The main difference between an International Bank Account Number (IBAN) and a Society for Worldwide Interbank Financial Telecommunication (SWIFT) code lies in what they identify. A SWIFT code is used to identify a specific bank during an international transaction, whereas IBAN is used to identify an individual account involved in the international transaction. Both play an essential role in the smooth running of the international financial market.
Prior to the introduction of these identification methods, there were no internationally recognized, standardized methods of identifying bank accounts. The information that one country used to identify the bank and individual account was not necessarily recognized by the receiving country. Lack of standard practice meant there was no way to ensure the information entered was correct. As a result, payments could theoretically be made to the wrong people or organizations. Similarly, payments could be delayed while the identifying details were confirmed. Missed, delayed and mistaken payments caused additional costs to both sending and receiving banks.
International Transaction Standardizations Are Introduced
According to the European Payments Council, standardization was first introduced in 1997 with the publication of ISO 136:1997. However, concerns were raised, mainly by the European Committee for Banking Standards, that there was too much flexibility within the proposed standards. The reworked version of the standard included a ruling that required the IBAN for each country to be a fixed length. It also stipulated that only uppercase letters could be used within the IBAN.
An IBAN allows for easy identification of the country where the bank is located and the account number of the recipient of the money transfer. The IBAN also acts as a method of checking that the transaction details are correct. This method of checking and identification is used within all European Union countries and the majority of other European countries. The United States of America and Canada are two major countries that do not use the IBAN system. However, they recognize the system and process payments according to the system.
The SWIFT Fund Transfer System
The SWIFT system pre-dates attempts to standardize international banking transactions through IBAN. It remains the method by which the majority of international fund transfers are made. One of the main reasons for this is because the SWIFT messaging system allows banks to share a significant amount of financial data. This data includes the status of the account, debit and credit amounts and details related to the money transfer. Banks often use the bank identifier code (BIC) instead of the SWIFT code. However, the two are easily interchangeable; both contain a mix of letters and numbers and are generally between eight and 11 characters in length. (For related reading, see: How the SWIFT System Works.)
Being able to access both of these identifiers is essential to ensuring a quick and successful international transfer. The identifier required by the bank depends on the bank being used, the recipient's bank and the countries in which the transfer is originated and received. However, without either, the chances of the transfer being completed successfully diminish considerably.