Has The Time Come To End IBAN Discrimination?

July 17, 2023
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IBAN discrimination is widespread across Europe, despite being illegal. The EU’s payments package released at the end of June aims to close a vital loophole, but there is a long road ahead to put an end to the costly practice.

IBAN discrimination is widespread across Europe, despite being illegal. The EU’s payments package released at the end of June aims to close a vital loophole, but there is a long road ahead to put an end to the costly practice.

International Bank Account Number (IBAN) discrimination is when an employer, tax authority or company refuses to accept a SEPA IBAN for euro payments when the customer’s bank account is located in another member state.

This practice has been illegal since 2014 when the SEPA Regulation came into effect, but in practice consumers are often turned away when they want to set up a direct debit or recurring payment using a foreign account.

For payment firms, this means extra friction and can result in failed cross-border payments for customers, who will then need to set up a local account with another financial institution.

Although the practice is against the law and goes against the ethos of the single market, experts say IBAN discrimination is still a widespread phenomenon across the bloc.

People are unaware of their rights

There could be various reasons why IBAN discrimination takes place, but experts agree that the largest obstacle is the lack of awareness that the practice is illegal.

“The first problem is that people are not aware of their rights, so they do not push back against that,” said Magali Van Bulck, head of EMEA policy at Wise.

“When a merchant comes back saying that the customer cannot pay because they need a local bank account, people just assume that the merchant or their financial institution is right.”

Similarly, many companies, especially smaller companies, might not be aware that what they are doing is illegal, and often this is because they use outdated systems.

Their debiting system, for example, will have the country code of the bank account number hard-coded in that system, so the customer cannot change it and pay with a non-local bank account, Van Bulck added.

There is also a “certain level of protectionism” to encourage customers to open bank accounts with national banks and providers, and a lack of enforcement from regulators.

The costs of IBAN discrimination

Many companies decide to add a local IBAN to overcome this issue. In July, N26 set up French IBAN accounts, while in May, Revolut announced that it has launched local IBANs for corporate clients in Ireland.

Although the cost of adding these IBANs can vary based on the market and the service the firm wants to offer, this process typically involves a significant investment.

“Assuming the company already has a banking licence in the EU, it can rely on the EU passporting regime which takes roughly three to six months to passport the licence to another country,” said Andrew Gómez, director at Lipis Advisors.

There are other costs as well. For example, the company has to set up a branch in that country, have senior managers and high-level employees working in that market and has to participate in the local clearing house, such as EBA Clearing or the domestic payment system, Gómez added.

This may include liquidity requirements at the national central bank and operational costs related to clearing the settlement cycles.

The path to ending IBAN discrimination

Although it is a slow-moving process, fintechs are keen to put an end to IBAN discrimination.

Wise is leading an "Accept My IBAN" campaign to raise awareness and collect data on the extent and nature of the issue.

Roughly 3,200 complaints logged on the campaign site show that IBAN discrimination is the most prevalent in France, which accounted for nearly one-third of the reported cases, followed by Spain (22 percent) and Germany (13 percent).

Across the EU, discrimination mostly occurs in the telecom and financial service sectors, each of which accounts for one-quarter of the complaints, but there may be differences depending on the country.

For instance, in Spain the largest culprits are telecom providers, accounting for nearly 43 percent of the complaints, while in France, the public sector leads the way with 26 percent.

Van Bulck said Wise is sharing its data with EU regulators, which is slowly starting to bear fruits.

For a long time, IBAN discrimination was not the top priority for national regulators, but it is becoming more of a core consumer issue as awareness grows.

Last year, the European Commission said it is “firmly committed” to ending this illegal practice and will take “robust enforcement actions” such as infringement procedures.

Over the last two years, member states such as France and Ireland have also said they will start cracking down on businesses that discriminate against foreign bank accounts.

Moreover, the EU’s Payment Services Regulation (PSR), proposed in June, will close the last potential loophole, as it confirms that open banking payments fall under the prohibition of IBAN discrimination.

“It is very clear that there will be no discrimination against non-local identifiers,” said Van Bulck.

“Now that this loophole is closed, the time is ripe for all of the national competent authorities to really look into this.”

Combined with its enforcement becoming a priority for supranational organisations, Van Bulck said that “hopefully, it will have a trickle-down effect”.

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