UK businesses that trade with foreign counterparts might find their payments face a familiar set of frictions. When a European customer pays a UK company, the payment typically routes through SWIFT, passes through correspondent banks before arriving several business days later, with fees deducted. Or, they could open a foreign bank account, which for most SMEs is slow, expensive and often impractical.
Virtual IBANs offer a way for companies to streamline how they transact with overseas counterparties. They allow them to route payments through foreign payment rails and work by giving a UK business local receiving details in a foreign currency. That means a European customer can pay via SEPA (an EU system for simplifying bank transfers) as if the business had a local eurozone bank account. The payment arrives faster and without the intermediary deductions that erode the amount received.
This guide explains what virtual IBANs are, how they work and why they can improve the processes of UK finance teams.
What is a virtual IBAN?
A virtual IBAN is a unique International Bank Account Number that routes payments to a master account held by a provider, such as Alt21. From the sender’s perspective, it can be used in much the same way as a standard IBAN, although behind the scenes there are a few differences:
- A standard IBAN corresponds to a bank account opened in the customer’s name at a specific credit institution.
- A virtual IBAN routes payments to a central account operated by the provider, with the customer’s balance tracked as a ledger entry within that account.
The virtual IBAN is a routing and identification layer so does not hold funds independently itself; nor is it a bank account.
Virtual IBAN are alternatively referred to as local IBANs, local receiving details and local account details. They all describe the same thing, which is a unique identifier, issued by a fintech provider or Electronic Money Institution (EMI), that allows a business to receive payments through local payment rails without opening a physical bank account in that jurisdiction.
Understanding safeguardingWhen you hold funds with a regulated payment institution such as Alt 21 Limited, those funds are protected through safeguarding rather than the Financial Services Compensation Scheme. Payment institutions are not banks and do not benefit from FSCS deposit protection. Under the UK Payment Services Regulations 2017, we must keep relevant client funds separate from our own operational funds and hold them in safeguarding accounts with an authorised credit institution. If the provider became insolvent, those safeguarded funds are generally protected from the provider’s own creditors, although the amount ultimately returned would depend on the insolvency process and whether any shortfall existed. For full details of how Alt21 Limited safeguards client funds, please refer to the Payment Terms and Conditions on the Alt21 website |
How virtual IBANs work
A provider, such as Alt21 or other non-banking account provider, either opens a master account at a banking partner or operates under its own EMI licence. When a new customer signs up, it’s issued one or more virtual IBANs, typically with a country prefix matching the currency. A EUR IBAN might carry a DE (Germany), NL (Netherlands), or other eurozone prefix; while a GBP IBAN carries a GB prefix. The utility of virtual IBANs does not extend to the US, which requires a local presence to access local payment rails.
When a counterparty sends a payment to that IBAN, it travels through the relevant local payment rail. EUR payments travel via SEPA using an IBAN. The payment arrives in the provider’s master account and is automatically matched to the correct customer via the virtual IBAN. The customer sees the funds in their account, tagged to the right currency, available for conversion or onward payment.
Finance platform providers typically handle virtual IBANs in one of two ways.
- Issue a single multi-currency IBAN: one account number that can receive multiple currencies, with the provider routing each payment to the correct currency balance.
- Issue separate IBANs per currency account: a EUR IBAN, a GBP IBAN, a USD IBAN etc., each with distinct account details.
When UK businesses use virtual IBANs
Receiving foreign currency from overseas customers
A UK business invoicing EU clients in euros can share a EUR IBAN so the customer pays via SEPA rather than SWIFT. The customer sees familiar local payment details, which eliminates the need for them to navigate international wire instructions and removes the correspondent bank fees that can reduce the amount received.
For businesses where late payment is a persistent problem, this can have a secondary benefit. The hassle of an overseas payment can be a cause of delayed settlement; making it easier for an overseas customer to pay often means they pay sooner.
Virtual IBANs for reconciliation at scale
For businesses receiving payments from multiple counterparties, matching incoming funds to the correct invoice or client is a manual process that only becomes more burdensome as payment volumes grow. A finance team processing dozens of inbound payments each month can spend significant time identifying which payment belongs to which customer.
A virtual IBAN per client simplifies this process. Each payment is automatically identified on arrival because the IBAN itself is unique to that client, eliminating the need for reference codes or manual matching. For B2B companies with a large number of regular payers, or SaaS businesses collecting subscription revenue across multiple currencies, this removes an administrative overhead.
Virtual IBANs and natural hedging
A business that receives EUR into a dedicated euro account might want to hold that balance, either to pay euro-denominated costs directly from it or wait for a more favourable exchange rate.
The former option is a form of natural hedging, i.e. using FX balances on-hand to pay bills in that currency. This saves on Spot conversion fees and reduces FX exposure.
That being said, companies need to be careful about overly relying on natural hedging to manage their FX risk. Even companies that are well-positioned in theory to naturally hedge can be caught out by the unpredictability of business.
For a deeper dive on natural hedging and other hedging strategies, read our practical overview of FX hedging strategies for SMEs.
How Alt21 supports multi-currency receiving and FX management
Note: FX forwards can help to manage exchange rate risk, but are not suitable for every business and carry their own risks, including the risk of loss. They may create obligations, involve margin requirements and remove the chance to benefit if exchange rates move favourably. Alt21 is not a bank.
Alt21 offers local IBANs for major currencies including GBP, EUR and CAD, allowing UK businesses to receive payments through local payment infrastructure. Balances can be held across currencies and converted at rates shown in full before each transaction, with the margin shown as a separate line item.
For businesses whose needs extend beyond receiving and holding foreign currency, Alt21 offers a hedging toolkit on the same platform. Forward contracts, FX Options and other hedging products are available alongside spot FX, limit orders and multi-level payment authorisation. This removes the need to move funds between a payments provider and a separate FX/hedging provider. For more on what to look for in a hedging platform, see our guide on FX hedging software for UK businesses.
Alt21 is authorised and regulated by the Financial Conduct Authority under both MiFID and the Payment Services Directive, covering both derivative products and payment services.
Ready to simplify your international payments? Open an Alt21 account.
Frequently asked questions
Is a virtual IBAN the same as a bank account?
No. A virtual IBAN routes payments to a master account held by the provider. Your balance is a ledger entry within that account, not a standalone deposit at a bank. Funds are protected through safeguarding rather than the FSCS deposit protection scheme. From the sender’s perspective, however, a virtual IBAN looks and behaves like a standard IBAN.
Can I receive SEPA payments with a virtual IBAN?
Yes, provided the EUR IBAN issued by your provider is SEPA-routable. Most providers issue EUR IBANs with a eurozone country prefix (such as DE or NL) that allows receipt of SEPA Credit Transfers and in some cases SEPA Instant. Check with the provider which SEPA schemes are supported.
What is IBAN discrimination?
IBAN discrimination occurs when a bank or payment provider rejects a payment because the receiving IBAN carries a country prefix from a jurisdiction the sender’s bank does not recognise or accept. IBANs with Lithuanian (LT) prefixes are most commonly affected. SEPA regulations prohibit this practice, but enforcement varies. Testing your IBAN with key counterparties before relying on it for regular payments is advisable.
What is the difference between a virtual IBAN and a multi-currency account?
The terms overlap. A virtual IBAN is the identifier that lets you receive payments. A multi-currency account is the broader product: the ability to hold, convert and pay out in multiple currencies. Most providers that offer one also offer the other. The question to ask is not which label applies but whether the provider gives you local receiving details, the ability to hold balances in the currencies you need and control over when and how you convert.
Are virtual IBANs safe?
Virtual IBANs issued by FCA-authorised providers are subject to regulatory safeguarding requirements. Customer funds must be segregated from the provider’s own funds and held in designated accounts at authorised credit institutions. The FCA has strengthened these requirements significantly. However, safeguarding is a different protection mechanism from the FSCS deposit guarantee that applies to bank deposits. Understanding how your provider holds and protects your funds is an important part of the evaluation.
For full details of how Alt21 safeguards client funds, see the Payment Terms and Conditions.
Alt 21 Limited is authorised and regulated by the Financial Conduct Authority (FRN: 783837). Alt 21 Limited is registered in England and Wales (10723112). Alt 21 Limited is not a bank or an e-money institution; it is an Authorised Payment Institution under the Payment Services Regulations 2017. The registered address is 45 Eagle Street, London WC1R 4FS, United Kingdom. This article has been produced by ALT 21 Limited for information purposes only. It does not constitute financial advice or an offer to sell or the solicitation of an offer to buy any products referenced. Hedging products are not suitable for every business. Before entering into any FX product, you should consider whether it is appropriate for your needs and circumstances. ALT 21 Limited assumes no liability for errors, inaccuracies or omissions. Eligibility criteria and terms and conditions apply to all products and services offered by ALT 21 Limited. Not all applications will be accepted.
