encountered an international IBAN before. Secondly, and likely a reason why consumers were reluctant to adopt international IBANs, international IBANs were (and are) sometimes refused by certain companies as a valid account number. When you google for “IBAN discrimation” or read this article, you will hear about employers not wiling to transfer salary to an international IBAN or local water supplier who does not want to accept an international IBAN for direct debit. Therefore, Neobanks such as N26 went the extra mile to register companies in other European countries and registered with the local authorities. This enabled them to issue local IBANs and made it easier to acquire customers in those countries (N26 blog post). It should be highlighted that the required effort is not like applying for an additional bank license (probably a lot less effort), nevertheless, the efforts have to be repeated in every country where local IBANs are required. And this means for smaller countries, that local IBANs are not available from international neobanks.

Sometimes I joke that it might have been better if the IBAN would not contain the country code as letters but rather as digits. That way the origin of the IBAN is slightly hidden and IBAN discrimination would probably be lower. But it’s too late for that.

It is very unfortunate, that an IBAN can in theory be used in whole SEPA, but in reality Fintech players have to invest further resources to actually avoid discrimination. Major neobanks may have the funds and focus to register in relevant countries, however, with the further spread of Fintech services, this might not always be the case and thus limit the expansion efforts of those players. Hopefully, with the rise of more neobanks, we will see a further adoption of international IBANs in our daily lives and providing local IBANs is not crucial anymore in the future.

To close the blog post on a positive note: The Swiss challenger bank Yapeal started their family & friends phase a few days ago (Source) and part of their offering is the option to create an personalized IBAN. While opening a bank account, a costumer can choose the last 12 characters from the 21 character long IBAN. The country code and check digits as well as the five digit bank code – which is required in Switzerland for identifying the bank (83019 for Yapeal) – are fixed and cannot be changed. The remaining 12 characters can be personalized and since Switzerland allows letters as well (unlike Germany for example where only digits are possible) funny IBANs are possible like: CH3183019WANTMORECASH (Source – only in German language).