How IBAN discrimination is holding back French fintech

Despite a booming scene for neobanking in France, progress is stalling owing to archaic practices with International Bank Account Numbers (IBANs), writes Selin Bucak in her first article for AltFi.

Digital banks face a major hurdle when expanding across borders in the European Union that places them at a significant disadvantage to local players in crowded markets like France.

France is one of the most advanced neobanking markets in Europe, coming only after the UK and Sweden, according to Exton Consulting. With more than 30 players – according to the most recent KPMG analysis – there is a lot of competition among neobanks including niche local players like Nickel, the bank for the underbanked; divisions of traditional banks like Boursorama, owned by Societe Generale; and more international operators like Revolut.

While Revolut and its German competitor N26 have been successful in client acquisition in France, with approximately one million and 1.75 million customers respectively, Nickel and Boursorama have a clear advantage: they can both offer clients a French International Bank Account Number (IBAN).

Anyone who has arrived in France without a French IBAN would have quickly noticed that it is necessary for everything from setting up direct debits to pay for utilities to receiving salaries. Even to receive reimbursements from the government for healthcare costs – which is how the universal healthcare system in France works – individuals need to have a French IBAN.

However, according to the Single Euro Payments Area regulation that was published in 2012 and came into effect in 2014, businesses in the EU have to accept any bank account number, regardless of which EU country it is from.

Several fintech companies have now banded together to speak out about the problem, launching an initiative called Accept My IBAN.

The coalition, led by Wise, includes wealth management platform Raisin, digital banks N26, Revolut, Starling and Fire; and fintech companies Sumup and Klarna.

“We have partnered with other institutions who are experiencing the same sort of problem…who all can see having these internal barriers are very counterproductive to the aims of a single market,” said Arunan Tharmarajah, head of Europe at Wise.

“If you operate in France – these barriers to smooth operation are really frustrating for us. What we really want to do is become as universally and fairly treated as a local bank. We offer the same services and want the same access rights. These barriers cause friction for us and the consumer. Then they have to go to a traditional bank, suffer high fees and hidden exchange rates.”

The main reason companies still refuse to accept IBANs from other countries, according to Tharmarajah, is a problem of infrastructure. Many of the merchants, such as utility companies, haven’t updated their systems, with some dating back to before the single market, and therefore cannot actually accept accounts from outside of France. The other reason is there is still some favouritism among companies preferring local banks.

The European Consumer Centre in France told AltFi that it has worked in cooperation with the French Ministry of Economy in recent years to solve this issue, and since last year has had barely any complaints about IBAN discrimination. But the lack of official complaints is not a good indicator of the problem as many consumers are unaware that the practice is illegal. In fact, Tharmarajah said that when Wise and others raised this issue with regulators, they often did not know the size and scale of the problem.

A spokesperson at the European Commission told AltFi that they are aware of the fact that many citizens and companies face refusals of cross-border SEPA credit transfers or direct debits. 

They added that the Commission “reminded national competent authorities of their enforcement obligations” in September and that they expect “them to swiftly investigate and remedy all breaches to the regulation by putting an immediate end to illegal activities and imposing appropriate sanctions. It will closely monitor cases of non-compliance and will launch any necessary infringement procedures”.

For N26’s chief banking officer Thomas Grosse, such discrimination stands in the way of client acquisition as customers will end up typically needing a second, local bank account.

“It obviously takes business away from us. It’s more cumbersome to apply for a second account, it costs extra money. And managing different bank accounts in parallel is not something consumers want to do,” he explained.

One solution the Berlin-headquartered group has come up with is setting up local branches in different countries. So far N26 has launched in Spain and Italy, deciding on the two markets because they were big enough.

But Grosse admits that setting up a local presence in different countries creates complexity and extra cost for the business.

“[You can] open 24 branches but the complexity would make it so inefficient and expensive we cannot offer our products in a competitive way because we would need to increase prices, which is not good for the consumer. Then what’s the benefit?”

He said the group is always looking at opening up more branches in Europe, but the smaller the country is, the more difficult it is to justify investing into a branch because of the costs involved.

Monese is one example of a neobank setting up operations in France and applying for a license in the country. When the digital bank launched in 2015 it was targeting a client-base very much in need: migrants and expats who were struggling to open accounts with traditional banks. Since its start in the UK, the digital bank has signed up at least two million customers, with 200,000 of these based in France, according to figures in 2020.

Despite the client acquisition, Michael Möglich, head of market development in Europe for Monese, said to “really double down in the market” they needed to provide banking as a local.

“One of the things [customers] told us is ‘your product is great, the instant set-up is very pragmatic, it can be free and low cost, but we’re struggling as we are operating with a non-French account number we’re facing friction, questions and refusal to accept this as a bank account from institutions and providers.’,” he recalled.

He admits that it wasn’t the “easiest thing in the world” to get a French license and it took a while, but the bank started to roll out French IBANs to its customers in 2020.

Although there are challenges, the French market continues to be attractive for digital banks like Monese, according to Möglich. Meanwhile, for customers a mobile-enabled, transparent service without the added bureaucracy of a traditional bank is appealing. But for many individuals, these international players will struggle to become main accounts until there is an end to IBAN discrimination.