Virtual IBANs: Removing Friction in Cross-Border Payments

Virtual IBANs: Removing Friction in Cross-Border Payments

In the past, businesses wanting to engage in cross-border payments had to set up physical bank accounts in each jurisdiction. This was time-consuming, expensive and often required a great deal of paperwork.

However, with the advent of new technology, businesses can now use virtual IBANs to make cross-border payments quickly, easily and without all the hassle.

A virtual IBAN is a unique identifier that is assigned to your account by a payment provider. This allows you to send and receive payments without having to go through the hassle of setting up a physical bank account in each country where you do business.

In this guide, we will discuss how virtual IBANs work and how they can remove friction in cross-border payments.

What is a virtual IBAN?

A virtual IBAN is a number assigned to your account by a payment provider. This number does not represent an actual bank account, but it enables incoming payments to be routed to an alternative account at a physical bank.

Virtual IBANs offer the same facilities as a traditional settlement with a number of additional advantages. For example, virtual IBANs allow you to send and receive payments in multiple currencies without having to open a bank account in each currency. In addition, virtual IBANs can be used to send and receive payments from any country in the world. This is because virtual IBANs are not tied to any particular country or region.

Let's say you own a financial services company that does business in the United States, Europe, and Asia. In the past, you would have had to open a bank account in each of these regions in order to process payments. With virtual IBANs, you can now use a single account to process payments in all three regions. This saves you time and money by eliminating the need to open and maintain multiple bank accounts.

How virtual IBANs work

When you sign up for a virtual IBAN, you will be given a virtual account number. This number will be used to route payments to your account.

In order to receive payments, you will need to provide the sender with your virtual IBAN. The sender will then use this number to send the payment to your account. Once the payment is received, it will be converted into the currency of your choice and deposited into your account.

The Friction: Explained

According to SWIFT, 2%-5% of payments are subject to an inquiry or investigation, leading to a delay before payment can be completed. There are a number of factors, both internal and external, that contribute to this friction. These include:

Different rules and regulations in each country:

Suppose you are a Australian-based company that wants to send a payment to a supplier in Europe. In order to do this, you must first understand the differences in payment rules and regulations between the two countries. This can be a difficult and time-consuming task, as each country has its own unique set of rules and regulations. 

Lack of standardization:

The payments industry is made up of a large number of players, each with its own processes and systems. This lack of standardization can lead to inefficiencies and errors in the payment process.

Incorrect data fields:

Another common cause of friction is incorrect data fields. This can happen when a client fills out a form with inaccurate or outdated information. For example, if you are trying to send a payment to a supplier in China, you will need to provide their Bank Identifier Code (BIC). If you do not have the correct BIC for your supplier, then the payment will be delayed or may even be returned.

Lack of understanding of cross-border payments:

Many businesses are unaware of the complexities involved in cross-border payments. This lack of understanding can lead to friction when trying to send or receive payments. Because of this, it is important that business owners work with a payment provider that has experience with cross-border payments and can help them navigate the complexities involved.

The solution: virtual IBANs

Virtual IBANs offer a solution to the friction involved in cross-border payments. By using virtual IBANs, businesses can send and receive payments in multiple currencies without having to open a bank account in each currency. Some benefits of virtual IBANs include

Seamless global transactions:

Virtual IBANs allow businesses to send and receive payments from any country in the world. This is because virtual IBANs are not tied to any particular country or region.

More time for operations: 

Let's say you're expanding your company into a new region. In the past, you would have had to establish a relationship with a bank in that region. With virtual IBANs, you can now use your existing account to process payments in the new region. This saves you time and money by eliminating the need to open and maintain multiple bank accounts.

Borderless banking:

Virtual IBANs reduce friction by allowing businesses to become borderless and operate globally without the headache of setting up physical accounts in each jurisdiction which becomes costly and time-consuming. For example, a business based in Canada can use virtual IBANs to receive and send payments to suppliers in Europe without having to open a physical bank account in Europe.

Reduced costs: 

Because virtual IBANs are not tied to any particular country or region, they can help businesses save on currency conversion fees. In addition, virtual IBANs can help businesses avoid other fees, such as FX conversions, that are often associated with cross-border payments.

Improved sales: 

By offering multiple payment options, businesses can increase sales and improve customer satisfaction. Virtual IBANs give businesses the ability to offer their customers the most convenient payment option for their needs.

Final Thoughts

As more businesses enter the global market, the need for virtual IBANs will continue to grow.

Gone are the days when outdated banking infrastructure could slow down or even stop global commerce. The modern global financial ecosystem is complex and ever-changing. 

As businesses utilise virtual IBANs to make and receive payments, they are future-proofing their cross-border payment options and gaining a competitive advantage.