A guide to virtual IBANs & how they work

Virtual IBANs ensure smooth international payments and efficient transaction management. Let’s look at why banks, fintechs, and PSPs should offer this service.

How virtual IBANs work - an in-depth explainer

Traditional IBANs - international bank account numbers - have been used by businesses and individuals for over 20 years. But they aren’t necessarily the best option for companies that do most of their business online. Virtual IBANs have emerged as a better alternative to traditional IBANs, ensuring cheaper cross-border payments and facilitating easier transaction administration.

Now banks, fintechs, and PSPs can enhance their service proposition by offering virtual IBANs to their clients. So let’s take a look at what virtual IBANs are, what they can do that a traditional international bank account number can’t, and how they work.

What is a virtual IBAN?

A virtual IBAN (International Bank Account Number) is a virtual account reference number allocated by a banking or payments provider. Much like a regular IBAN, a virtual IBAN consists of up to 34 alphanumeric characters and identifies the bank account to which the money should be sent.

But unlike traditional IBANs, several virtual IBANs can be associated with the same physical bank account. In a sense, virtual IBANs are ‘pseudo’ account numbers that allocate payments directly to a real IBAN that is linked to a physical account.

From the end user’s point of view, a virtual IBAN works in exactly the same way as a regular IBAN account - once they make a payment, their funds will end up in the physical bank account linked to the virtual IBAN. For the payee, however, virtual IBANs perform several important functions that cannot be fulfilled by conventional IBANs.

Why is there a need for virtual IBANs?

When it comes to international business, getting paid isn’t always easy. Accepting international payments can often result in companies incurring a large number of transaction fees.

One solution is to open bank accounts in countries you want to sell your products or services in. But doing so is inconvenient and expensive. Traditional business account solutions often involve long, laborious onboarding processes during set up. Moreover, ongoing resources need to be allocated to ensure all banking relationships are maintained appropriately.

Virtual IBANs provide a wide variety of benefits for companies doing business overseas. Your virtual IBAN allows you to have a multi-currency, multi-jurisdictional banking solution without the need for managing many different banking services.

What can a virtual IBAN do that a traditional IBAN can't?

With virtual IBANs, a company can use a number of “phantom” account numbers to have all the payments made to them rerouted to the same master account. This makes a virtual IBAN a powerful tool that can bring a number of significant benefits.

Increased functionality

Virtual IBANs mimic the effects of having multiple bank accounts, without the hassle of maintaining them. They offer a multi-currency, multi-jurisdictional banking solution for foreign exchange (FX) and payments organizations without the need for a different banking relationship in each country. You can create a virtual IBAN for individual countries, regions, product ranges, and even customers. This makes managing customer payments, settlement, and reconciliation much smoother and simpler.

Cost savings

Virtual IBANs are commonly used as a cost-saving measure for businesses that are transacting across borders. Virtual IBANs not only reduce the banking fees resulting from opening and managing physical accounts in different countries. Transactional fees are also reduced for both incoming and outgoing transactions, which has a significant impact, especially for international businesses.

Efficient transaction management

Virtual IBANs eliminate manual reconciliation and allow companies to centralise transaction management. This makes them a valuable tool for optimising workflow and decreasing the administrative burden. Having a master account but allocating an individual IBAN for each client means that client X only processes transactions through IBAN X. Each payment can then be identified instantly, making reconciliation and payment pattern analysis considerably easier.

Virtual IBANs can also simplify currency management issues for companies that regularly receive payments in multiple different currencies.

Virtual IBANs will not benefit every business equally. For instance, a company that only has one international B2B customer can just use the IBAN directly associated with their actual account. But for companies that accept international transactions frequently, there are no real downsides. Virtual IBANs are a cheaper and more flexible alternative to having multiple physical bank accounts or trying to manage multiple customers paying in multiple currencies through a single account structure.

How do virtual IBANs work?

Core banking software providers enable financial institutions such as banks and fintechs to issue virtual IBANs for their customers.

Here’s how the process works:

  • a financial institution opens a series of virtual IBANs for its client,
  • underlying each of these is a real physical account (held in the financial institution’s ledger),
  • payments made to these virtual accounts are routed to the underlying physical account.

Once the payment hits the bank’s or fintech’s core banking system, a virtual account engine maps the payments made to these virtual IBANs to the real account number, enabling the funds to be cleared to this physical account. The virtual IBANs are also captured in the account statements, allowing the clients to identify the payment originators. This drastically simplifies their reconciliation process.

Core banking platform providers such as Paysolut offer the opportunity to generate and manage virtual IBANs automatically through an easy-to-integrate API. This simple access to Virtual IBAN generation can help companies to scale faster and provide new features for their customers. For example, UK-based Payments-as-a-Service provider My EU Pay wanted to offer its customers access to SEPA. It also wanted the ability to onboard larger clients so it could scale more rapidly.

By partnering with Paysolut, My EU Pay gained the ability to issue 2 million virtual IBANs, each offering access to SEPA, including SEPA Instant and SEPA Direct Debit. As the company’s CEO, Sarah Dees, explains, this has helped significantly with scaling.



"

The service that we have via Paysolut and the Bank of Lithuania has enabled us to scale up very quickly. What I love about the structure is there's no limitation. We have up to 2 million virtual IBAN's at our disposal, and that really gives you a competitive advantage.

Sarah Dees, CEO of My EU Pay

Increasing the ease of payments and facilitating internal reconciliation, virtual IBANs bring multiple benefits to businesses and the financial institutions serving them. You can learn more about the benefits My EU Pay gained by reading this case study.

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