The Estonian payment market
How many of us still remember the days when you actually had to go to a bank or to the electricity company to pay your electricity bill? Or when you could only pay with cash in a shop? But in fact it was only 25 years ago. As technology has developed, so electronic banking has moved forward so fast that today paying by card or using online banking is as commonplace for us as using the telephone or public transport, and fewer than one in ten of the Estonian population remain dedicated users of cash. The payment market is continually developing further though, and in recent years there have been several important changes and advances:
In 2014 Estonia became a member of the Single Euro Payment Area (SEPA), which essentially allows payments to be made internationally at the same speed and for the same price as they are domestically.
E-state. E-payment recipients. E-invoices
The Estonian state manages financial matters with its own citizens mainly through e-channels. State benefits and subsidies and pensions are mainly paid directly to bank accounts. Everyday banking has moved onto the internet and people go to their local bank office much less often. It has been possible for some time now to get a new bank card or apply for a loan without moving away from the computer at home. Since 2017 it has even been possible to open a bank account using a video link and without actually going into the bank office.
One important initiative by the state has been to transition away from expensive and time-consuming paper and PDF invoices to e-invoices. The Estonian state is quite advanced in this because the public sector refuses to accept anything that is not an e-invoice. Anybody can order e-invoice standing orders to make regular payments and save themselves having to remember payment deadlines each month and avoid their inbox being full of payment reminders.
Contactless bank cards started to be issued in Estonia in 2016. At first they could be used for payments of up to 10 euros, but now payments of up to 25 euros can be made without inserting a card into the PIN payment terminal. The limit for contactless payments is the same in most European countries, though it is smaller or even larger in a few, like Finland and Germany, where it is 50 euros. Larger payments even than that can be made without entering a PIN by using smart devices like watches or telephones.
The first Estonian banks joined the instant payment system in 2018. By now it seems perfectly natural for transfers to be made between different banks within seconds, day or night, every day of the year. For the clients of banks that have joined the instant payment system, this means that whether the payment is within a bank or between banks no longer makes any difference to the speed that the money is transferred at. The banks cannot rest on their laurels though, because solutions based on instant payments are already being developed that will add further options for payment on top of cards and cash.
Open banking will widen the set of providers of financial services and allow banks to share financial information securely and with client consent in order to allow clients more choices. Open banking will create new services, such as account information services and payment initiation services. The account information service will allow clients to use the website of their online bank or other payment service provider, such as FinTech companies and payment intermediaries, to see accounts in other banks, so that they can quickly and easily get a total picture of all their spending and the state of their accounts. The payment initiation service will allow clients to start a payment in an online store directly from their bank account without using a credit or debit card or a bank link.
The instant movement of invoices and money requires payment and settlement systems to work together smoothly and without interruption.
The are a few payment and settlement systems that are important for Estonian consumers:
- The card payment system, which is a domestic system where transactions with cards issued by banks operating in Estonia are authorised and processed.
- STEP2, which is a pan-European SEPA payment system where the banks operating in Estonia settle transfers between banks. Payments are made between banks five times a day on working days.
- RT1, which is a pan-European SEPA instant payment system where the banks operating in Estonia settle instant transfers between banks. Payments are made between banks in just a few seconds on any day and at any time of day.
- TARGET2-Eesti, which is part of TARGET2, the pan-European real-time gross settlement system used to settle fast and large-value payments.
- The Estonian securities settlement system, where securities are settled using the single securities settlement platform of the Eurosystem, TARGET2-Securities (T2S), through a joint Estonian, Latvian and Lithuanian IT-platform.
Beyond this each bank has its own internal systems where a large share of payments are made between accounts held at that bank.
Some payment services are also provided by payment institutions, but the volume of payments that they handle is very small next to those of the credit institutions.
Residents of Estonia prefer to pay by card, but it is still important for cash to be easily accessible.
Surveys have shown that seven people out of ten in Estonia always or usually prefer to pay for their purchases using a bank card. Only one resident in ten is a dedicated user of cash. This is similar to the picture in the Nordic countries and there are only a few countries in Europe where people pay by card more often than they do in Estonia. Cash is still clearly important though, as it is a good alternative to card payments and is sometimes the only way of paying. Access to cash has recently improved substantially in Estonia. Ever more shops are working together with banks to allow a cashback withdrawal service from tills, which is especially important in rural areas.