The concept of a unified European financial space, where money flows freely across borders, is foundational to the Single Euro Payments Area (SEPA). However, IBAN discrimination continues to have broad implications for businesses, consumers, and the fintech sector across the European Union. Despite the clear regulations against such practices, the lack of enforcement and penalties have undermined the EU’s vision of financial unity.

What is IBAN discrimination?

IBAN discrimination involves banks refusing to process transactions based on the country prefix of an International Bank Account Number (IBAN). This violates SEPA regulations and places undue burdens on individuals and businesses.

A 2021 European Commission report reveals ongoing IBAN discrimination within the EU. The report highlights various forms—from outright refusal to accept payments from accounts with particular SEPA member states’ IBANs and imposition of higher fees for cross-border transactions, to payroll payments being blocked due to the IBAN’s country code.

The causes of IBAN discrimination at individual banks are not always clear, but potential explanations include perceived risks linked to the counterparty’s SEPA country or internal bank processes unrelated to established policies. Fundamentally, the issue shows the challenges in harmonising banking practices across diverse national contexts with varying degrees of risk tolerance and regulatory compliance.

The effects of IBAN discrimination

The repercussions of IBAN discrimination are far-reaching, especially in Europe’s current challenging macroeconomic climate. The uncertainty associated with promptly sending or receiving payments between SEPA participants can result in late payments, strained relationships with suppliers, and overall financial instability. The risks of IBAN discrimination create unnecessary friction for businesses expanding across the block, taking away from the EU’s goal for the single market.

For consumers, IBAN discrimination is equally disruptive. European citizens residing in countries different from their origin often face hurdles in receiving salary payments or accessing goods or services from ecommerce vendors across the EU. This not only complicates their personal financial management but also places unnecessary barriers to mobility and economic integration within the EU.

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It is also hampering the development of open banking across the EU. Fintechs building payment networks, banking infrastructure and other financial tools across the block are struggling to bring products to market due to inconsistent success rates of SEPA transactions. Creating an open banking ecosystem, a goal repeatedly set out by the EU’s European Commission, requires a fast, reliable and universal payments network to enable further innovation.

Multinational banks are also feeling the strain, facing more challenges as they try to deploy consumer payment products across EU markets. Once again, the ideal of an open and collaborative EU single market is degraded by IBAN discrimination.

How the EU can move forward

Regulation already exists to prevent IBAN discrimination but there is no penalty for banks which violate this rule for SEPA Euro transactions. Introducing fines or other regulatory penalties could incentivise banks across the EU to put IBAN discrimination to bed for good. Rules are not enough without enforcement, and to address the issue, it is not further regulation which is needed – but instead, proper enforcement.

In the meantime, fintechs are forging a path ahead. One of the most common workarounds involves opening an entity in each European member state, enabling access to local IBANs. Fintechs are also striking partnerships with local banks to access local IBANs without costly regulatory compliance burdens.

fintech coalition formed in 2021 has upped the ante with an activist approach, directing consumers to the “Accept my IBAN” webpage to file complaints with the European Commission. The complaints, which reached almost 2000 in one year, mount pressure on the offending banks to comply with SEPA regulations and enable open banking in the EU to thrive.

By creating alternative pathways for transactions and pressuring regulatory bodies through collective action and public reporting, fintech companies are at the forefront of advocating for a more inclusive and efficient European financial ecosystem.

In conclusion, IBAN discrimination is a hurdle to achieving the EU’s aspiration of a unified financial space. Ultimately, a joint effort by regulatory bodies, financial institutions, and the fintech community is crucial to eradicate IBAN discrimination and create a truly integrated European financial system, promoting open banking and other innovative financial products.

Maya Kumar is EVP, Business Development, Banked