The views expressed in this article are solely those of the author and should not be attributed to the European Payments Council.

We continue our series of European payment landscapes with a profile of Estonia. Estonia is a frontrunner for card payments, and its PSP community was among the first to adhere to the Single Euro Payments Area (SEPA) Instant Credit Transfer (SCT Inst) in 2017. We interviewed Rainer Olt from Eesti Pank to learn more about payments in his country. In addition, our infographic summarises all you need to know about the Estonian payment landscape.

Q. Estonians are frequent card users. How do you explain this characteristic? 

Estonians rank highly for their use of cards and other non-cash payments because of their literacy in digital payments and the broad acceptance and use of cards without minimum thresholds. In the early 1990s, we built our financial and payments infrastructure from scratch using the best technologies available. Estonia set out to become a digital nation where banks acted as fintechs, advancing digital payment solutions and building up high expectations among payment service users. We had online banking in 1996 and mobile banking in 2000, and upgraded to electronic identification or e-ID and e-signatures in 2002 and smartphones in 2010. We were late to Near-Field-Communication (NFC) cards, but they are now coming rapidly into mass circulation.

Two behavioural factors have boosted the move to digital customer relations, in addition to technology. First, the banks start educating active users of cards and digital banking as young as six years old. Second, they systematically teach the elderly how to use digital solutions, and since 2009, pensions and social benefits have only been paid out electronically. 

Visits in person to the bank are no longer necessary, as all services are available from smartphones and tablets. Furthermore, the pandemic encouraged the use of digital payment solutions and e- or m-commerce. Now each resident makes an average of two or more online purchases a month.

Q. As Estonia is one of the countries pioneering SCT Inst, how would you describe its first years of experience processing SCT Inst transactions? What are the main lessons already learned and the next steps? 

SEPA instant payments have taken payments in Estonia to the speed that people demand in the digital and social media age. SEPA provided many benefits in 2014, but it slowed Estonia down, as customers were already used to instant payments within one bank and payments that took 30-60 minutes between banks during business hours. Today, we see a growing migration of inter-bank payment traffic from SCT to SCT Inst, which covered in excess of sixty percent of domestic and seventy percent of cross-border payments in August. 

Given the speed at which funds are transferred, banks had to introduce measures to mitigate fraud instantly. Today, the banks have re-introduced ‘name and IBAN conformity checks’ before crediting the payee’s account. From the payer’s perspective, however, it would be better to make this check before authorising the payment. It would be a good idea to enable it as an add-on to the SEPA Proxy Lookup (SPL), as the data needed are available in the databases. Boosting security would provide a strong incentive for onboarding customers into the national proxy databases while also connecting those databases to the European SPL service.

Liquidity management requires an additional effort, but nevertheless, immediate settlement is more resilient than settlement cycles. In practice, a solution that would enable 24/7/365 central bank money liquidity management in instant payment systems would be welcomed. TARGET Instant Payment Settlement (TIPS) now aims to deliver this.

Instant payments are like real-time interactions on social media, therefore payment service users demand to be able to make or request payments instantly. Estonian banks are taking steps to meet this demand: this spring, the banks launched proxy payments at domestic level, and they are now taking action to deliver inter-bank Request-To-Pay services while also aiming to satisfy the needs of SMEs and micro-enterprises.

In sum, the key takeaway from Estonian banks is that providing SCT Inst as the new norm primarily ensures customer loyalty, and the solutions built on top are likely to bring new business. Because it is expensive to maintain both SCT and SCT Inst infrastructures in parallel, an overall upgrade to instant may be more efficient in the longer perspective and definitely greener! 

Q. Can you tell us more about the Estonian electronic identification (e-ID) and e-signature system? How can it be used for payments and to combat payment fraud? 

The Estonian e-ID and e-signature systems help combat fraud as a universal strong customer authentication (SCA) solution that is used by practically all citizens and e-residents. Thanks to the use of e-ID and e-signatures in combination with advanced mobile banking apps, Estonians do not need to visit banks physically. The customer relationship is digital. The most basic features are bank login and payment authorisation. The key advantage, however, is in enabling more automated processes for providing all financial services in digital form. It is possible to lease a car or even sign mortgage agreements remotely and digitally, for instance, though a visit to a notary still has to be made in person. 

The financial sector would benefit from using national e-IDs and e-signatures for Know Your Customer (KYC) purposes and from the secure transmission of original documents for customer due diligence. The legal framework already supports interoperability across Europe. The financial sector can use it, but would need to decide collectively how to make it work in practice. The time will surely come when Estonians and, for example, Belgians can use their national e-ID and e-signature to access digital financial and payment services in each other’s countries. 

NB! As most fraud occurs with manipulated invoices or fund requests, it would be wise to catalyse work on secure pan-European e-invoice presentment and payment solutions that build on the ISO 20022 request-to-pay standard as agreed at the ERPB level. 

Q. The Estonian banking sector has adopted a zero-tolerance approach to money laundering and terrorist financing. Can you tell us more about it? 

It is in all our interests at a European level to combat money laundering and terrorist financing. Trust in the Estonian financial sector has been put severely to the test over the years, though the credit institutions responsible have now ceased their activities in the Estonian market. The Anti Money Laundering (AML) and KYC requirements are today at the strongest level ever, as is transaction monitoring, but there is a boomerang effect. The low-risk appetites of the banks have caused a perceptible increase in client accounts being closed and bank clients finding it harder to open new accounts. This affects new start-up businesses.
 

Banks continue to upgrade their payment systems with more sophisticated solutions designed to identify suspicious transactions, but the key question is how to do this at the national level.

One option would be to use the granular payment statistics collected by Eesti Pank and, as an additional level of defence, to apply machine-learning solutions to identify money laundering and terrorist financing risks. Another, more ambitious option would be to apply this at the level of inter-bank payment systems. Research on this is ongoing.

Q. Finally, a broader question: how do you see Estonia’s payment landscape developing over the coming five years? 

First, banks in Estonia continue to be well capitalised and to have good profit margins thanks to the high level of digitalisation and automation. However, there is more competition from non-banks, which are finding niches in the payments landscape.

Second, the market is open and allows properly run businesses to operate while using new technological solutions to mitigate money laundering or terrorist financing risks by applying national-level screening on at least a daily basis. 

Third, SCT Inst is fully deployed as the new norm together with Request-To-Pay for consumers, small and medium-sized enterprises (SMEs) and micro-enterprises. In addition, digital banking wallets, e-invoices, e-receipts and contactless technologies have found a place in mainstream use. 

It is clear that the Estonian payments landscape has to continue to upgrade its platform solutions for commerce and payments so they can support a swift switch to non-face-to-face economic activity, as was the case during the pandemic this spring.

Infographic: The Estonian payment landscape (September 2020)

(Click to enlarge and download)