IBAN Debate Escalates After EC Exclusion From Payment Directive

BRUSSELS-The lack of a standard account number identifier required for the Payment Services Directive (PSD), which becomes law in Europe by November 2009, could slow down harmonization of the European payments landscape, officials say.

The European Commission (EC) is not including the International Bank Account Number (IBAN) as a standard requirement for identifying account numbers in the PSD. "While the IBAN was included as one of several options for identifying customers as part of the original draft of the PSD issued in 2005, it was excluded in the final version...there are no examples at all of what the payment system providers might use as identifiers in the final version," says Boston-based Susan Feinberg, research director, whole sale banking at research company TowerGroup.

Instead, firms will use different identification codes for different payments. "What will end up happening is that there will be two sets of identifiers, one for local domestic payments and one for cross-border European payments," says Feinberg. This means it will take longer for the adoption of the IBAN to be as widespread as people would want, and it will create difficulties for corporate clients, who will need to keep track of both sets of information, she comments.

The lack of a standard identifier also means the payments market remains fragmented. "The goal [of the PSD] is harmonization and creation of a single payments market. Not including a standard for identifying bank account numbers seems like a big gap, but it is not a step backwards, because it doesn't change the fact that IBANs are required for the single euro payments area (SEPA) transactions and cross-border euro transactions, for example," adds Feinberg.

While some countries, such as Luxembourg, have opted to use IBANs for local domestic payments, the PSD does not particularly encourage non-euro countries to adopt the use of IBANs.

In fact, the PSD specifically prohibits individual countries from mandating any specific format, so the legislation is going to leave it up to the industry to identify what will be used to identify customer account numbers in payments, says Feinberg. "This exclusion will slow down the implementation and acceptance of IBAN beyond where it is required for SEPA," she adds.

But London-based Nicholas Daniel, business development manager at payments reference data provider CB.Net, says the adoption of the IBAN standard will not be unduly affected by the lack of inclusion in the PSD. "The real issue is that the payments aspect of the PSD is prejudiced by the lack of understanding and clarity around the identification and routing of BICs and the lack of a definitive guide to reachability," he says.

The relevant parties did not agree on the inclusion of IBAN. Some suggested including it in the PSD was not practical or feasible as it would require the domestic payment systems to use their own formats and have different practices, together with the costs of implementing IBAN throughout the European Union.

Meanwhile, it has been suggested that the industry has not given the PSD enough attention. "There is so much happening in the payments environment that I think there is a case of being overwhelmed by all the change...Most banks have worked on the PSD as a compliance exercise and they are only just now starting to understand that it will have a very big business impact on them in terms of how they offer their products and services and what kinds of service levels they offer to their customers," says Feinberg.

In fact, the PSD is much broader than SEPA-it is a legal framework and is also affecting existing domestic payment systems in all European currencies, resulting in changes to payments systems across Europe.

"All the existing legal contracts between corporate clients and their banks will have to be torn up and rewritten because of the terms of the PSD. As a result it is going to have a very significant impact not only from a technology perspective, but also from a business perspective," says Feinberg.

Carla Mangado