Annual Report 1996. Estonian Payment and Settlement System

The majority of inter-bank payments in Estonia are settled through the clearing centre of Eesti Pank, which since August 1993 also has a netting system. Besides credit institutions, the services of Eesti Pank's clearing centre are also used by the Central Depository for Securities and some non-resident financial institutions.

The Eesti Pank clearing centre processes both debit orders and credit orders. The processing is based on multilateral netting. All the credit (payer-originated) orders are electronic. The debit (beneficiary-originated) orders are both electronic and paper-based, although the latter account for less than 1% of the total number of orders. The system does not distinguish between large-scale and retail payments.

The payments are settled on the same day the orders are received. Multilateral netting falls into two phases. At the end of Phase 1 at 15.00 preliminary information is sent to participants on the sums received and paid out and on payments rejected because of the lack of money.

After receiving the results of Phase 1, the participants in the clearing have two hours in which to get money from the financial market to pay for the rejected orders. The money can be obtained from the inter-bank money market or through trading in the central bank's certificates of deposit (CD). At a certain penalty interest rate, the banks can also use part of their reserve requirement. There are no other sources for additional money.

At the end of Phase 2 at 17.00 the final settlement takes place. Those payment orders that could not be settled because of the liquidity problems of some participant will be rejected.

Table 37 (Number of electronic payments settled through Eesti Pank, between 1994 and 1996) brings a survey of the amount and structure of payments settled by the system. In 1996 the total turnover of the system was 212.2 billion kroons, nearly four times more than the volume of Estonia's GDP.

CHANGES IN THE SETTLEMENT SYSTEM IN 1996

The development of the financial sector and more expedient levelling of clearing risks demand the constant improvement of the payment and settlement system. The main change introduced for reducing financial risks consisted in measures aimed at increasing the liquidity buffers (see the Monetary Policy chapter, description of the operational framework).

In order to increase the credibility and reliability of the payment and settlement system, a new all-Estonian standard on the account number, reference number and payment order forms was introduced and its implementation started. To guarantee that the money would get from the payer to the beneficiary within a minimum of two banking days, definite settlement terms were assigned to payer credit institution and the beneficiary’s credit institution. Prerequisites were created for the abandoning of the practice of sending payment order copies on paper from the payer’s bank to the beneficiary’s bank.

In order to introduce the principle of self-financing in the payment and settlement system, a fee was introduced for the services of the central bank. Every transfer now costs 10 sents. For the credit institutions, the settlement account in the central bank is still free of charge but the settlement accounts of the subdivisions of banks are not. Imposing a charge on the latter served two purposes: equalizing the positions of credit institutions with only one settlement account with credit institutions having several settlement accounts, and, secondly, to make credit institutions with several settlement accounts put their liquidity management in order.

NON-CASH PAYMENT INSTRUMENTS

Every year the amount of payments made with the non-cash payment instruments has increased as compared to the cash payments. The non-cash means of payment include the credit order, direct debits, payment cheques and plastic cards.

The credit orders are mainly used by companies for settling inter-company debts, but an increasing number of private individuals too have come to prefer this payment instrument in paying large sums of money. The credit institutions have introduced a special service recently - the standing order - which enables to take care of regular payments. The standing order is most frequently used for the payment of loans and interests.

The direct debit is the beneficiary-originated payment for the transfer of a fixed sum of money from the account of the payer to the account of the beneficiary. The use and limitations of the direct debit have to be previously agreed upon by the payer and the beneficiary. On the Estonian non-cash payment instruments market the direct debit is still a novelty and its share is small as compared to the credit order, for example. The use of direct debits is at the moment also restricted by the fact that the payer and the beneficiary must have their accounts in one and the same credit institution. For the private persons, the direct debit is convenient for paying the rent, phone, electricity or some other bills.

Payment cheques have never played an important role in the Estonian market of payment instruments. However, there is a certain small group of people who prefer this way of payment. This group has not decreased over the past year although the share of payments made by cheque has decreased because the total number of payments with other instruments has increased.

Among the non-cash payment instruments, the popularity of plastic cards has increased the most in Estonia. The number of domestic plastic cards had increased 3.5 times and the number of international plastic cards was up 4.6 times at the end of 1996, as compared to the end of 1995 (see Table 38. Total amount of plastic cards and automatic teller machines, between 1994 and 1996). In the turnover, the biggest number of transactions were withdrawals of cash from the automatic teller machines. In 1995 withdrawals accounted for more than 98% of the turnover of plastic cards, and in 1996, approximately 95%. The reason for the decline was the increase in the number of companies accepting plastic cards for payments: as we can see from Table 38, the number of point-of-sale terminals increased by nearly five times in 1996.