SUNANDO ROY – On Banking, Finance and Society

Virtual IBANs (vIBANs) have become a significant infrastructural innovation in contemporary payment systems, especially in the context of embedded finance, marketplace platforms, and cross‑border payment solutions. They enable payment service providers (PSPs) and other intermediaries to offer customers unique IBAN‑formatted identifiers without opening a fully segregated bank account for each user, thereby decoupling customer‑facing account identifiers from the underlying bank account structure. In practice, a vIBAN looks like an ordinary IBAN to the payer, but “behind the scenes” it routes into a pooled account operated by a bank or payment institution. As digital finance scales and non‑bank actors increasingly intermediate payments, vIBANs are being used to support scalability, interoperability, and efficient reconciliation, but their layered architecture also creates supervisory blind spots and governance challenges that regulators are actively trying to address.

What is a vIBAN?

A vIBAN is a unique IBAN‑formatted identifier that routes payments to an underlying master or pooled account held with a regulated financial institution, typically a bank or an authorised payment or e‑money institution. From the payer’s perspective, a vIBAN functions like a standard bank account number—payments are initiated and received using the IBAN string—but, operationally, funds are credited and debited on a central account, while the vIBAN is used at ledger level by the provider to attribute funds to specific end users or sub‑ledgers. Conceptually, this resembles the “virtual account” logic used in corporate cash management, but extended and productised for platform and retail use.

Crucially, a vIBAN is not, in itself, a bank account in the legal sense; it is an addressing and bookkeeping tool sitting on top of an underlying payment or deposit account. This distinction matters for consumer rights, deposit protection, and insolvency treatment, because regulatory protections attach to the underlying legal relationship, not to the mere existence of an IBAN‑formatted identifier. In the EU context, whether a structure involving vIBANs constitutes a “payment account” depends on the functional test under payment services legislation: if the arrangement is used for the execution of payment transactions, it may fall within the scope of payment services regulation even if funds are ultimately pooled.

Two broad models are observed internationally:

• Payment‑identification vIBANs: Virtual accounts used only to tag and reconcile incoming payments in a pooled account, with no capacity for the end user to initiate outgoing payments directly from the vIBAN.

• Transactional vIBANs (“full” vIBANs): vIBANs that function as payment accounts under a licensed payment service framework, supporting both incoming and outgoing transactions, sometimes combined with card issuing, FX, or other value‑added services.

Why vIBANs exist

vIBANs developed in response to structural frictions in payment systems and to the rise of platform‑based business models. Several drivers stand out:

• Barriers to direct scheme participation: Many fintechs and platforms cannot or do not wish to become direct participants in domestic payment systems. vIBANs allow them to “rent” scheme access via a sponsoring institution while maintaining customer‑level granularity in their own ledgers and interfaces.

• Cost and operational constraints: Opening and maintaining individual bank accounts for large user bases is expensive and operationally complex, given the need for onboarding, KYC, ongoing monitoring, and reporting. Pooled accounts with vIBAN sub‑ledgers offer economies of scale, especially for high‑volume, low‑value payments, while still enabling granular reconciliation.

• Demand for embedded and borderless payments: Marketplaces, platforms, and cross‑border service providers need instant, low‑cost, programmable payment tools that can be embedded into user journeys. vIBANs support this by providing “local” IBANs in multiple jurisdictions without requiring each front‑end provider to build full local banking infrastructure.

• Alignment with BaaS and outsourcing models: vIBANs are closely associated with banking‑as‑a‑service, white‑label banking, and agent/distributor structures in which regulated entities expose infrastructure via APIs to unregulated or less‑regulated front‑end firms. This makes existing outsourcing, agency, and third‑party risk management rules directly relevant to how vIBAN programmes are designed and supervised.

A typical example is a marketplace assigning each seller a vIBAN so that buyers can pay into a seller‑specific IBAN, while all flows settle into the marketplace’s pooled account at its partner bank. Internally, the marketplace uses the vIBAN to update seller balances, even though the legal account relationship is between the bank and the marketplace, not the bank and each seller.

Benefits of vIBANs

Operational efficiency

vIBANs allow providers to manage thousands or millions of customer payment relationships through a small number of underlying accounts, reducing onboarding friction, internal account maintenance overhead, and reconciliation complexity. For regulated institutions, this can simplify liquidity management and reporting, because they monitor a limited set of pooled accounts rather than an atomised book of individual customer accounts, while still supporting fine‑grained end‑user records at the virtual‑account level.

Faster and more transparent reconciliation

Each vIBAN uniquely identifies a payer, payee, or transaction stream, enabling automated reconciliation of incoming funds without manual reference matching or reliance on fragile remittance‑information conventions. This improves straight‑through processing and the quality of audit trails and exception handling, which is particularly valuable in high‑volume merchant acquiring, subscription billing, and marketplace disbursement models.

Financial inclusion and innovation

By lowering barriers to offering payment functionality—especially where direct scheme access or full banking licences are out of reach—vIBANs support fintech platforms, digital wallets, remittance providers, marketplaces, and other non‑bank actors that serve SMEs and underserved customer segments. When combined with proportionate licensing and safeguarding regimes, vIBAN‑based models can broaden access to domestic and cross‑border payment services without requiring each intermediary to become a fully fledged bank.

Enhanced customer experience

Customers receive a familiar IBAN‑based identifier that works with existing payment initiation channels such as online banking, payroll systems, and invoicing tools, limiting behavioural change and supporting trust. In cross‑border contexts, vIBANs can give users “local” receiving details in multiple jurisdictions (for example, a local IBAN in the euro area and another in the UK), reducing friction in B2B and B2C flows and improving the perceived legitimacy of the service.

Data and control

Because vIBANs can be allocated flexibly (e.g., per customer, per contract, per project, or per counterparty), they support more granular data collection and control over transaction flows. Providers can, for example, assign separate vIBANs for different business lines or partners, facilitating risk segmentation, reconciliations, and targeted monitoring. However, these data and control benefits must be balanced with compliance with data‑protection and privacy rules, particularly where profiling and behavioural analytics are involved.

Key regulatory risks and supervisory concerns

Despite their benefits, vIBANs introduce structural and governance risks that regulators are increasingly focused on mitigating. The core theme across many jurisdictions is that vIBANs do not sit outside existing rules; instead, they intensify questions about how those rules apply when multiple entities share functions along the value chain.

AML/CFT and financial crime risk

The central AML/CFT challenge in vIBAN structures is the fragmentation of roles. One entity may onboard and KYC the end user; another may operate the pooled account; a third may provide technical routing or front‑end services. This can lead to gaps or duplication in customer due diligence, particularly around beneficial ownership, risk assessment, and ongoing monitoring. It can also blur who is responsible for sanctions screening at onboarding and at each payment event, as well as who must file suspicious transaction reports or respond to law‑enforcement information requests.

Because vIBAN arrangements often support cross‑border flows and nested relationships, there is a risk that entities rely excessively on each other’s controls without clear oversight of the overall AML/CFT framework. This raises issues under standards for wire transfers and information on the payer and payee, as well as under broader guidance on digital identity and remote onboarding. Where vIBANs are used to scale quickly with light front‑end onboarding, supervisors are particularly concerned that risk‑based approaches are not being meaningfully applied in practice.

Accountability and legal clarity

In layered vIBAN structures, questions arise over who is the legal account provider, who is responsible for transaction execution and blocking, and who interfaces with law enforcement or supervisory authorities. At the customer interface, the user may perceive the platform or fintech as their “bank”, even though the legal account is held by a separate regulated institution and the platform is acting as an agent, distributor, or purely technical service provider.

Without clear contractual allocation of roles, there is a risk of regulatory arbitrage, where vIBANs are used to offer bank‑like functionality while attempting to shift or dilute regulatory responsibilities. Ambiguity over which entity is the “payment service provider” for regulatory purposes can undermine enforceability of rights related to execution times, error resolution, refund rights, and complaint handling. From a public‑policy perspective, regulators are increasingly unwilling to accept arrangements in which consumer‑facing entities present themselves as account providers while relying on a separate licensed entity “in the background” to absorb responsibility.

Consumer and deposit protection

Where vIBANs resemble payment or deposit accounts, regulators scrutinise how customer funds are protected and what rights users actually have. A critical distinction is between safeguarded client funds held by payment or e‑money institutions—typically segregated or otherwise protected from the institution’s own estate but not covered by deposit guarantee schemes—and deposits held by banks, which may be covered by deposit insurance up to certain limits but are not necessarily segregated by individual customer.

Users may infer “account‑like” protections (such as deposit guarantee coverage, statutory execution‑time rights, or chargeback‑style mechanisms) from the presence of an IBAN and from banking‑style branding, even when the product is legally a limited‑function payment instrument or a pure technical identifier. In insolvency scenarios, the legal characterisation of the underlying relationship determines whether end users have proprietary rights to funds, beneficial interests in safeguarded accounts, or merely unsecured claims. The existence of vIBANs does not itself guarantee segregation or priority in a wind‑down, which is why supervisors focus on how safeguarding and client‑asset protections are implemented in practice.

Payment system integrity

Because vIBANs provide indirect or nested access to payment systems, supervisors assess whether they undermine access criteria designed to manage systemic and operational risk. A single direct participant may sit on top of large numbers of vIBAN‑enabled programmes, significantly increasing the number of effective end users and transaction flows “behind” its participation. This can complicate the assessment of concentration, liquidity, and credit risk at the level of the payment system.

Large pooled accounts associated with vIBAN programmes can become single points of failure: an outage, de‑risking decision, or enforcement action affecting the sponsoring institution can disrupt entire platforms and ecosystems. Furthermore, complex routing chains and multiple intermediaries can complicate the application of rules on settlement finality and loss allocation, particularly when some entities are regulated in different jurisdictions or under different sectoral regimes.

Transparency and customer disclosure

Regulators increasingly expect customers to clearly understand whether they are receiving a full payment account, a virtual identifier linked to a pooled account, or a limited‑functionality product. Misleading or inconsistent terminology—for example, describing a vIBAN as a “bank account” without clarifying the underlying arrangements—can undermine informed consent and may constitute unfair or misleading commercial practice.

Clear, layered disclosures are therefore critical. These should specify, at a minimum: (i) who the regulated provider is; (ii) how and where funds are held; (iii) what protections apply and do not apply (e.g., safeguarding versus deposit guarantee); and (iv) how customers can raise complaints or seek redress. In addition, disclosures and marketing should align with the entity’s actual regulatory permissions and with the contractual allocation of responsibilities within the vIBAN chain.

Regulatory direction and emerging expectations

Globally, supervisory authorities do not typically seek to ban vIBANs as such. Instead, they are converging around a set of expectations that “discipline” vIBAN use within existing legal frameworks. Rather than creating a bespoke vIBAN regime, regulators tend to interpret and apply existing payment services, AML/CFT, outsourcing, operational resilience, and financial‑market‑infrastructure rules to these arrangements.

Several themes are emerging:

• Clear allocation of responsibilities: Contracts and governance documents should delineate which entity is responsible for each regulatory obligation, including onboarding, transaction monitoring, safeguarding, complaints handling, and reporting. This allocation should match the operational reality and not simply be a paper construct.

• End‑to‑end AML/CFT frameworks: AML/CFT controls should be designed on an end‑to‑end basis, covering all entities in the vIBAN chain, with clear policies for information‑sharing, escalation, and suspicious‑activity reporting. Supervisors expect each regulated entity to understand and manage the risks introduced by its partners and technical providers.

• Explicit treatment of customer funds: Where customer funds are held, the applicable regime—payment institution safeguarding, e‑money, or bank deposit protection—should be clearly defined, correctly implemented, and transparently communicated. This includes robust segregation mechanisms, reconciliations, and contingency planning to protect customer funds in stress or insolvency.

• Accurate customer disclosures: Product design, UX, and marketing materials should accurately reflect the legal nature and limitations of vIBAN‑based services. Regulators are increasingly attentive to discrepancies between how products are branded and how they are structured legally, particularly where this affects expectations on safety and recourse.

• Strong reconciliation, audit trails, and resilience: High‑quality reconciliation between vIBAN‑level ledgers and underlying accounts, coupled with robust audit trails, is becoming a baseline expectation. In parallel, regulators emphasise operational resilience, business continuity, and exit strategies for critical third‑party relationships that underpin vIBAN programmes.

Taken together, these expectations aim to preserve the benefits of vIBAN‑based innovation while ensuring that core safeguards around financial crime, consumer protection, and payment system stability are not eroded by complex layering.

Sum up

vIBANs are neither inherently risky nor merely technical artefacts. They present a regulatory design challenge at the intersection of payments infrastructure, consumer protection, and financial crime controls. Properly governed, vIBAN structures can enhance efficiency, financial inclusion, and competition by allowing non‑bank actors to connect safely to core payment systems and to offer tailored payment functionality to end users. Poorly structured, they risk obscuring accountability, weakening supervisory oversight, and eroding trust in the underlying payment infrastructure. The core regulatory task is therefore not to resist vIBANs, but to embed them coherently within existing legal and supervisory frameworks, clarifying responsibilities, protections, and expectations along the entire value chain.

Reference

Bank for International Settlements. 2012. Principles for Financial Market Infrastructures.Principles for Financial Market Infrastructures

European Banking Authority. 2019. Guidelines on Outsourcing Arrangements.Guidelines on outsourcing arrangements | European Banking Authority

European Parliament and Council. 2015. Regulation (EU) 2015/847 on Information Accompanying Transfers of Funds.Regulation – 2015/847 – EN – Funds Transfer Regulation – EUR-Lex

European Parliament and Council. 2015. Directive (EU) 2015/2366 on Payment Services (PSD2).Directive – 2015/2366 – EN – Payment Services Directive – EUR-Lex

Financial Action Task Force. 2019. Guidance on Digital Identity.Guidance-on-Digital-Identity.pdf

Grabowski, Michał. 2022. “Virtual IBAN as a Service in the Law of the European Union and Poland.” Journal of Risk and Financial Management 15 (12): 566.Virtual IBAN as a Service in the Law of the European Union and Poland