to put it short: the merchant’s reasoning is bullshit.
It’s forbidden to discriminate IBANs in the EU.
Regulation (EU) No 260/2012 Article 9 Section 2:
A payee accepting a credit transfer or using a direct debit to collect funds from a payer holding a payment account located within the Union shall not specify the Member State in which that payment account is to be located, provided that the payment account is reachable in accordance with Article 3.
There is also an email address where you can report the IBAN discrimination: firstname.lastname@example.org