In a previous blog we answered the question ‘what is a BIC’ (Business/Bank Identifier Code) but we didn’t delve into the detail about what a BIC is used for.
As we saw in the last blog, a BIC is used to identify a specific business, most commonly a bank, and in some cases a specific department or location. BICs were first used to identify sender and recipient on the SWIFT inter-bank network. They are still sometimes called SWIFT codes and, in fact, SWIFT is still the registrar for them.
BICs are therefore used when it’s necessary to identify exactly a party of a transaction and are frequently used to help route payments; in some countries, such as the Netherlands and the UK the first four characters of a BIC form part of the IBAN (International Bank Account Number).
Most of the main uses of the BIC are financial. Here are five of the most important ones:
• Network address: the purpose of the BIC, first and foremost, was as an identifier for an entity on SWIFT’s inter-bank network. ISO9362 was created in part to give banks an address on the SWIFT. BICs are used in SWIFT messages, such as payments, securities and foreign exchange, and are a vital component in ensuring security and integrity: banks and businesses applying to connect to SWIFTNet must apply for their own BIC(s). These days some BICs are connected to the SWIFT network and some are unconnected.
• Postcode for payments: in addition to its use as a “phone number” on the SWIFT network, BICs have been used to specify the origin, intermediary and destination banks for international payments messages since the demise of the international payment by telex; as such they are a key part of the SWIFT message standards, such as MT101, MT103 and MT940. While the BIC doesn’t identify the exact account, it does get the payment to the right destination bank, in the same way a postcode routes a letter to the delivery office; it is the IBAN or domestic account number which corresponds to the full ‘address’ that gets the payment to the correct account.
• SEPA coordinates: Today, SEPA (Single Euro Payments Area) uses the BIC as a payments postcode and this is where most consumers will have encountered it. SEPA requires a BIC and an IBAN in the credit transfer and direct debit payments which flow between banks. Originally customers had to provide BICs but from 2016¹ they will be allowed to use just the IBAN.
• Unambiguous identifier: Because a BIC is a definite reference to a bank or business, BICs are also used to identify an entry, say in a directory. SEPA uses BICs to identify bank operations country by country and scheme by scheme which participate in SEPA. These BICs should not be used to route payments, but to check that a bank can receive a SEPA Direct Debit or Credit Transfer.
• Scheme-specific BIC: a bank can have many BICs; some register a BIC for every branch. BICs can also be registered for specific payment systems, such as CHAPS, TARGET2 or FedWire. In this case the BIC specifies a destination within a bank that those transactions should be sent to. For example, in the UK not every branch can accept CHAPS payment and in some cases CHAPS payments may be handled by a different, “sponsor” bank.
The BIC is a versatile identifier and has a life beyond the misconception that it’s just a SWIFT code. It’s important to understand that more than one BIC could be valid for a payment, depending on mechanism and where it’s used. And with the advent of IBAN-only payments for SEPA, consumers will no longer be obliged to remember them.
¹Eurozone from March 2016, Non-Eurozone from October 2016