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Fintechs and challenger banks including Wise, Klarna and Revolut have called for "clear rules, concrete actions and cooperation" to bring IBAN discrimination to a halt in the EU.
A “lack of enforcement, action, and strategy” to put an end to IBAN discrimination is leaving consumers without access to basic services when moving to or purchasing services in another EU member state, EU fintechs have warned in a new letter, which has been circulated on LinkedIn, to EU legislators.
IBAN, or International Bank Account Number, 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.
"The ban on IBAN discrimination is one of the clearest rules in financial services regulation, and it’s been around for nearly a decade, and yet, it still occurs on an incredibly wide scale," said Magali Van Bulck, founder of Accept My IBAN and head of policy (EMEA) at Wise.
In the letter, the nearly 30-strong coalition of fintechs has now warned that a lack of action makes companies perceive the EU as "a fragmented market where it is harder to do business".
"We urge policymakers and national competent authorities to take a new approach in combating the issue of IBAN discrimination — a practice that has been prohibited for nearly a decade, but which is still widespread across the EU and prevents consumers and businesses from making payments or getting paid," the letter says.
Fighting against IBAN discrimination
This is far from the first time that the fintech coalition has spoken out about IBAN discrimination.
In fact, co-signees of the latest letter were complaining to Vixio about this issue in March 2021, when the coalition launched the Accept My IBAN initiative.
The letter says that the Accept My IBAN initiative has collected feedback “every month” from hundreds of people complaining that they cannot pay for amenities such as phone contracts, rent, newspaper subscriptions, electricity bills, gym memberships or public transport.
“What is even more worrying is that in some cases, an IBAN starting with the ‘wrong’ letters can prevent consumers from receiving tax rebates, unemployment benefits, and social security payouts,” the fintechs state.
From an economic perspective, the coalition has also highlighted that IBAN discrimination is standing in the way of growth.
According to the letter, companies are prevented “from scaling across the EU as they are unable to pay their suppliers or receive payments from their customers”.
“To combat the prevalence of IBAN discrimination and the lack of enforcement, fintechs are having to dedicate a considerable amount of financial resources to localising their business and obtaining local IBANs,” the letter says, pointing out that this often comes with a requirement to set up a local office and hire local staff as opposed to “thinking globally and contributing to the growth of European champions”.
Is upcoming regulation a solution?
"There is just no excuse for this level of friction," said Van Bulck. "That’s why we’re calling on policymakers to tackle this. The Payments Package presents a unique opportunity to make IBAN discrimination a thing of the past for consumers across the Single Market. Step one is stronger enforcement and we look forward to seeing stronger action against discriminating entities."
The fintechs suggest that new legislation, such as the revised Payment Services Directive (PSD3) and the Payment Services Regulation (PSR) provide a good opportunity to shore up rules in the trading bloc.
“Co-legislators currently have an opportunity to address it through stronger language and better enforcement mechanisms,” the letter says.
Speaking to Vixio, TrueLayer’s Andrei Cazacu pointed out that refusing payments on the basis that they are cross-border within SEPA is explicitly prohibited for payment initiation services (PIS) in the draft PSR.
“There needs to be more there on the other types of discrimination, like the extra hurdles in the payment journey that discourage consumers,” said Cazacu, who heads up TrueLayer’s EU policy work.
“The updated rules need to be clear and explicit to cover all IBAN discrimination cases,” he said.
There are other ways the PSR could help, Cazacu added. For example, requiring national competent authorities to monitor IBAN discrimination and use their new enforcement measures to tackle it. “It will of course help if the rules are clear.”
The PSR, in particular, appears to incentivise tougher enforcement actions from national competent authorities. For example, it grants authorities powers to investigate potential infringements of the regulation and specifies sanctions for the breach of certain requirements.
It would not be challenging for co-legislators to hone in on this and make amendments to the PSR to more clearly set out IBAN discrimination tactics.
Sources in Brussels have previously told Vixio that in the run-up to next year’s elections, it is likely that co-legislators will want to focus on issues that can provide good consumer outcomes, with fraud being a core topic in negotiations over the PSD3 and PSR.
IBAN discrimination comes at a detriment to consumers in the EU as well, although may be more challenging to get on the agenda as the number of consumers it affects is much lower.
However, although the PSR could be a tool to prevent IBAN discrimination, it is likely to take years for new rules to be in place.
“The EBA [European Banking Authority] could already begin cracking down based on existing SEPA rules,” said Cazacu. “We need action, we need cooperation, and we don't need to wait years for PSR."
According to Van Bulck, some regulators say they will issue high fines or will look into tackling this practice.
For example, France now issues fines of up to €375,000, but campaigners are unaware of instances in which they have been used.
"We have a strong dialogue with a number of regulators, including Ireland, who are keen to ensure IBAN discrimination disappears," she explained.
Yet as with Cazacu, Van Bulck indicated that the the current rules are pretty clear.
"The real issue is two-fold. Consumers are unaware of their rights and if they are aware of their rights, figuring out where to complain is very hard. That's why, among other things, we're calling on authorities to create an EU-wide portal to make that part more straightforward.
"At the same time, expanding the ban to other EU currencies will help more consumers," she explained.
Fintechs call for stricter measures
In the letter, co-signees have outlined recommendations to improve the situation.
This includes tightening up existing rules. For example, although the SEPA Regulation addresses the issue of IBAN discrimination, there are no clear obligations for payment services providers, merchants or public authorities to accept non-local IBANs and to do so without friction.
Additionally, there is no effective framework for enforcement.
The letter says that it is essential to ensure that national competent authorities have adequate powers and resources to "proactively and rigorously fight" against IBAN discrimination.
"Since the introduction of the SEPA Regulation, many member states have delayed implementing any enforcement mechanisms, which has hampered the power of national competent authorities to act," the co-signees suggest, adding that it would be beneficial to introduce a harmonised, minimum level of sanctions for entities committing IBAN discrimination.
Further, the letter pushes for one single EU channel for reporting IBAN discrimination, arguing that this would not only benefit consumers, but also national competent authorities “particularly in Member States where several authorities are responsible, as they would be in a better position to both assess the extent of the issue, and coordinate a response”.
The fintechs have also called for regular monitoring of IBAN discrimination at the European and national level, and for the establishment of a more regular and formal forum, where policymakers and regulators regularly discuss the state of fighting against IBAN discrimination and share enforcement practices and information on the progress made.
The fintechs suggest that such a forum could also serve as an instrument to escalate certain cases if no action is taken at a national level.
"The establishment of a formal mechanism is crucial as the existing meeting conventions haven’t produced any results," the letter says.
"We strongly believe that consumers and businesses will benefit from a proactive approach towards fighting against IBAN discrimination and therefore clear rules and concrete actions are urgently needed."
