EBA Reports on Virtual IBANs

NL Law
EU Law

The European Banking Authority (EBA) published a Report on virtual IBANs (vIBANs) on 24 May 2024 in which it set outs characteristics and use cases of vIBANs and commented on identified risks associated with this development in the payments market. 

In this short read, Roderik Vrolijk and Maarten Weekenborg break down the EBA’s report and analyse how vIBANs could be or become a useful innovation for businesses. 

What are vIBANs? 

IBAN is an abbreviation for International Bank Account Number. The term refers to a bank account that follows ISO standard 13616-1. The IBAN standard is well-established as a form of account identifier for international payments. 

Conversely, there is currently no legal definition, technical standard or uniform understanding of the meaning of a vIBAN. According to the EBA’s report, however, vIBANs most commonly refer to an identifier that follows the same format as an IBAN and is linked to another separate account, referred to as a ‘master account’. The link between the vIBAN and its master account most commonly means that all incoming payments to the vIBAN are automatically rerouted to the master account, and in some cases a vIBAN can also be used to make outgoing payments from the associated master account. 

The link between a vIBAN and its master account is not visible for third parties. From a third party’s perspective, a vIBAN is therefore typically indistinguishable from a regular IBAN. 

Regulatory treatment of vIBANs 

No bespoke regulatory regime currently applies to vIBANs. Their place in the existing regulatory framework for payments in a broader sense is far from definitively settled. 

The regulatory treatment of vIBANs is currently surrounded by uncertainties down to the very core of their legal classification, because opinions differs as to whether a vIBAN is to be treated as an IBAN account in itself or merely as a secondary identifier for the master account IBAN. This has implications under several regulations in the payments sector, such as PSD21 and the SEPA Regulation2 . It also leads to uncertainties among financial institutions that offer vIBANs as to how the accounts should be treated in regulatory compliance measures efforts and in contacts with supervisory authorities.

The EBA furthermore observed that the non-transparent nature of vIBAN structures has been viewed by many supervisory authorities as an obstacle to effective monitoring and control by financial institutions, in particular in relation to risks of money laundering and terrorist financing. Supervisory authorities have also reported that the lack of visibility on the existence of vIBANs poses challenges in their supervision of financial institutions’ product offerings. 

A provision in the upcoming AML Regulation3 recently adopted by the European Parliament marks the first step in specifically regulating vIBANs. Banks and other financial institutions that issue vIBANs will be required to verifiably identify the user of each vIBAN they issue, as well as the master account with which the vIBAN is associated. Correspondingly, account servicing institutions for master accounts with a vIBAN linked to it will be required to ensure that the vIBAN issuer provides identification details on the end user of each vIBAN issued by it. Although this certainly is an important step towards legitimising vIBANs and mitigating the risks and challenges that follow from their non-transparent nature, the AML Regulation does not enter into force until mid-2027, which is still some time away. 

Usefulness of vIBANs 

The current regulatory landscape may leave businesses wondering whether vIBANs could be useful for them and whether now is a good time to explore those possibilities further. 

On the one hand, vIBANs can certainly serve a purpose in some types of businesses and organisations. For example, vIBANs can be a tool to streamline payment tracking or automate payment reconciliation by assigning individual vIBANs to specific uses (such as specific customers, business areas, projects or companies within a group). Another reason to consider using vIBANs is where a business experiences discrimination based on its IBAN having a country code that certain payers or payees view less favourably, or even refuse to transact with. 

On the other hand, there are also potential risks and challenges to consider for a business that sees potential benefits of having vIBANs. 

Currently, the absence of a bespoke legal or regulatory regime coupled with divergent views between national supervisors on a range of aspects relating to vIBANs leaves these products in a relatively precarious position. Users of vIBANs should expect to experience different treatment depending on where vIBANs are issued and used, and would therefore do well to inform themselves about the view taken on vIBANs in the specific jurisdiction(s) of relevance to them. Furthermore, the future developments in the legal and regulatory treatment of vIBANs is most uncertain, which leaves a risk that currently unforeseeable legislative changes could make vIBANs less attractive than they are today. 

For consumers, the use of vIBANs is also associated with additional risks stemming from some providers reportedly giving inaccurate information about which deposit guarantee scheme applies to deposits on their vIBANs. 

With this said, vIBANs may be an attractive opportunity to look into for some, despite the current risks and uncertainties. Meanwhile, those who prioritise foreseeability and stability may find that the landscape surrounding vIBANs is not yet reliable enough to firmly commit to this product.

Feel free to reach out to our team to learn more about this topic and what it could mean for your business from a financial regulatory perspective.

  • 1Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market.
  • 2Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euro.
  • 3Procedure ref. 2021/0239(COD).