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Barriers in using e-banking in payment system of bosnia and herzegovina and other transitional countries.

Abstract: In recent years banks in banking system of Bosnia and Herzegovina (BH) have been working very hard on adoption modern technological innovations in their business. Specially, given bank's attention to introduce these new technological innovations, e-banking, seems like distribution channels of their financial products to their clients. This paper will analyze using of credit cards, ATM machines, POS terminals and Internet banking in payment system of BH and in other transitional countries. Also, this paper will analyze barriers in using of this instrument in payment system of BH.

Key words: e-banking, low computer literacy, low income, economic development, education

1. Introduction

Banks in thin one financial system like Bosnia and Herzegovina (BH), Croatia, Serbia, Macedonia and Estonia financial systems have an important role in financial intermediation between creditors and debtors, in development of financial markets and in monetary transmission mechanism. Financial system of Bosnia and Herzegovina is "bank dominated" system which means that in financial system dominated banks (credit institution). In Bosnia and Herzegovina assets of banking system present 71,8% of GDP in 2004, which illustrates the importance of financial services provided by banks relative to the size of economy. One of the main functions of banks in economy is clear and settles payments to facilitate trade and commerce (Sinkey, 2002). After reform of payment system in BH all payments go only through banking system. In that segment of their works, now banks use technological innovations like as automated teller machines (ATMs), point of sale (POS), and Internet banking.

E-banking is the provision of banking services by means of electronic data transfer between participants (Mishkin, 2004). Internet and telephone are major channels of e-banking. Internet banking is a term used for performing transactions, payments etc. over the Internet through a bank's secure website. In a same way clients may use ATMs or POS by using a plastic card with a magnetic stripe, which encodes the customer's account number, and by entering a personal identification number. An important aspect of Internet technology means high initial investments cost for banks.

Automated Teller Machines or 24-hour Tellers are electronic terminals that let you bank almost any time. To withdraw cash, make deposits, or transfer funds between accounts, you generally insert an ATM card and enter your PIN.

Personal Computer Banking lets you handle many banking transactions via your personal computer. For instance, you may use your computer to view your account balance, request transfers between accounts, and pay bills electronically.

Point-of-Sale Transfers let you pay for purchases with a debit card, which also may be your ATM card. The process is similar to using a credit card, with some important exceptions. While the process is fast and easy, a debit card purchase transfers money fairly quickly--from your bank account to the store's account. So it's important that you have funds in your account to cover your purchase.

Our hypothesis in this paper is that clients of BH's banks faintly use instrument of e-banking in payment system in relation with other selected transitional countries. The aim of this work is to analyze the reasons of small frequency in using e-banking in payment system. On the basis of those results we will give recommendation to improve that situation.

2. E-banking in payment system of Bosnia and Herzegovina

The Internet was introduced in BH in 1995 through the university line UTIC (University Tele-Information Centre). Several months later, BH PTT offered the service for its users. All IPS are in the state-owned PTT monopoly. Today, in BH 41 licensed Internet services providers exist (BH's Communication Regulatory Agency, 2005). The development of e-banking in banks of BH is linked on introducing to credit and debit cards in BH. 33 banks were operated in BH banking system on the end of 2004; from that number 32 commercial banks are included in payment system. Five years ago, the first ATM has been installed in payment system of BH. Using of e-banking in payment system of BH started with opening national banking system to foreign banks through process of privatization. Using Internet made payment simple. Twenty one banks in BH operate with credit cards. Between them 14 made card business operation with international cards. In comparison to 2003 a same number of BH's banks works with international cards, but 4 more included in theirs business domestic card. Analyzing frequency of using those instruments in payment system of BH we show share of ebanking payments in total value of transaction in payment system of BH in 2004, figure 1.

Also, it is important to say how in 2004 twenty banks offer theirs clients e-banking services, which are 4 banks more than in previous years. It is significantly that in BH we have in same period just 3.668 legal entities and 867 citizens as users of e-banking services. Now we will see in table 1 number of issued credit cards from banks in Bosnia and Herzegovina in September 2004.

From these data, it is clear that the total number of credit cards (local and international) in BH is increased for 95%. Same trends have other components of e-banking in payment system. Number of ATM machines was increased double if we made comparison with last analyze, number of installed POS terminals which is increased by 56% more than in previous analyze. In table 2 we made comparison in number of issued credit cards with others selected countries at the end of 2004.

In comparison with other countries, we find that clients of BH banks faintly use new payment instruments. In BH one domestic card BamCard and those international like Visa, Euro Cards and Diners Card exist. One bank in BH Central profit issued owns local credit card, and one more bank planning to do same in next period.

During the first nine months in 2004 there were more than six million transactions in the total value of 495 million Euro. Out of the value, around 224 million [euro] was realized through ATM (cash), around 205 million [euro] through POS terminals for payments in banks and stores as cash withdraws and around 67 million [euro] through POS terminals for the payment good in stores.

For example, in Estonia the total value of transaction made with e-banking instruments in the same period was 711 million [euro]. At the end of 2004, in BH cards were not a widespread payment method, used by nearly a 20% of BH's population or each fifth. For comparison, in Croatia on one man exists 1.5 credit cards.

From this data, it is clear, referred to BH that some of these selected countries have more than fourth to tenth times more installed ATM and POS terminal in same period. In BH, there are only 18 banks which offer their clients Internet banking. Decreasing number of banks' personal and number of branches is result of e-banking development in a country. In Bosnia and Herzegovina we can see in figure 2 that isn't case. It's clear that number of banks personnel and branches increasing even banks works hard on offering e-banking services to theirs clients.


Generally, we can say that banks in BH offer traditional financial products and services clients through Internet. Usually that is manipulation with theirs accounts, fund transfers and bill payment. Those banks' services present a group of base level e-banking. Also, we must say that a few banks don't have build web sites, what means e-banking in start of theirs developing. First phase of developing e-banking is banks possibility to offer information about banks' production and services to clients.

A few banks in BiH offer or will be in future in situation to offer services to clients as: brokering, chase management, applying credit request, credit and debit card, financial advertising, online trade, request and information, tax services, e-commerce, investment, assets management. All these services which are offering through Internet made build top up based phase.

3. Barrier for faintly using e-banking instruments in payment system of Bosnia and Herzegovina Banks in BH have got rather small number of clients for which is performed e-banking.

There are a few reasons for which e-banking instruments in payment system are faintly using in banks of BH. The fact is that big banks mostly in foreign ownership and small banks in domestic private ownership supply their clients with products which included technological innovation in payment system. Where are the problems than? Problems in using modern technological innovation in payment system of BH are mostly on one side--clients. We will emphasize the main problems:

1. low computer literacy

2. low income

3. small number of Internet access

First and the most important barrier is availability, which is connected with the affluence of the population. Personal computers and mobile phones are not affordable for the most of the population in BiH. Hardware prices are high; one PC costs approximately 770 euro or more depending on the quality. Average net salary in the Federation of BiH is 284 euro and in Republic of Srpska [euro] 232, basket of necessary products cost 237 [euro], so it is obvious why the new media is not widely introduced. The users of computers are mostly:

1. high school and university students

2. primary school students

3. middle-aged people

4. foreigners.

Most Internet users in BH are young: the average age is 27 years. The women/men ratio is 1:2 (Vockic-Avdagic, 2005). Computer ownership in BH is six percent. In 2003 in BiH ware 274 mobile telephones and 26 Internet users o[10.sub.n]00 people what shows low development of IT sector and current economic situation (World Bank, 2005). Today, in BH 41 licensed Internet services providers exist (BH's Communication Regulatory Agency, 2005). According to RAK report results of the survey based on sample of 32 licensed ISPs providing services in BH, have shown that in Bosnia and Herzegovina there are 168.937 Internet subscribers, out of which some 14% are legal subjects. Based on these data, the average number of household members and the average number of employees in legal subjects in BH, overall penetration of users of Internet services is 19.9% (770.898 users), i.e. every 5th BiH citizen has an Internet access.

Another barrier to the development of e-banking in BH is the lack of client's trust in banks, and even more so in Internet banks. An important barrier to the development of this form of payment like banking services is the security barrier. We are talking about an operation risk which are results of using e-banking. Services provided by banks through new channels of distribution should contain security mechanisms, not allowing unauthorized individuals to perform account transactions, protecting. Furthermore, the development of e-banking may be limited by profitability, which is related to the high costs of e-banking for banks, who implement it, and for clients, who use it. Monthly price for using 20 hours of Internet in 2004 in BH was 7 USA $, in Croatia 14 USA $, Macedonia 19 USA $, Serbia and Montenegro 13 USA $ and Estonia 14 USA $.

A certain impediment to the development of e-banking is the lack of detailed legal regulations protecting the interests of e-banking users and consequently increasing the security of concluded operations. E-banking expose banks to different kind of risks governance, legal, operational, and reputational same as in traditional banking.

Governance risk present wrong objectives settings and unknowing whether they have been achieved by management.

Legal risk arises from the potential that unenforceable contracts, lawsuits, or adverse judgements can disrupt or otherwise negatively affect the operations or condition of a banking organization.

Operational risk present risk from direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.

Reputational risk is the potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.

Additionally to mentioned risks, banking regulators are faced with new challenges after introducing IT. In response national regulators must modify their regulations to achieve their main objectives: increasing the safety and soundness of the domestic banking system, promoting market discipline, and protecting customer rights and the public trust in the banking system. To help banks and supervisors expand their existing risk oversight policies and processes to cover their e-banking activities Basel Committee on Banking Supervision create Risk Management Principles for Electronic Banking. The Risk Management Principles for Electronic Banking fall into three board:

1. Board and Management Oversight

2. Security controls

3. Legal and Reputational Risk Management.

Board of Directors and senior management are responsible for developing the business strategy and effectively risk management in their banks. Also Board of Directors has the responsibility for ensuring that appropriate security controls processes are in the place for e-banking. To minimise legal and reputational risk associated with e-banking activities, bank must insure that adequate information is provided in their websites to allow consumers to make informed conclusions about identity and regulatory status of the bank before they enter into e-banking.

4. Conclusion

To improve use of e-banking in payment system of BH, it's very important to formulate and to realize poverty reduction strategy which must be based on strong economy growth. On that way people in BH will increase demand and using e-banking.

Computer literacy in BH is very low and that is the second problem which must be solved. For that reason it's an important to raise a computer literacy in BH.

This aim may be realized with the government supported programs in secondary schools for increasing computer skills and knowledge. It's important to secure a solid information-technology infrastructure and to develop an IT service industry. Cheaper computer prices, cultural acceptance of the Internet are influencing the online surge of new users.

On the other side, banks in their marketing plans must work on promotion and informing their clients how to use a new technological innovation in banks business.

Bank's promotion plan must show benefits of new instruments in banking supply. The most important thing in using e-banking services for clients is save their time. Also, it's important for supervisors to formulate and implement efficiency strategy and procedures for supervise e-banking activities of BH banks. In that job supervisors must include standards which are given by the Bank for International Settlement Basel. The Committee noted that e-banking increasing and modifying some of the traditional risks.

5. References

CBBH (Central bank of Bosnia and Herzegovina), (2005). Annual report of CBBH. Available from: Accessed: 2005-06-20

BIS (Bank for International Settlement), (2003). Risk Management Principles for Electronic Banking. Available from: Accessed: 2005-05-05 Federation of the Bosnia and Herzegovina, Federal Office of Statistic. Major Indicators of Economic and Other Trends, Available from: Accessed: 2005-06-05

Mishkin, F. (2004). The Economics of Money, Banking and Financial Markets, Addison Wesly, ISBN 0-321-20463-8, New York

Sinkey, J. (2002). Commercial Bank Financial Managment--In the Financial-services Industry, Prentice Hall, ISBN 0-13-090910-6, New Jersey

Vockic-Avdagic, J. (2005). The Internet and the Public in Bosnia-Herzegovina, Available from: Accessed:2005-05-05

World Bank, (2005). World Development Indicators, Available from: wdi2005/wditext/section5.htm Accessed: 2005-06-2

Authors' data: M.Sc. Zivko I.[gor], Faculty of Economics Mostar, University of Mostar, BiH,

This Publication has to be referred as: Zivko I. (2006). Barriers in using e-banking in payment system of Bosnia and Herzegovina and other transitional countries, Chapter 53 in DAAAM International Scientific Book 2006, B. Katalinic (Ed.), Published by DAAAM International, ISBN 3-901509-47-X, ISSN 1726-9687, Vienna, Austria

DOI: 10.2507/daaam.scibook.2006.53
Table 1. Number of total issued credit cards in Bosnia and Herzegovina.

Time period Number of credit cards

June 2003 348.404
September 2004 678.843

Table 2. Number of issued credit cards in Croatia, Serbia
and Montenegro, Macedonia and Estonia at the end of 2004.

Country Issued credit cards on the end of 2004.

Croatia 6.360.954
Serbia 2.500.000
Macedonia 127.905
Estonia 1.536.135

Table 3. Number of ATMs and POS in Bosnia and Herzegovina,
Croatia, Serbia and Montenegro, Macedonia and Estonia.

Country Number of ATMs and POS
 on the end of 2004


Bosnia and Herzegovina 253 5.697
Croatia 1.919 41.760
Serbia 400 15.000
Macedonia 131 4.860
Estonia 779 11.113

Table 4. Number of computer and Internet users
per 1000 people in 2003 for selected countries.

Country Number of computer Number of Internet
 per 1000 people users per 1000 people

Croatia 173,8 232
Estonia 440 444
Macedonia -- --
Serbia 27,1 79

Fig. 1. Share of e-banking payments instruments in total value of
transactions in payments system of BH.

Share of e-banking payments instruments in total value of
transactions in payment system of BiH

value of e-banking
transactions in
system of BiH 4%

value of
transactions in
system of BiH 100%

Note: Table made from pie chart.
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Author:Zivko, Igor
Publication:DAAAM International Scientific Book
Article Type:Report
Geographic Code:4EXBO
Date:Jan 1, 2006
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