EFA view on virtual IBANs

The EFA is pleased to observe the ongoing work of the Council of the EU regarding the review of the Payment Services Directive and the new Payment Services Regulation (PSRD), and the progress made with regards to fraud prevention and mitigation. Recently, we have observed suggestions made regarding virtual IBANs, and would like to bring to your attention a few considerations regarding consequences that certain suggestions may have on the FinTech industry and innovation in the payments market.

The EFA supports the Anti-Money Laundering Regulation’s (AMLR) provisions requiring virtual IBAN
(vIBAN) issuers to identify the end-users of vIBANs and including vIBANs and their linked payment account to the Bank Register. These provisions will ensure adequate control and visibility/transparency.
● The EFA is concerned recent suggestions, in the context of the Payment Services Regulation (PSR)
mandating that the country code of the vIBAN matches the country code of the linked account with which it is associated do not strike the right balance between seeking to mitigate risk and encouraging
innovation and competition for European businesses and consumers. Such rules would severely limit the
Payment Institutions and Electronic Money Institutions (PIEMIs) ability to provide seamless cross-border
payment services for European consumers and businesses. In addition, they would limit the ability of
European businesses to truly leverage the EU Digital Single Market to offer their services across EU
Member States. The proposals would be a significant step backward in strengthening Europe’s
competitiveness, and we urge co-legislators not to adopt them.
● Instead, we propose alternative measures to address the potential risks perceived by the regulators, e.g., information exchange between industry and enforcement authorities, which is already successfully
applied in some member states.
● We further encourage co-legislators to adopt measures that would put an end to IBAN discrimination by including the recommendations from the European Forum for Innovation in Payments dated 12 February 2024 in the Level 1 text, and ultimately creating a new single European IBAN number.

IBAN discrimination & access to bank accounts

We are deeply concerned that IBAN discrimination is not fully understood or treated as a serious issue. Even today, businesses can struggle to accept payments to an account which country code differs from that of the consumer seeking to buy their products and services. Therefore, these end users depend on PSPs offering localised virtual IBANs to facilitate a significant share of transactions taking place in the EU and facilitating the EU economy.
It’s not just merchants who fall victim to IBAN discrimination. Many EU consumers struggle to pay or get paid when using a non-local IBAN. This can take the form of outright payment rejection, for example when a consumer tries to set up a direct debit to pay their internet provider or pay their taxes. Or it can take the form of friction, for example when a consumer is asked to go into the branch to authorise a payment to a non-local IBAN or when they have to authenticate an open banking payment multiple time.

The PSR does not contain meaningful provisions against IBAN discrimination, and we are concerned that the new proposals potentially remove one avenue that PIEMIs can pursue to overcome the widespread and underreported practice of IBAN discrimination – the use of vIBANs.
In our view, the proposals do not strike the right balance between mitigating alleged risks and enabling
competition and innovation. They would also stand in the way of a true Single Market for payments.
Under the proposed regime, PIEMIs would be required to obtain access to a payment account with a PSP in each Member State in which they are active or set up a branch (as explained below) in order to obtain local (or “virtual” IBANs).
Currently, the vast majority of PSP fintechs operate across EU borders on the basis of passporting under PSD2, by obtaining a licence in a Member State and a bank account with an ASPSP. The ability to obtain vIBANs to circumvent IBAN discrimination from corresponding PSPs is essential to their ability to provide services across the Single Market and grow.
Furthermore, given the experience under PSD2, which saw widespread unwarranted de-risking by credit
institutions that refused to provide payment accounts to PIEMIs. Thus, the EFA is alarmed that the current
vIBAN proposals may severely restrict the ability of PIEMIs to provide cross-border payment services for the benefit of payment service users.
Imposing restrictions such as having to obtain a bank account in each Member State they operate in would be a severe blow to European FinTech competitiveness, and would only benefit large, established, non-European incumbents. Obtaining a bank account in each Member State comes with significant overhead and resources and European FinTechs – particularly SMEs – cannot compete if required to obtain a bank account with a credit institution in each Member State in which they wish to provide seamless payment services. The alternative would be to set up a branch in each Member State, which comes at an even bigger cost and undoes the benefits of passporting across the Single Market.

The regulatory treatment of virtual IBANs

We believe that in order to ensure legal certainty for both providers and users of vIBANs, it is crucial to clarify that vIBANs are not payment accounts. What constitutes a payment account should be defined by the functionality that a product offers, for example for payment acquiring virtual IBANs simply help merchants receive bank transfers from their customers. This does not present the characteristics of what could be treated as a payment account. Leaving the regulatory treatment of virtual IBANs to national competent authorities will create divergence in the application of rules across EU member states and significantly impact how credit institutions, PIEMIs currently operate.
We are concerned about the suggestion to apply the ISO IBAN standard (ISO standard 13616) to vIBANs. New updates to the ISO standard might limit the options for PSPs to offer vIBANs to customers, even in the allowed use cases. For instance, with the ISO standard, it might become difficult in the future to differentiate between the master account holder and the vIBAN holder, which would make salary depositing impossible for the end customers.

The EFA is equally concerned of another recent suggestions, considering vIBAN accounts as payment accounts would mean that there should be a contractual relationship between the vIBAN issuer and the end users and this may prohibit the current sponsorship model as well as the issuing of vIBANs attributed to non-EU users.
This goes against current setups of our members with their banking partners or their established business
models. It would require our members to give up their entire customer database to banks they are also
competing with, which distorts competitions, hampers user privacy and requires additional costs.
Some of our members also issue EU vIBANs to non-EU citizens for the purpose of enabling customers to receive money internationally without the need for currency conversion. This saves customers money and also enables businesses to receive money from their customers more seamlessly and keep funds available for future transactions in that currency. To provide legal certainty, it’s crucial that the co-legislators classify that IBAN issuing enables “correspondent services” between PSPs. This would provide the necessary clarity, including the regulatory obligations associated with it, e.g., the obligation of the correspondent institution to be able to obtain information about the end customer of the respondent institution is already foreseen under the applicable regulatory framework. .
There are alternative measures to address the potential risks perceived by the regulators. This can be achieved through information exchange between industry and enforcement authorities, rather than an overall prohibition of innovative business models. For example, it is noteworthy that Lithuanian law enforcement and financial institutions have recently signed a memorandum of understanding to launch a new data and information sharing platform. This tool will significantly contribute to faster and more efficient investigation and prevention of various types of criminal acts. The new software will allow officers of the Lithuanian Police, the Financial Crimes Investigation Service, and the Special Investigations Service to promptly submit requests electronically and receive data from credit, electronic money and payment institutions and banks operating in Lithuania.

Fostering European payment methods

VIBANs are often used to facilitate account-to-account payments or bank transfers as a reliable, low-cost, and often European payment method. Therefore, we would like to encourage member states to consider the effects of limiting the use of vIBANs and consider alternative ways of mitigating potential risks and creating greater transparency, e.g., through greater reporting by PSPs to issuing ASPSPs on virtual IBAN use.

We would also encourage co-legislators to adopt measures that would put an end to IBAN discrimination. This could be achieved, at a minimum, by including the recommendations from the European Forum for Innovation in Payments dated 12 February 2024 in the Level 1 text. Specifically, these recommendations should compel member states to shift from a “waiting for complaints” approach to a proactive one, enhance communication efforts to raise awareness about IBAN discrimination, insist on the need to end it, establish clear access points for lodging IBAN discrimination complaints, and impose effective and dissuasive fines on offenders to provide clear incentives for making the necessary investments to achieve compliance as soon as possible. Ideally, we would like to see changes that introduce a new single European IBAN number, further strengthening the Single Market and Banking Union.

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