If payments move, the economy functions

One of the functions of Eesti Pank is to ensure financial stability, i.e. solid and strong banking. To perform this function, we collect statistics about the activities of banks, carry out financial supervision (assess the risks of banking and implement the necessary policies) and monitor payment systems or, in other words, that money moves smoothly from one bank account to another and from one bank to another. Failures in movement of payments affect the functioning of the entire economy. For instance, if a salary is not transferred to an employee’s bank account on the specified date, the employee might be unable to pay invoices on time or make certain purchases. If a delay occurs through the fault of a bank in the movement of payments from one bank to another, the confidence of other banks in the bank in question decreases and this may consequently affect the entire banking and economy. Thus, the smooth functioning of payment systems is crucial to Eesti Pank.

But why is it Eesti Pank that has to perform the functions of a supervisor of payment systems and promoter of development? The reason is simple: such tasks can only be entrusted to an independent party. As Eesti Pank is liable for Estonia’s financial system as a whole, including the functioning of payments systems, it must also direct the development of the area.

Commercial banks play a significant role in the daily transfer of payments. While payments move quickly within a bank during a 24-hour period as well as on weekends and holidays, interbank payment systems only work during business hours and business days. Keeping these systems in operation outside of business hours would make the transferring of these payments considerably more expensive. However, it is possible to make payments in limited amounts between two bigger banks using a mobile payment option. Mobile payments work in the same manner as intrabank payments, thus it does not matter which day of the week or what time of day it is.

The interbank payment settlement systems are usually managed by the private sector, but there are some countries where this function is performed by the central bank. In Estonia Eesti Pank has managed settlement systems to date. From February 2014, when single payment rules and requirements enter into force throughout the European Union, the private sector will take this duty over from Eesti Pank – in other words, the European systems will be used to make interbank payments.

More and more payments are being made with bank cards in Estonia

Although people can pay for purchases in different ways – using jars of jam if the other party agrees to it – most settlements are actually made in money. It is much easier, more convenient and more secure. While in the last century people mostly preferred and were able to pay in cash, since the end of the 20th century electronic systems have been developed into such convenient and safe services that more and more people prefer to pay by bank card or make transfers over the Internet. According to a survey conducted by TNS Emor in 2013, a third of payers only or predominantly use cash in daily shopping in Estonia; the rest prefer to use payment cards. 99% of all the payments made via banks are electronic – just 1% are made with cash, cheques or bank transfers on paper.

In 2013 almost a million domestic payments with a total turnover of half a billion euros per day were made each day via banks in Estonia. There were around 600,000 card payments per day, forming nearly three-quarters of all domestic payments. Settlement of invoices over the Internet is also very popular in Estonia: almost 200,000 payments are transferred daily in the Internet bank environment. Invoices are also paid in cash outside banks, but no relevant statistical data are available.

Other payment methods (payment orders on paper, direct debits, standing orders, cash payments and cheques) are used to a small extent and their share in the total number of payments made via banks is approximately 17%.

Detailed statistics on payments made through banks

Bank transfers need good systems

At the beginning of the 1990s payment documents usually moved between banks on paper. Processing of payments was labour-intensive and time-consuming; it often took days. However, since the second half of the 1990s Estonia has used modern payment systems that make it possible to transfer payments from one bank to another within hours and within the same bank immediately, and the system also works on weekends and holidays.

In terms of making payments, Estonia has been one of the most successful countries in Europe and has in a sense been a little ahead of its time. But from 1 February 2014, all of the countries in the European Economic Area (the Member States of the European Union plus Iceland, Liechtenstein, Monaco, Norway and Switzerland) will make payments in the same manner. This means that payment systems must also meet the same conditions. This change affects the interbank payment system used in Estonia, as well.

From February 2014 Estonian domestic interbank payments will switch to the international payment systems used in Europe. While at present Eesti Pank observes the movement of money from one bank to another, hereafter this function will be performed by EBA Clearing, a private company managing STEP2 – one of the greatest pan-European interbank retail payment systems. This system is employed by most European countries, which means that domestic and international payments will move at the same pace and according to a similar price list. The introduction of the new system is primarily beneficial to those who manage their financial affairs at the international level.

Eesti Pank manages the real-time settlement system

In addition to the fact that each bank has one system for intrabank and another system for interbank settlements, the euro area also has a separate payment system for urgent real-time payments – TARGET2. The functioning of this system is ensured by central banks, i.e. Eesti Pank in Estonia. Payments are settled in five minutes using this system. TARGET2 is primarily intended for interbank transfers and the monetary policy operations of central banks, but banks can also execute time-critical payments orders of clients via the system.

Detailed statistical overview of settlements through the system

Estonia compared to other member states of the euro area

Payment habits differ among Member States of the euro area. To make a rough generalisation, technological development has been faster in the northern countries, where cash is used less than in the southern countries.

Cash continues to be the most important means of payment in making daily purchases in the euro area as a whole. This is due to several reasons. One is that it is possible to pay in cash anytime, anywhere. Cash is preferred by the elderly, because they are used to it. In addition, small amounts cannot be paid by bank card in all places in some countries, because there is a minimum amount established for card payments. Estonia does not have such a limitation and bank cards may be used for purchases as low as 50 cents.

Within the last ten years, the share of card transactions has grown substantially throughout the euro area. Estonia is one of the top three countries in the euro area (alongside Finland and Denmark) in terms of active bank card use. In Estonia 159 card payments are made per person per year; the European average is a mere 79.

The popularity of direct debits is growing in Europe. Compared to the average in the euro area, the use of direct debits is moderate in Estonia: while 56 direct debit transactions per person were made in the euro area on average in 2012, the corresponding figure was just 16 in Estonia.

Credit transfer orders that include, for instance, payments in the Internet bank, standing orders or payment orders on paper are losing importance in Estonia and across the euro area because the share of card payments is growing.

Cheques are still used elsewhere in Europe, but are rarely used or not used at all in Estonia.

E-money is increasingly a talking point. This is an electronic device that has a monetary value saved on it. E-money may exist in the form of a plastic card, a computer memory or another e-money device. It is primarily intended for daily payments of lesser value, e.g. paying for bus tickets, parking or newspapers. To date the share of such transactions has been small, and they are more common in Luxembourg and the Netherlands (accounting for 69% of all such transactions in the euro area).

Detailed information about research into virtual currencies