The introduction of the Euro provided an internal currency, but international banking can still be improved.
The creation of the Economic and Monetary Union (EMU) was not finished with the Euro. The next goal is Single Euro Payments Area (SEPA). Today is the official SEPA start day. That means that banks are ready for SEPA credit transfers.
Originally planned for 2008 Jan 1, the start date was moved to 2008 Feb 28.
The reason the ECB gives for the two-month delay, to reduce the risk of
additional technical problems due to the change of year.
fails to convince, but
the important thing is that the project is now moving forward.
The Euro removed exchange rates and other trade barriers by replacing national currencies with an international one. The SEPA idea is to remove all remaining inefficiencies and obstacles to trade, such as complex and costly procedures caused by differences between the various historically evolved national banking standards. The goal is a unified infrastructure in which cross-border transfers are as easy and affordable as domestic ones. The practical goal is known as Straight Through Processing (STP); automatic handling of payments without human intervention or specific attention to cross-border payments.
The European Central Bank likes to say that all payments will become
domestic
(note the quotes). That choice of words is unfortunate. Quite some
press is now saying that SEPA will change the European Union (EU) into a single
domestic market (without quotes), and that is politically incorrect. The
politically correct thing to say is that SEPA will merge existing national
markets into a single supranational market.
Perhaps the ECB is merely enthusiastic and ahead of its time, but it seems
best to stop referring to SEPA as domestic
, with or without quotes.
Merging the markets is done by removing all remaining differences between them. All existing national systems must move towards a single supranational standards.
Some national standards will be abolished completely. The Netherlands has a acceptgiro system, unknown in other countries. It was introduced in the early 1980s. It is a pre-printed fixed-format payment form that can processed efficiently by optical readers. Many large organisations, such as utility companies, carries, post order firms and insures send these to their clients. All they have to do is sign and mail it to their bank. Some acceptgiros leave the amount blank, but most often that is preprinted too. Every else, such as the name, place and bank number, and codes to speed up processing, has already been printed on it.
The three big Dutch banks (ING, ABN/AMRO and Rabobank) have been moving to abolish the acceptgiro in favour of an electronic standard they call a digital bill, that works with Internet and SMS-capable phones.
The Nationaal Fonds Ouderenhulp (National Fund Elder help) protested that many elderly do not have a computer and does not use SMS.
Early in 2007, Bas van der Vlies, the frontman of the Staatkundig Gereformeerde Partij (Political Reformed Party) asked the then Minister of Finance Gerrit Zalm questions about this. Zalm’s official answer was that the banks do not plan to abolish the system, but provide the new digital bill as an alternative.
Zalm did not address the concern that clients who continue to use acceptgiro may be charged higher handling costs than those opting for electronic payment, and the SGP has not moved for a law that prohibit a surcharge on acceptgiros.
Neither the questions nor the answers showed that either party was aware of
the coming Single Euro Payments Area. It seems likely that both the acceptgiro
and the national digital bill introduced by the banks will have to make room for
this supranational standard, and minister Zalm was certainly aware of that
already.
He must also have been aware for years now that the SEPA plan has three phases,
the second phase of which is summarised as Electronic only: paper is abolished.
All payments are made electronically
yet his official reply as Minister of
Finance is a statement that there are no plans to abolish the acceptgiro.
Moreover, the more successful the banks are in promoting electronic payment over acceptgiro, the more inevitable the abolishment of acceptgiros becomes. Production and support of the equipment for the printing and processing of acceptgiro may cease when it becomes uneconomical. Unless politicians interfere with this development, the last remaining machines and spare parts may effectively dictate an end date.
The basis for the supranational is the International Bank Account Number (IBAN). Originally developed by the European Committee for Banking Standards (ECBS), IBAN has been adopted as ISO 13616 Some leaflets, background info, the standard itself and implementation guidelines are all available on the ECBS web site.
The IBAN standard is simple alphanumeric standard that builds on pre-existing standards and practices. Each IBAN is essentially the ISO 3166 two-letter country code, followed by the national bank number. The national bank numbers already exist of a bank code followed by the account number. Thus, an IBAN is defined as three-part code consistent of a country code (CC), and two check digits followed by a Basic Bank Account Number (BBAN), but is - by design - effectively a a four-part code consisting of a country code (CC), two check digits, a bank code a Bank Account Number (BAN). It is defined as a three-part code because the BBAN remain under national control, and the actual format for BBAN will continue to differ between countries. The four parts are always there, but only the format of the first two parts is the same for all countries.
Some national account number formats need some adaptation to achieve easy recognition of the bank. Easy recognition is important to ensure swift and reliable routing of transactions.
For example, although it is possible to recognise the bank holding a Dutch bank number by the first few digits of that number, the IBAN still uses a four-letter code in front of it to identify the bank. That may seem superfluous, but I welcome development as a desirable one.
Full implementation of this IBAN code will remove infrastructure barriers to full number portability. Clients wishing to change banks should be able to retain their bank number when switching banks. In a system with bank number portability, the bank number will not indicate the holding bank, but merely the bank that originally issued the number. This could be similar to phone number portability. Number portability is beneficial to consumers even if they need to specify a BBAN, simply because they will no longer have to make an effort to learn their new number. number. Number portability reduces lock-in and increases market fluidity, and that may induce banks to better serve both existing and potential clients. Consumer organisations may want to start looking into and lobby for laws mandating bank number portability now, to ensure that it becomes a reality soon.
The IBAN is an international standard code of up to 34 characters. The actual length depends on the length of the BBAN.
The ECBS adds several supplementary specifications to the ISO specification, including a standard printed representation without lower-case characters, and the demand that the BBAN is fixed in length, and the the bank code within it is fixed in both length and position for each country code prefix. The print format is simply a space after every fourth character.
Thus, the length differs from one country to another, but same for all banks
in one country. Today, the 15-character code used by Norway is the shortest and
the 26-character codes for Cyprus, Hungary and Poland are the longest.
The IBAN for the Netherlands is 18 characters long. It is NLkk BBBB CCCC CCCC
CC; the NL country code for the Netherlands, the two check digits, the
four-letter bank code and the 10-digit bank account number. Current Dutch bank
numbers are 9 digits, to get 10 digits the number is prefixed with zero.
Postgiro numbers, which may be any length, are prefixed with as many zeroes as
needed to fill out to ten digits.
The bank code used in IBAN is not the same as the Bank Identification Code (BIC) used in SWIFT. BIC is ISO standard 936. The BIC8 format consists of a four-letter bank code, a two-letter country code and a location code. The BIC11 format adds a branch code.
BIC is international format, the bank code in IBAN is under national control. BIC contains a country code, but the IBAN already starts with a country.
There is undeniable overlap between systems and they will be used alongside each other for a while. The International Payment Instruction (IPI) defined by ECBS in EBS206 supports the combination of BIC and IBAN.
Several countries, including the Netherlands, have chosen to use the Bank Code used in BIC as the bank code in IBAN. That seems a wise choice, which may ease interoperability with SWIFT and migration of current national systems that already support SWIFT.
Once IBAN has replaced current national standards, the perception of the format is sure change. The country-specific structure that makes it relatively easy to migrate to IBAN will no doubt be criticised as needlessly complex and spark initiatives to further standardise or replace the format.
IBAN validation is done with the ISO 7064 mod 97-10 algorithm common in the banking industry. Details are in the ECBS documents.
To make the Single Euro Payments Area a reality, banks must be able to process IBAN codes as easily as the national codes. The ISO-standard IBAN, the strong Euro and the importance of the European Union make ECBS standards of more than European interest. Just how important these standards will become depends on the world-wide banking community.
Copyright © Tamura Jones. All Rights reserved.