IBAN Discrimination Impact on Payments Market: Consumers and Businesses Dealing with Increased Transactional Friction

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The Single Euro Payments Area (SEPA), launched in 2008, was introduced to harmonise cashless transactions across Europe, with a single system for both domestic and international payment transfers. However, this has not put an end to IBAN discrimination which, although deemed illegal, is still a common occurrence obstructing transactions from non-local bank accounts. According to Simas Simanauskas, Partnerships Director at ConnectPay, cases of IBAN discrimination undermine the initiative’s aim to facilitate transactions as well as severely complicate payments for consumers and businesses alike.

In layman’s terms, IBAN discrimination occurs whenever an entity, part of the SEPA scheme, rejects a payment from a non-local bank account, even though it resides in a member country. For instance, a France-based business, which has a French bank account, being unable to accept payment because the client’s account is based in Germany.

According to Simanauskas, multiple underlying reasons may be at fault. Firstly, the legacy infrastructure; businesses are simply not incentivised to make costly infrastructure updates to accommodate foreign transactions.

“Utility companies, telecom and other large service providers have been operating way before member-states adopted the SEPA standard. Back then, their customers were local and fintech was hardly a phenomenon,” he commented. “Fast-forward 10 years and most of the people still have accounts at brick-and-mortar. Hence, the reluctance by some to re-design their all-encompassing systems and start accepting payments from other European countries.”

Individuals from EU countries, associated with higher anti-money laundering (AML) risks, may also encounter more problems when using their IBANs.

“This might be related to internal automated risk-management processes that assess individuals’ or companies’ AML risk based on a combination of factors, including the origin of an IBAN,” he noted. “That said, this should be addressed by introducing more thorough screening procedures – not declining all payments.”

The illegal practice of IBAN discrimination has resulted in increased friction in the market, most of which is felt by the consumers, who have become limited in their options and may have to find alternative payment methods. This undermines one of the main EU principles as well—the free movement of goods and services—as citizens cannot reap its benefits. This led market’s leading Fintechs, including ConnectPay, to create a joint initiative titled “Accept my IBAN”, whose purpose is to streamline reporting regarding discrimination cases.

“There are authorities and regulations in place to restrict these illegal practices, yet a big problem is that we do not know the full extent of it—numbers, frequency, and location,” Simanauskas explained, emphasising Fintech’s role as a watchdog for the EU market.

“As Fintechs, we are in a strategically good position to address the issue, as the inherent nature of our business allows us to remain flexible and collect, process, and respond quicker to cases of discrimination than, for example, governmental authorities, which are limited by complicated frameworks that slow down the response to such claims. Therefore, users that have had their payment rejected due to non-local IBAN are encouraged to report it,” Simanauskas concludes.

Since the introduction of acceptmyiban.org in mid-March last year, more than 1000 reports have been received. As such joint efforts continue to ensure that cases do not slip by authorities, IBAN discrimination may slow down in the future but will require a monolithic approach from both government bodies and private entities.