Category Archives: SEPA

A Single Euro Payments Area but no free movement of bank-accounts

As of 1 February 2014 people in the European Union will have to use a lot more ink to fill out bank-account numbers. The International Bank Account Number (IBAN), formerly reserved for cross-border transfer of money, will be the new standard for everyone wanting to transfer money from one account to another, irrespective of a cross-border element. This means that some people in Europe will have to remember up to 31 characters (though the average of the IBAN numbers is closer to 20 characters). For your trouble you may rejoice in the fact that we should then be “one step closer to a proper functioning of the internal market” (Regulation No. 260/2012). A step closer, but a small one at best.

BACKGROUND

Making IBAN the standard for all accounts with European banks follows from EU Regulation No. 260/2012, which aims at advancing towards a Single Euro Payments Area (SEPA). In this area citizens, businesses and public authorities can make and receive payments in euro under the same basic conditions, rights and obligations, regardless of their location. The objective of SEPA is to increase efficiency and competition so that high-quality and competitively priced electronic payment products shall exist throughout the whole of the area.

Interestingly enough, the initiative of SEPA lies not with any of the EU institutions, but with the European Banking Industry, albeit with strong support of the European Commission and the European Central Bank. The SEPA project’s first success was the Direct Debit scheme, which enables consumers to make cross-border direct debit payments throughout all the SEPA countries. This provided consumers with easy payment of bills in other SEPA countries, from their home country by direct debit.

After this initial success, the European Commission did not consider the developments. The Commission also noted that not  all stakeholders were taken into account:

In particular consumer and other user interests have not been taken into account in a sufficient and transparent way. The voice of all relevant stakeholders should be heard.

The Commission thus took over, which led to Regulation No. 260/2012, which amended the earlier Regulation 924/2009 on cross-border payments in the Community.

Using IBAN as the standard, is considered to be “necessary for the proper functioning of the internal market” and will further that goal by increasing competition for (mainly) banks. This, as is often stated in favour of SEPA, will inevitably set a consolidation process in motion, with the resulting economies of scale leading to a lower cost price for payments. Which would be beneficial for consumers and businesses alike.

MY TWO QUESTIONS & CENTS

There are two things I do not understand about the upcoming change: (1) IBAN numbers were already in existence for those who wanted to make use of cross-border debits or credits, why would we need these for domestic debits and credits as well? (2) If advancing competition is the goal, then why no bank account number portability?

1. USE OF IBAN FOR DOMESTIC AND CROSS-BORDER TRANSFERS ALIKE

When the question came up whether the BIC, the Bank Identifier or SWIFT Code which locates the specific bank and helps the translation from IBAN to domestic bank, required in current cross-border transactions, should also come into play, it was specifically stated that:

BIC is required only in a very small, residual number of cases. It seems unjustified and excessively burdensome to oblige all payers and payees throughout the Union always to provide BIC in addition to IBAN for the small number of cases where this is currently necessary.

Whilst I understand that cross-border transactions which make use of IBAN without BIC are frequented more than those that do require such a code, one wonders why the movement towards a SEPA requires the sole use of IBAN. There is no reason to assume that for domestic transfers (within a single country) the IBAN ought to be used. Does this not also put an obligation to all payers and payees throughout the Union that is not necessary?

For cross-border transfers the IBAN is already used. Why not implement all that SEPA wishes to implement but leave out the necessity of going to IBAN for all transfers, including purely domestic ones? Removing hurdles for cross-border transfers is fine. I applaud the effort, but see no reason to extend it to purely domestic transfers. A 2012 Eurobarometer survey showed that 79% of people say they have not bought goods or services of any kind in another EU country over the past year. I suspect, that of the 21% that did, not an awful large part of all their payments was made up of those cross-border transfers, let alone direct credit/debit transfers, more-often a credit card will be used.

Inferences are drawn that a Single Euro Payments Area wishes to extinguish the difference between domestic and cross-border transfers, and therefore adheres to a single standard, that of IBAN. Such is closely tied to the competition argument, which brings me to my second question.

2. IF ADVANCING COMPETITION IS THE GOAL, WHY NOT INTRODUCE NUMBER PORTABILITY; A TRUE FREE MOVEMENT OF BANK-ACCOUNTS?

Had SEPA really wanted to make a step towards an increased competition, then the hurdles for setting up a bank account with another bank should be tackled as well, preferably by the ability to take your account number with you, to whichever bank you see fit, ie. number portability.

The Netherlands (and other Member States) have attempted to make the switching of bank accounts easier with introducing a 13-month switching period, in which you keep two accounts, your old and your new. You then have enough time to change your automatic credits and debits as well as inform all that need to know of your change of bank account. When the discussions in Dutch Parliament turned to the options available, the cheaper 13-month switching period was preferred over introducing number portability with its EUR 300-500 million price tag.

Part of the reason for these high costs was the fact that we had introduced IBAN not too long before that. Introducing number portability is not compatible with the IBAN system; as the latter is a number that is partly constructed by using the bank code. Number portability is therefore incompatible with IBAN. The Dutch Finance Minister at the time nevertheless was in favour of number portability. Yet, because the SEPA progress had already been in progress and EU involvement was present, the Minister considered this to be a matter of EU law, but stated he would do his best to bring number portability back on the table.

In Europe on the other hand, the lack of a Dutch implementation of number portability was an argument used by banking experts to oppose the introduction of EU-wide number portability. A somewhat circular reasoning if you ask me. From that same report is became clear that the banking sector is not in favour of number portability, due to the fact that their systems are designed for IBAN use, and a complete overhaul would cost an awful lot. Basically, had we wanted number portability we should have done it 20 years ago. Moreover, such a change would in their view still make it a burden for consumers (and companies) to change banks.

Also, banks would still need to carry out money laundering checks on new customers and branded products such as debit card and chequebooks would still need to be re-issued by the new bank, and debit cards would need to be re-issued in any case because they carry the International bank identifier number. Finally, account portability would remove the one-to-one relationship between a bank and a sort code, which is important, for example to identify which branch a cheque needs to be sent, and a ‘number portability’ remedy would increase the risk of fraud.

Consumers and companies do not, however, encounter difficulties with having to change a bank card in their wallet or throw out their old chequebook and replace it with a new one. No, the issue lies with having to inform all your debtors and creditors of the changed account. This is not mentioned by the banking experts, but is touched upon by the consumer experts.

In the summary of the public consultation on Bank Accounts, carried out by the Commission, one of the questions was particularly directed at switching bank accounts. It was asked:

What other measures [other than those directed at preventing misdirection of payment, AB] should be considered to improve bank account switching? Please describe.

Consumers and civil society
The majority of the stakeholders that replied to this question indicated that the introduction of bank account number portability offers the best solution, as it would eliminate the risk of misdirection of payments as well as most of the complications for consumers and third parties and would require only the banks concerned to make changes. As an intermediate solution, consumer organisations proposed to introduce a rerouting system, like the one currently in place in the Netherlands and in course of adoption in the UK. Stakeholders indicated that any long-term measure should focus on the portability of bank account numbers or the portability of customer account numbers linked to the underlying bank account numbers (like in the Swedish ‘Bankgiro’ system). Respondents also addressed the importance of ensuring compatibility between account number portability and the SEPA and IBAN frameworks, and called on the European Commission to launch an in-depth feasibility study on this topic.  (emphasis added, AB)

By maintaining the bank-code in the IBAN number enhanced competition is intrinsically hindered by the administrative hurdles of actually switching to competing bank. By opting for the  IBAN-number a step towards a Single Euro Payments Area has been made, but one that will not necessarily be followed (easily) by consumers or companies. In the 2012 Euro Barometer, a mere 5% of the respondents would consider switching to a bank in another country, as opposed to 7% six years earlier. The number has only decreased. Perhaps 1 February 2014 will change the tide, but I expect number portability would do more to that number than switching to IBAN for all transfers would.

One final thought, should competition soar, and people in large numbers change accounts from (traditional) domestic to banks in other countries, the effects of this large scale movement of bank accounts might require another inspection of the Deposit Guarantee System. In volatile economies, banks might not survive, and consumers could lose their deposits with the banks. EU regulation in this area exits, but perhaps requires a recalibration should large scale switching of bank accounts in EU take place.

FUTURE OUTLOOK

A Single European Payments Area has not been achieved yet as several areas have been left out of the scope of the Regulation. This leaves room for hope that in future legislation a truly competitive market will be achieved by implementing something of a free movement of bank-account numbers, which has been hinted at. Though, do not expect this in the upcoming 10 years. Nevertheless, I look forward to future developments in this area. For now, you have roughly 10 months to get used to your (new) account number.

 

This post has also been posted on: www.mepli.eu