Whilst the SEPA project has bought us many positive things, one of the strangest decisions was that of enshrining use of BIC and IBAN as identifiers for credit transfers and direct debits (not just the EPC schemes!) through Regulation 924/2009 and the PSD.
The combination of BIC and IBAN has grown from a single company solution (SWIFT) to a pan‑European Unique Identifier standard through the backing of the ECBS and European regulation. While the combination of these two identifiers is still important for routing transactions in the SWIFT environment, some parties are questioning whether it is the right tool for everyday use in the new SEPA environment.
While BIC and IBAN meet the basic needs of Payment Service Providers seeking to route transactions by including all of the necessary information, and it is clear that the standards governing the identifiers are managed in an appropriate manner in accordance with best practise identified in European guidelines, the complex nature and large number of digits mean that consumer recollection and support for BIC and IBAN are low – meaning that a key underlying tool of SEPA instruments may be a considerable risk factor.
This consumer issue is actually one of a number of weaknesses in the BIC and IBAN approach. Given that it is indeed possible to route national transactions using only IBAN, and that BIC causes some difficulties for smaller Payment Service Providers, the consumer argument becomes only part of a bigger picture.
Regulation 924/2009 and the considerable investment already made by many organisations in the BIC and IBAN combination suggests that it is likely that no change from the current situation is feasible in the short term, but given the lack of adoption in the US and competing approaches from new payment channels and institutions, it is possible that momentum for change could gather.
One of the reasons for this is that IBAN itself is probably one of the best examples of an unstandard standard. The standardisation approach used being one of norming or aligning existing standards from every country rather than going back to basics. And it is this approach that causes most of the issues with IBAN.
The first issue is one of length. While there are 6 billion or so citizens in the world – which could each be given a unique identifier of 10 characters, IBAN allows 34. Given that IBAN is also alphanumeric, this could even be as little as 7 or 8 characters. It is true that people need multiple identifiers and that businesses also need multiple identifiers, but this still can be achieved with considerably few characters. The shorter the identifier, the better it is adopted by users – although the identifiable elements of the current IBAN format are a plus for adoption.
A further issues is the lack of an easy conversion from national bank number schemes (BBANs) to IBANs. In many countries there is a simple correlation, but many also introduce new elements and have numbers that just don’t match. So for every person or business that you want to pay, you need to ask them or their bank what the IBAN really is. For those with multiple outgoings, this is quite an issue.
The final issue with IBAN is that it isn’t universal. Just like with EMV, the USA has not adopted it – focussing currently on ACH-initiated schemes for unique identifiers such as the Universal Payment Identification Codes (UPIC) standard developed by the Electronics Payment Network and used primarily in domestic ACH transactions. The UPIC proprietary standard is a unique identifier that ‘masks’ the account details in transactions. A reconciliation database at the ACH facilitates routing during transaction processing. This is a similar approach to that proposed by the Mobey Forum for using unique identifiers in mobile transactions.
All this goes to show that while SEPA is seeking to harmonise payments across Europe the lack of a fresh baseline has been a strong hampering factor, and will prevent SEPA from reaching its full potential in the future. Ideally the SEPA initiative should have been used as tool to start again from scratch with payments infrastrucure – especially given the investment that had to be made anyway by Europe’s banks – and potentially we would have taken a leap forwards rather than a whimper that has left all participants apethetic.