Baltic and Polish Payments and Collections
Accession to the European Union in May this year has put the payments and collection systems in the Baltic states of Estonia, Lithuania and Latvia as well as Poland under greater focus. With the increased cross-border trading and business opportunities that EU membership brings, the systems in place to support intra-EU and extra-EU trade through payments and collections are likely to experience greater volumes and more rapid change.
Despite some lingering (and misplaced) perceptions of Soviet-era infrastructure and systems, the reality is very different. Today the Baltic states of Latvia, Lithuania, Estonia, and Poland, have very modern information technology (IT) systems for national clearings and payments.
One of the paradoxes of being left behind the West in terms of electronic banking when the Soviet Union collapsed, is that banks in the Baltic states have leapfrogged a generation of IT systems. As such they are thankfully unencumbered with mainframe legacy systems that western European banks are still running and trying to phase out. Moreover, in all four countries there are clear trends that will rely on further investment in modern IT, most notably the growing use of electronic banking solutions, whether PC-based or internet-based.
And despite Estonia, Latvia, Lithuania and Poland now being members of the EU, their payment and collection systems for Euros, have yet to fully reflect this. To date transactions involving Euros are not equally priced nor are they fully accepted as a local payments. This will undoubtedly change, but exactly when is unclear. A timetable for the local clearing of Euro payments has not been set for Estonia, Latvia or Lithuania. Poland is the exception, next year, on March 1 2005, a new system to support settlement in Euros is scheduled to be introduced by the Polish Central Bank.
Arguably the most advanced of the Baltic states in terms of banking payments and collections is Estonia. Banks in the country continue to be willing to devote the resources to develop new payments and collection solutions for narrow market segments. While this is expected to continue over the short to medium term, increasing market maturity will limit the scope of innovation to the bigger, more profitable segments before 2010.
The dominant non-cash payment structure in Estonia is electronic for both domestic and foreign transactions. Of these, credit transfers are the most popular format followed by card payments. Direct debits remain very limited in use, partly as a result of the lack of a unified process between banks as to how to handle them. Internet banking is growing fast for corporate and retail customers. PC banking is used by limited companies with special requirements such as high numbers (over a thousand) of payments per day.
Local currency clearing is carried out through the Estonian Central Bank three times a day. For non-urgent transaction the DNS (file system) is used, for urgent payments Estonia’s RTGS (SWIFT) system is used. There is no float for domestic outgoing payments if submitted before the cut-off time of the last clearing of the day. There is no float for incoming payments. Settlement for international normal payments is T+2, for urgent it is T+1 and for express it is T+0 but only for USD and EUR.
Cross-border intra-company payments are treated differently according to the banks involved. If the banks are part of the same group or have a partnership arrangement, these transactions are process on the same value date and at a lower cost. If the banks involved do not have a suitable relationship, settlement takes two days or for a higher cost can still be settled on the same value date.
A variety of cash pooling services are available in Estonia including local zero balancing and notional pooling. Pooling can be built up in different ways to suit the needs of the customer, for example, pooling can be structured at two levels with a corporate client. Interest compensation pooling is not, however, available as other pooling solutions satisfy customer needs and there are no legal restrictions to build up a cash pool.
Latvia is the leading user of credit transfers of the three Baltic states, these account for over 60 per cent of all non-cash payments in the country. Conversely, payments by card is the lowest of the three in Latvia at around 35 per cent, however usage of cards is growing rapidly. Similarly direct debits, which were introduced a few years ago, are being increasingly used but remain at a low base. For medium and large corporates, electronic PC banking is the primary delivery channel. For smaller corporates, internet-based banking is developing rapidly.
Local currency clearing for normal transactions is conducted through the EKS Net Clearing System three times a day. For amounts over LVL50,000 and for express domestic payments, the SAMS-RTGS system is used. Unlike Estonia and Lithuania, Latvia typically has a one day float for normal domestic outgoing payments. However, if the payment is made before the first clearing session (11am) the transaction is usually effected the same day.
Normal international payments are conducted on a T+2 basis, urgent payments on T+1 and express on T+0 (for EUR and USD only). Cross-Border intra-company settlements occur on same day or T+1 depending on the time of the transaction and the environment of the settlement. If the banks involved are part of a single banking group, clients will benefit from faster settlement and lower costs. A wide variety of pooling solutions are available in Latvia. The most commonly used forms are interest compensation and notional pooling.
Credit transfers remain the dominant payment structure in terms of volume and value in Lithuania, with card payments in second place. The use of direct debits, as in Estonia and Latvia, is not wide but is increasing. The main delivery channels are PC banking and internet banking. Electronic payments are mostly used among large and medium size companies. The country’s LITAS settlement system is owned and operated by the Bank of Lithuania to support interbank transfers and net clearing between banks.
Local currency clearing is conducted through the Clearing Centre. There is no float for domestic outgoing payments if submitted before cut-off time. There is no float for incoming payments. Normal status international payments are cleared T+2, urgent payments T+1 and express payments T+0 (for EUR and USD only). EU payments are supported. Cross-border intra-group payments are settled on T+0.
Companies can take advantage of a variety of pooling options in Lithuania. These include both local and cross-border zero-balancing as well as interest compensation pooling To date, notional pooling is unavailable in Lithuania. Lithuania, along with Estonia and Latvia, is expected to introduce pan-Baltic compensation pooling programmes in the near future.
The overwhelming majority of payments (a little over 80 per cent) in Poland are effected by credit transfer. The balance of payments are made by cards, direct debts and cheques. The primary delivery channel for corporate banking is through electronic banking. Internet payments are growing rapidly and paper-based payments remain significant.
The normal payment system is ELIXIR, which is used by all banks and is owned by the national clearing house, KIR. All payments on this system are conducted electronically. ELIXIR has D value date and accounts for 95 per cent of transfers by value and 67.4 per cent of transfers by volume. There are three clearing sessions a day on the system. Urgent RTGS payments are conducted through the SORBNET services owned by NBP, the central bank. SORBNET is also used for MM settlements.
In addition, all payments in excess of one million Zloty must be made through the SORBNET system. There are, however, two exceptions, payments directed to the tax authorities and social insurance payments. Both of these payments go through the ELIXIR system. Cross-border payments are T+2 for both intra-group and intra-company transactions.
Pooling is possible for local currency deposits. There is no cross-border pooling in Poland to date. The Polish Bankers’ Association is working to remedy this situation but there are some tax implications which have to be resolved.