STATEMENT OF THE PURPUSE OBJECTIVE SCOPE AND LIMITATIONS OF THE STUDY

STATEMENT OF THE PURPUSE, OBJECTIVE, SCOPE, AND

LIMITATIONS OF THE STUDY

There is extensive debate about the future of the banking channels roles, functionality and

management. There are opinions that branches will become very difficult as a customer move

toward online channels, whereas others believe that majority of transactions will still remain

in the bank branches and customers still looks the location as per their convenient because

they really need face-to –face and human interaction.

The objective of the study is to evaluate the banking sector in Kosovo, more specifically

distribution channels development, channels management, integration among them, and

global trends and strategies. In addition, different channels penetration, number of

people/inhabitants per different channels and also analyze how our market stands in

comparison with other regional counties. The objective of the study is also to describe how

the electronic channels help to reduce costs for both banks and customers!

Banks are finding current market environment and conditions tough and try to find the best

way to meet customer demands, provide superior customer service, while increasing

efficiency and reduce operating costs. Putting customer first is the right response, and the

branch is the places to do that, however how much cost are associated with opening new

branch? The answer on the question is based on the products and services which the new

branch will offer. The fundamental question to this is: whether these transactions and

payments can be performed in other alternative channels which are less costly? Globally,

the role of branches is changing rapidly. Most of the services and routine transactions are

moving toward alternative and electronic channels such us: Automatic Teller Machines,

Internet Banking, Mobile Banking and Call Centre.

One thing is clear: the branches will always exist, however the following questions occur,

respectively the scope of the study is:

• What will be the future of the bank branches? What will be the role of the branches

in the environment dominated by new channels?

• What role other alternative/electronic channels will play?

• How the development and usage of alternative/electronic channels will effect CIR

(cost income ratio) and banks profitability;

One of the possible limitations of the study are lack of quantitative data, in particular, data

for mobile banking in Kosovo and regional countries, Call Centre/Telebanking sales

activities, as well as costs structure through different channels, which could ensure a better

origination of this paper.

SPECIFIC, METHODOLOGY OF THE STUDY

For the purpose of this thesis I chose the qualitative research method by using observation

techniques, interviews and literature review.

This research was started back in 2005 and since then in my position as a distribution

channels head, responsible for network channels development, management and integration,

I have used observation techniques. During this period, I conducted a close observation in

all channels throughout the Republic of Kosovo. The focus was in all branches /cities, as

well as centralized alternative channels located in head office in Prishtina, i.e Call Centre.

My second approach to this research was the interview method, where I used the structured

and semi-structured interviews with all relevant parties in branches, including branch

management and front line employees. Additionally, there were questioners organised in

branches in order to gather internal and external customers’ feedbacks. In order to triangulate

the study I used the literature review to verify the data collected during the observatory

techniques and relevant interviews.

Methodology includes shifting from traditional channels of distribution to more advanced

channels, such us: E- Banking, ATM and Mobile Banking, as well as costs and benefits.

The data collected in this study were compared to the study case of in-branch and E banking

usage by customers, analyses of basic/simple transactions and more complex transactions

These comparisons were mostly based on the literature reviews from different retail banking

conference materials and presentations in Europe, EFMA magazines

, The Economists

European banking reports and publications.

1. FINANCIAL SECTOR IN KOSOVO

1.1. The evolution of Banking

In the middle Ages, gold and silver were used as money in most European nations and for

international trade. To avoid the inconvenience (and risk) of carrying around a wheelbarrow

full of gold and coins, most merchants preferred to keep their money in a safe place. They

usually left it with goldsmiths or money changers who first placed it on benches (or counters)

so it could be examined and weighted. This practice evolved into what is now known as

Banking. The word Bank is derived from the Italian word of bench, which is banco

1.2. Development of the Kosovo Financial Market

The Kosovo economy inherited in 1999 had been damaged by poor economic policies,

broken external trade and financial links, international sanctions, a lack of investment, and

ethnic conflict6. Therefore, the economic and socio-political uncertainty persisting during

the 1990s that eroded the public confidence was reflected in the creation of the structures

characteristic of a cash society and in the restrained foreign investment even after the conflict

was over.

Kosovo financial sector is one of the newest financial sectors in Eastern Europe, the

development started in 2000 when the Banking and Payment Authority for Kosovo (today

operating, Central Bank of Kosovo) has licensed the first bank after the conflict,

MicroEnterprise Bank, January 17, 2000 (today operate as a ProCredit Bank).The graph

below summarizes the development history of commercial banking in Kosovo market.

Today, Kosovo Banking market consists with eight commercial banks, operating throughout

Kosovo (source: Central Bank of the Republic of Kosovo).

Figure 1: Development of the banking sector - entrance of new Banks by years

Notes:

1. January 2008, NLB Prishtina took over and merged Kasabank (KSB) and Banka e Re e Kosovës (BRK).

2. Raiffesien International came to Kosovo by the end of 2001 by purchasing most of the shares of the American Bank of

Kosovo to complete the purchase and rename the bank in June 2003.

3. Tthe Banking and Payments Authority of Kosovo (BPK), in its capacity of bank supervisory authority, by order dated

March 13, 2006 revoked the license of Credit Bank of Pristina.

Table 1: List of Commercial Banks operating in Kosovo

Commercial Banks; June 2012 - Acronyms

RBKO

Raiffesien Bank Kosovo J.S.C.

PCB

Procredit Bank

TEB

Turk Economic Bankasi

BKT

Banka Kombetare Tregtare

Banka Ekonomike

NLB

Nova Ljublanska Banka

Komercijalna Banka

BRK, BE, ABK acquire

d TEB & NLB

PCB ABK, BpB by Raiffeisen BKT

2000

200

2003

2007

1.3. Kosovo Economy overview

Over the past years Kosovo's economy has shown remarkable progress in transitioning to a

market-based system and sustaining economic stability, but it is still highly dependent on the

international community and the diaspora for financial and technical aid. Most economic

development since 1999 has taken place in the trade, retail and construction sectors. The

private sector which has emerged since 1999 is mainly small-scale. The industrial sector

remains weak. Kosovo has very low levels of general government debt (only 5.8% of GDP)

Migration and remittances have made an enormous contribution to the Kosovo economy. On

a household level, they ate considered a coping mechanism for the disadvantaged household

lacking employment and earning opportunities. More than one in every third household in

Kosovo has family member abroad, and one in every forth receive remittances

Remittances from the diaspora - located mainly in Germany, Switzerland, and the Nordic

countries - are estimated to account for about 17% of GDP, and foreign subsidies for

approximately 20%. The amount of remittances in 2011 reached 584 mio. A fairly high share,

57.2% of cash remittances are channeled to Kosovo through banks and money transfer

agencies, 42.8% are bought in person by emigrants or their friends. Also the transfers

channels have been formalized, informal channels are still popular because of the costs

compared to formal channels. The remittances inflow shows the positive trend since 2005,

except 2009 when there was a slight decrease from 535 mio ( 2008) to 505 mio (2009), which

is mainly justified with the global economical and financial difficulties in the countries where

emigrants lives.

Unemployment, around 45% of the population, is a significant problem that encourages

outward migration and black market activity. Most of Kosovo's population lives in rural

towns outside of the capital, Prishtina9. With international aid, Kosovo has been able to

privatize 50 per cent of its government-controlled enterprises (SOEs) by number, and over

90 per cent of SOEs by value.

The countries of Southeastern Europe (SEE) recorded positive economic growth rates during

2011, among which Kosovo marked the highest growth rate. Most of the SEE countries

during 2011 were careful in reducing the budget deficit; despite the fact that the level of

public debt in the SEE countries is moderate. Year 2011 was characterized with higher rates

of inflation, whose main source were energy and food prices. As a result of developments in

the euro zone and SEE, a slowdown of credit growth and deterioration of quality of loan

portfolio was observed in these countries. Within the SEE countries, Kosovo continues to be

one of the states with the highest rate of credit growth and a better loan portfolio quality. The

macroeconomic data indicate that there has been a recovery of economic activity and a

positive economic growth

. According to CBK and IMF reports, the GDP real growth in

Kosovo was 2.9 % in 2009, 4% in 2010 and 5% in 2011, whereas forecasted growth for 2013

and 2014 is 4%.

Figure 2: GDP growth (%) by years in Kosovo, (2013 and 2014 forecasted figures)

1.4. General Characteristics of Financial Sector in Kosovo

The positive performance of the real sector of the economy also helped maintaining the

stability of the financial sector, which in year 2011 continued to increase its activity.

During the second half of 2007 the banking sector was characterized with new entries. In

third quarter of 2007, the license for operating in the Kosovo banking market was granted to

Banka Kombëtare Tregtare (BKT) from Albania. At the end of 2007, Türk Ekonomi Bankasi

(TEB) from Turkey joined the Kosovo banking system and in January 2008 started its

operations. Also NLB Prishtina which took over and merged Kasabank (KSB) and Banka e

Re e Kosovës (BRK) started operations in January 2008. In December 2009, Kosovo banking

sector consisted of eight commercial banks (Table 1), of which six in foreign ownership and

the remaining two in domestic ownership.

Even though the number of commercial banks didn’t change much in the last five years

(figure 1), the number of alternative channels was rapidly developed, which we will analyze

in more details in the next chapter.

Financial sector assets at the end of 2011 reached the value of euro 3.5 billion, representing

an annual increase of 9.3 percent. Banking system assets continue to dominate the structure

of overall financial sector assets with a share of 76.3 percent (figure 3). The activity of the

banking system continues to be concentrated in lending to the country’s economy, while the

main source of funding for banks remain deposits collected in Kosovo. In 2011, loans issued

by the banking system recorded an annual increase of 16.4 percent, reaching a value of euro

1.7 billion.

Deposits in the banking system continued to grow, reaching the amount of euro 2.1 billion,

thus representing an annual growth rate of 8.5 percent. Kosovo’s banking system has

continued to maintain a high level of stability, characterized by a high level of capitalization,

good quality of loan portfolio and satisfactory liquidity position.

For the banking system as a whole, the Tier One Capital Ratio as of January 2012 was 17.5%,

the proportion of non-performing loans was 5.9%, and the credit to deposit ratio was at

80%.

1.5. Structure of the financial sector

Commercial banks continued to represent the main participant in financial sector, managing

76.3 percent of total assets of the sector. An increase 2011 vs.2010 is noticed in share of the

pension funds which at the end of 2011 managed 17% of the financial sector assets compared

to 15.4% percent in 2010. The number of commercial banks operating remained unchanged,

at eight (8), as well as pension funds two(2).Changes are noticed in the number of insurance

companies operating in Kosovo, where in late 2011 began operating two new companies, thus

raising the number of insurance companies to 13

The number of new entries on regard to commercial banks is much affected from global

economic and financial difficulties in the European countries. These difficulties are reflected

in the performance of potential investors, thus, effecting their capacity and interest to extend

the activity into new markets.

Figure 3. Structure of financial system assets by sectors

Commercial Banks

76.3%

Pension Funds

17 %

Microfinance Institutions

3.70%

Insurance Companies

Financial auxiliaries

0.20%

1.6. Foreign Investments in Banking sector

Financial sector in Kosovo is characterized with a large presence of foreign capital. This is

mainly prevalent in the banking and insurance market .The presence of foreign financial

institutions in Kosovo has contributed in the modernization of the financial system by

bringing more advanced practices in finance and stimulating competition (figure 4 shows

market share by banks operating in Kosovo). In the last five years there was no new foreign

investment in the Banking sector, however by end of 2012 it is expected that new Turkish

bank will entre in Kosovo financial market.

The ownership structure of Kosovo’s banking system consisting of six foreign-owned banks

and two domestically-owned. The sector remains dominated by foreign-owned banks, which

manage over 90 percent of total banking sector assets. Kosovo’s banking sector continues to

be characterized by a high degree of concentration, with over 70% percent of total assets

being managed by the three largest banks, respectively Raiffeisen Bank Kosovo, Procredit

Bank and Nova Ljublanska Banka.

76.3

3.7

Commercial Banks

Insurance Companies

Pension Funds

Microfinancial Institutions

Financial auxiliaries

Figure 4: Lending and Deposits market share by banks

The banking sector activity remains mainly basic and relies on lending to the domestic

economy, while its main source of finance remain deposits collected in Kosovo,

consequently the Kosovo was not directly exposed by 2008-2009 financial crises.

Raiffesien Bank International

Raiffeisen Bank International AG (RBI) regards both Austria, where it is a leading corporate

and investment bank, and Central and Eastern Europe (CEE) as its home market. In CEE,

RBI operates an extensive network of subsidiary banks, leasing companies and a range of

other specialized financial service providers in 17 markets.RBI is the only Austrian bank

with a presence in both the world's financial centers and in Asia, the group's further

geographical area of focus. In total, around 61,000 employees service about 14.1 million

customers through more than 3,100 business outlets, the great majority of which are located

in CEE.

RBI is a fully-consolidated subsidiary of Raiffeisen Zentralbank Österreich AG (RZB). RZB

indirectly owns around 78.5 per cent of the common stock, the remainder is in free float.

RBI's shares are listed on the Vienna Stock Exchange. RZB is the central institution of the

PCB

RBKO

NLB

Prishtina

TEB

BPB

BKT

PCB

RBKO

NLB

Prishtina

TEB

BPB

BKT

PCB

RBKO

NLB

Prishtina

TEB

BPB

BKT

PCB

RBKO

NLB

Prishtina

TEB

BPB

BKT

Austrian Raiffeisen Banking Group, the country's largest banking group, and serves as the

group head office of the entire RZB Group, including RBI.

1.7. Kosovo's membership in the International Monetary Fund

During 2009 a big progress was made, Kosovo become a member of IMF- International

Monetary Fund, being its 186th member.

The International Monetary Fund (IMF) is an organization of 188 countries, working to

foster global monetary cooperation, secure financial stability, facilitate international trade,

promote high employment and sustainable economic growth, and reduce poverty around the

world

.Membership of Kosovo in the IMF represents a particular opportunity for new

perspectives and challenges of economic development.

1.8. European banking sector in figures

According to the European Central Bank’s figures on Credit Institutions operating in the EU,

the decade-long trend of a decline in the number of Credit Institutions (CI) continued into

2011. Over the past decade, the EU-27 Credit Institutions population shrank by some fifteen

hundred institutions, resulting in just over 8,060 Credit Institutions by the end of 2011. This

financial consolidation has been accompanied by a solid bank asset growth, total aggregated

assets witnessing an 85% increase in 2011 compared with 2001. Over the same period, the

loan base grew by 69% to finance the EU businesses and private persons, and 79% more

deposits are now held by the EU banks. The EU financial sector ended 2011 on a positive

note: total assets grew by 4.4%, while both loans and deposits increased by almost 3.7% and

4.3% respectively. According to the International Monetary Fund (IMF), the level of non-

performing loans (NPLs), as a share in total loans, was still rather high in most EU countries

in 2011. Median NPL ratio was at 6.0% in the EU-27, and at 5.6% in the euro area

1.9. Global Financial Crises

The impact of global financial crisis (2008 and 2009) cannot be said to have affected

only US or Europe or Africa due to the fact it had a global impact. Every country suffered

serious economical loses even if they were not the originators of the crisis. It marked a time

in history when people in all walks of life had almost similar economic challenges to speak.

Governments, banks, companies and other financial institutions had to come up with

remedies in order to cope with the situation. Think of cutting costs, low credit facilities, low

income, and budget controls just to mention a few. Indeed, some countries are still struggling

to repair or rather recover from this situation. Kosovo is part of Europe and cannot act as a

closed oasis.

The year 2008 will be remembered as a year of crises which happened once in a

century. Initially, the crises caused the turbulences in the Wall Street and brought the

radical changes from the governments. The year of 2008 was a year of financial crises, which

brought the USA, Europe and Japan into recession, for the first time after the Second World

War.

In the long history of global financial crisis, 2008 crisis is regarded as among the most

profound and comprehensive on the speed and wideness of development. The sources of the

crisis lie in the three pillars of the functioning of banking institutions: inadequate

management of credit risk and liberalization of excessive lending policies (undervalued

credit risk due to the intensification of competition in financial markets); inadequate

capitalization of the banking institutions; and inadequate management of their liquidity. A

lot of people took loans without having the capacity to pay their debts, creditors started to

bankrupt. These brought to the situation that banks have limited the lending to business and

individuals. Given the fact that lending by financial institutions is the source of funding for

many economic activities, problems in this area had "domino effect" for many of those

economic activities. Therefore, the crisis played a significant role in the failure of key

businesses, declines in consumer wealth, and a downturn in economic activity leading to the

2008-2012 global recession and contributing to the European sovereign debt crises.

Following, will try to widen its scope by capturing the general impact of global financial

crisis on Balkan economies (Southern Eastern Europe).

1.9.1. Global Financial Crisis – It’s causes and consequences

This section will seek to discuss the meaning of Global Financial Crisis, its causes

and consequences. Here, the study will focus more on its general implications.

It is believed that the global financial crisis witnessed in 2008 was the worst in history

since the Great Depression

(Trivedi, 2009). At the onset of this crisis, large financial

institutions in US encountered failures and challenges (Trivedi, 2009) which also led to other

European bank failures. As such, financial crisis applies widely to various situations. In most

cases, financial institutions or assets lose their value all of a sudden.

This loss is normally big and unanticipated. As a result, it causes serious recessions and

most banking processes panic, a crash occurs to the stock market, increased proliferation of

financial bubbles, and crisis of currency and sovereign defaults (Trivedi, 2009).

As mentioned earlier, panicking in the banking system and recessions can be

experienced in commercial banks where the depositors rush to withdraw all they have, what

can be referred to as a bank run. Again, financial institutions eventually lose a larger part of

their value.

Global financial crisis is not a phenomenon that occurs in a vacuum. As such, its

consequences can be determined; it is believed that cases of regulatory failure, fraud,

mismatch of asset-liability and leveraged investment act as major causes of such crisis

(Trivedi, 2009).

It is also worth noting that global financial crisis impacts on the demand side of

development process and the supply side of development process. Impact on consumer

demand occurs due to the fact that majority of consumers reduce their spending including

the private sectors who may consider postponing their projects. It is also worth noting that

the intention of the private sector to invest in real estate can be adversely effected (Davies,

2009)

Looking at the impact on the supply side of development process the private capital

flows (FDI) slows down as the crisis affect the available pool of funds. In terms of liquidity,

global financial crisis leaves banks on the danger of potential losses on their foreign

investments. Moreover, most skilled workers undergo untimely retrenchment or there would

be a downward pressure on their income and remuneration. This scenario would also occur

to the un-skilled laborers who would also experience a reduction in their remuneration. The

cost of raw materials may also depreciate due to the reduction of prices in the commodities.

In this regard, the cost of materials in general would also decrease (Piscar, 2009)

. From this

point it can be seen that reduction in the cost of materials has got both a positive impact and

a negative impact. This is because the consumer of such raw materials will be able to pay for

them at a cheaper price but on the other hand, the seller

will make less profit that he would not have made had he sold the commodities at a higher

price.

In general, global financial crisis affects the welfare and quality of life of all citizens.

Inflation, for instance, can be one of the reasons to this. Another factor is what has already

been mentioned in that loss of employment can reduce people’s income. It is very difficult

to have job opportunities in a situation of global financial crisis

(Norhayati, 2009).

1.9.2. The Effects of Global Financial Crisis on Balkan Economies

This section will take into consideration the impact of global financial crisis on

Balkan economies. The section may contain some aspects that have already been discussed

earlier only that they will be more specific.

It is believed that the crisis did not come out as a financial crisis to the Balkans but it

was some sort of an economic turbulence that was due to the fact that Balkan’s products had

a reduced demand in the world markets (Lenahan, 2009)

. In the same context, other sources

of finance also suffered immensely. There were increased losses in investments, industrial

production, foreign exchange, remittances and employment (Lenahan, 2009).

In the beginning of the crisis most governments thought that they were still immune

to its challenges but after many citizens lost their jobs and the increased reduction of world

commodity prices, the governments accepted the reality of this crisis. Although as they

insisted that the effects would not impact much on the Balkan region, the economy indicators

still exhibited some degree of challenges and downfall, reduced industrial output, foreign

investment and increasing rate of unemployment (The Economist, 2009). Clearly, the growth

forecasts reduced from five percent to three percent, there was slowdown of investor projects

and governments were embarking on rescue plans (The

Economist, 2009). It is believed that in September 2008 when the global financial crisis

was at the peak, contractions occurred to growth and joblessness mounted in the Balkan

region. The situation seemed worse due to the fact that managers in foreign institutions and

especially, foreign banks looked for foreign support so that they could withstand the

situation. This was a clear indication that although the governments felt protected and secure

from the situation they were still exposed to the financial crisis that replicated in the region

in the form of economic crisis.

The increased fall of prices in the world markets had its challenges. Balkan region is

known for its steel and metal exports and it was unfortunate that it had been affected by the

global slump in the prices of the commodity. It was noted that the price of metals fell by two-

thirds in mid 2008 which posed serious economic challenges to the region.

(Dnevnik,

2009).

Global financial crisis saw many companies announce lay-offs due to reduced

demand and closure of many factories (International Monetary Fund, 2008). In Macedonia,

for instance, unemployment was rated at 33%. Furthermore, Bosnia, Herzegovina and

Kosovo recorded their unemployment rate at 40% 23.

Another sector that lost adversely was the real estate market due the fact that credits

went down and it was also very difficult for the borrowers to clear their loans. Moreover, the

prices for houses rose including other commercial-property prices. It is also worth noting

that demand for new residential houses had also gone down

It is worthwhile to mention that global financial crisis also affected the small scale

enterprises and medium enterprises which actually serve as a backbone of the Balkan

economies (Utrinski, 2009).

1.9.3. The Macroeconomic and Social Impact of the Global Financial Crisis

This section seeks to discuss the impact of global recession on Southeast Europe

Economies. It will take into consideration the trends in GDP, employment, fiscal balances,

monetary and social policy responses. It shall examine several economies where Kosovo is

one of them.

According to tables below there was a slowed growth of GDP in Southeast Europe in the

year 2009

Table 2: GDP trends (%) in SEE (2005-2008)

Period (2005-2008)

GDP Trends (%)

Montenegro

7.7

BiH

5.8

Serbia

5.8

Croatia

4.2

FRYoM

4.8

Kosovo

4.7

Albania

6.0

Table 3: GDP trends (%) in SEE (2009)

Period (2009)

GDP Trends (%)

Montenegro

-4.5

BiH

-3.2

Serbia

-3.0

Croatia

-5.6

FRYoM

-1.2

Kosovo

3.4

Albania

2.5

As can be seen from table 3 (see above), Kosovo has the best growth performance of 3.4%

followed by Albania with 2.5%. However, the other economies have their GDP below zero

since they record at negative values. The GDP growth in Kosovo and Albania was due to the

fact that the two regions avoided sharp external adjustments. However, other economies

reduced their net capital inflows which in turn tightened credit conditions in the period 2008-

2009.

Q: To what extent has global financial crisis impacted on Kosovo?

Financial markets crisis has not had a material impact on financial sector due to Kosovo

limited exposure outside of the Kosovo. However there were indirectly impacted, such us:

Pension Savings Trust, which ended with the decline of the value of shares in the financial

markets, mainly on 50% in U.S. markets, lower remittances during 2009 which continues to

be the main source of income for a lot of Kosovo population, lower foreign direct

investments etc.

During these periods, the banks were more conservative on lending. The potential losses of

the Kosovo financial markets would be in case of external exposure like placements or

interest-bearing demands with other banks.

One thing that this study needs to re-affirm is that global financial crisis was real in

Kosovo and its repercussion has been felt. Kosovo is part of Europe and cannot act as a

closed oasis.

2. Distribution Channels Management in Banking Sector

This section will seek to discuss the Distribution Channels in banking sector. Here,

the study will focus more on role and usage of different channels, staring from Branch

Network, Sales Agents, POS (point of sales), ATMs, E banking and Online/Call Centers.

Multi-channel integration is set to become a key growth story in the bank distribution channel

market, as customers increasingly select to use the full range of offered channels. By

investing in channel integration and functionality towards channels strengths, Banks can

offer seamless customer service, while improving cross-sell rates, leveraging process

synergies and increase efficiency while streamline operations (reduce costs).

2.1. Overview of Distribution Channels in Kosovo banking sector

Banking channels developments - What are the current trends?

Even though the number of banks remains the same in the last five years, outstanding

improvements were made in terms of new channels of distribution, in particular alternative

channels, such us: Point of Sales, ATM network and E- banking.

An expansion of the distribution network which improved citizen’s access to banking

services was noticed in the last five years. The number of commercial bank branches in 2012

reached at 309, from 279 in 2008 (all of them are sub branches spread out in different area

in order to provide the easy and convenient access to the customers). Years 2008 to 2012

marked a significant increase in the provision of banking services such as Automated Teller

Machines (ATMs), points of sale, electronic banking accounts, thus, facilitating customers’

access to banking services. Number of branch/sub branches was increased for 11%, whereas

number of POS terminals increased from 3,426 in 2008 to 7,534 in 2012, respectively 120%,

Automatic Teller Machines increased from 240 in 2008 to 460 in 2011, respectively 92%,

whereas E banking users from 13,000 in 2008 to 68,992 in 2011, or 429 %

, indicating that

usage of alternative channels is growing rapidly comparing to the traditional branch network.

Table 4: Banking channels developments in Kosovo, 2008 –2011

Banking channels

2008

2009

2010

2011

growth

Number of ATMs

240

339

415

460

92%

Number of POS

3,426

5,251

6,194

7,534

120%

Number of E banking users

13,051

40,924

55,292

68,992

429%

Number of branch units

279

287

311

310

11%

The table below presents the volume of payments over the last three years. Apart from the

outstanding increase on number of alternative channels, the usage, respectively volumes

performed has shown a high increase year on year, indicating that cash economy gradually

is reducing while usage of alternative channels has been increased.

Table 5: Electronic Payments in millions euro, Kosovo market

Description

2009

2010

2011

% growth

ATM withdrawals

582

639

790

36%

POS payments

142

109%

E-banking payments

607

782

1,191

96%

Source: CBK annual report (2011)

2.1.1. Branches, as a main distribution channel

A significant slowdown during the last five years has been evident with regard to the

expansion of the number of commercial bank branches and sub-branches. These

developments mainly reflect the measures undertaken by commercial banks to reduce their

basics transactions in-branch and shift them to electronic and less costly channels. The

number of commercial bank branches and sub-branches in 2012 reached at 309 (279 in

2008). The expansion of bank infrastructure, in terms of the number of Automated Teller

Machines (ATM), points of sale (POS) and electronic banking (e-banking), continued over

the years, thus enhancing customer’s access to banking services.

Figure 5: Number of branch units in Kosovo by years

Following, I will analyze the number of bank branches in comparison with other countries.

It is important to analyze how the other Balkan countries have developed the different

channels, how the ratio stands for number of Branch units per inhabitants in Kosovo and

comparison with different countries.

Table 6: Number of bank branches in different countries

Kosovo

Albania

Bosnia

Croatia

FYR

Macedonia

Slovenia

Bulgaria

Turkey

Population

2,100,000

3,195,000

3,843,000

4,489,409

2,057,284

2,050,189

7,504,868

73,000,000

Loans (bn €)

1,6

3,54

7,54

36,94

3,04

34,44

25,94

274

Deposits (bn €)

2,1

5,89

6,40

36,45

3,47

23,50

23,99

260

Loans per

inhabitant

762

1,108

1,952

8,228

1,478

16,798

3,456

3,753

Deposits per

inhabitant

1,000

1,844

1,665

8,119

1,687

11,462

3,197

3,562

Branch units

309

548

955

1,282

436

741

5,961

10,072

Number of

inhabitants/branch

6,796

5,830

4,024

3,502

4,719

2,767

1,259

7,248

As can be seen in the above table, the number of bank branches various between countries.

Kosovo has the fewest number of branches per inhabitants, respectively 6,796 inhabitants

per branch unit, whereas the best ratio in the region has Bulgaria with 1,259 inhabitants per

branch.

If we compare with EU, by the end of 2010, the number of banks in EU had fallen by 2.2%

to 6,825. Bank branches also had registered a decline of 1.9%, to 215,000 on the account of

rise popularity of online banking

. The average standard in Europe Union is 2,300

inhabitants per bank branch (503 mio/215,000 branches). Austria has a highly developed

banking sector. Access to banking services, measured as number of inhabitants per bank

branch, is among the highest in Europe (1,673 inhabitants per branch in 2010).

Figure 6: Number of inhabitants per branch- comparison with regional countries

2.1.2. Branch Productivity in Europe - Branches’ central role

Below will present the study made by “Finalta”, on regard to Branch Productivity in Europe.

In 49% of the banking establishments questioned, more than 80% of products are sold via

the retail Branch Bank. Only 2% of those questioned conducted the majority of their sales

through other channels ( see Figure 7).

Figure 7: What percentage of retail products sales are made through branch network?

,000

Kosova

Albania

Bosnia

Croatia

Macedonia

Slovenia

Bulgaria

,796

,830

,024

,502

,719

,767

,259

Number of inhabitants per branch

For 49% of the Banks questioned the branch network accounts for more then 80% of the

volume of sales to private customers. Products with high added value are sold via the branch

network. Because of this, the branches’ central role to the retail bank’s profitability remains

key

. Furthermore, I have analyzed the products sales by channels in Bank X. From the

analyses performed (see below figure 8), we see that majority of sales are performed in

Branch Network, respectively 70% of volumes, 20% by Mobile Bankers network, 7% by

the CRM, while 3% thru the Call Centre. Please note that analyzes and sales are performed

for Mass Banking only!

Figure 8: Volumes of sales by channels, Bank X

It is important to emphasize that above I have analyzed the products sales and not

routine/simple transactions, such us: teller transactions and payments. Therefore, I will be

Branch, 70%

Mobile

Bankers/Agent

s, 20%

CRM, 7%

Call Centre, 3%

able to conclude that yet the main channel for products sales, especially loans remain branch

network. In order to have clearer picture for majority of transactions made in branch I have

also analyzed the service part, respectively routine/simple transactions and payments. The

aim of these analyses was to see the volume of these transactions performed by cashiers and

service staff, as well as see the possibility to move these transactions to other less costly

channels, respectively electronic channels. In order to make this study more comprehensive

I have also analyzed the costs structure for traditional and electronic channel transactions.

The analyses prove how electronic channels help reduce the costs for both banks and

customers.

2.1.3. Analysis of the transactions type performed in branch

From the analyses below performed in Bank X, we see that over 60% of transactions,

respectively 50% of the staff are engaged to routine transactions, majority of them can be

performed by other alternative channels, ATM’s, E banking and Call Centre. Therefore, the

core question here is: whether these transactions can be performed in electronic channels?

The answer is yes! Majority of these transactions can be performed in other channels: cash

withdrawals can be performed in ATMs, while other payments, such us utility and diverse

transfers through E-banking and Mobile Banking channels.

Figure 9: Type of transactions in branch, study performed in Bank X (Kosovo)

Cash

withdrawals,

Cash deposits,

Utility

payments, 20%

Transfers, 15%

Others, 10%

In order to have more comprehensive study, I will also present the results from Global

Consumer Banking Survey 2012.

According to this survey, customers want the flexibility

to use different channels for different transactions. Banks need to let customers personalize

their distribution choices, with different cost and accessibility options. Internet banking is

now customers’ preferred way to access account information’s. The huge success of online

banking can be attributed to its convenience and accessibility. In most markets, internet

banking is also the most popular channel for customers undertaking simple transactions such

as paying bill. Despite the success of internet banking, customers around the world agree

that access to branches and branch staff remains crucial to overall satisfaction. This is

especially true when it comes to complex transactions, which customers in all markets prefer.

The picture is more varied for advice on products and services.

Figure 10: Preferred method for simple transactions- EU

Figure 11: Preferred method for complex transactions- EU

Branch visit

Postal Mail

Mobile app,

Internet

ATM

% Call

Centre

Additionally, “Finalta” study also analyzes the incentive scheme for Branch Managers.

Branch Managers leadership are the key role for successful Retail Banking. Based on the

study done by Finalta (Financial Service Benchmarking, London), European Branch

Managers bonus depends greatly on sales. On average, 64% of branch mangers bonuses

depend on sales targets being achieved, 12% on costs, 11% on customer service, 6% on staff

satisfaction and 10% on other factors (generally risk or specific strategic initiatives).

Figure 12: European Branch Managers MBO’s and bonuses criteria;

In addition, I have also analyzed the bonuses scheme in Bank X (see below figure 13).

Analyzing, the above “Finalta” study results, and branch managers’ bonuses scheme in Bank

X, I can conclude that similar criteria’s are applicable for Branch Managers bonus scheme

in Bank X as well. However, there is a slight difference on credit quality and regulatory

Branch visit

Call Centre

Internet

ATM

Postal Mail

requirements. Yet, as the banking channels strategies and trends are changing, the criteria’s

on the incentive schemes should be modified, accordantly. As the banks are moving and

shifting the focus to more electronic channels, the incentives should also linked to usage of

alternative channels, such us: E banking sales and usage/turnover, number of ATM

transactions, number of payments through POS’s etc. What the banks staff needs to work

on is advice customers to use more ATMs, E banking and Mobile Banking, while in-branch

staff must be focused more on higher value-added transactions which cannot be performed

through other banking channels, i.e. higher volume loans, mortgages, consultation and

financial advises.

Figure 13: Branch Managers MBO and bonuses criteria in Bank X;

2.1.4. The future of Bank branches

We all are aware that branches are most expensive channel. The cost structure of branches,

starting from operating costs: staff expenses (i.e. hiring and training), facilities (electricity,

heating etc.), security costs including cash dispensing , and at the other side capital

expenditure, are putting pressure on the cost/income ratio of many retail banks, which is

considered to be one of the key performance ratio for a successful bank.

There are couples of reasons to believe that branches will remain one of the main distribution

channels even in the future. Why they will still exist?

Customers still want to visit branches. Even though this also depends on various countries

and cultural habits, customers still prefer face to face interaction, especially for higher ticket

loans, like mortgages, financial advices and investments opportunities. In addition, in many

countries legal framework is not harmonized with customer’s adoption strategy. For

example, to open a bank account legally customers are obliged to be present in branch in

order to prove identification, despite the fact that there might be online functionality for

account opening process.

Bank branches, are now considered as a way of securing the loyalty of existing customers

and acquiring new ones. Having said that before, the branches of today are not the same as

yesterday. The branches are now one of several components in multi-channels strategy,

human contact, a warm welcome and offering advice. Naturally, the trend towards opening

branches places greater emphasis on automation. In other worlds, current developments

concern both content and form. Branches will not disappear, but they will change over the

time [29].

Whilst bankers all agree on the predominant role played by a branch in terms of distribution,

it is remarkable to analyze the different channels. Below I will explain the role of other

banking channels: Automatic Teller Machines (ATMs), E-banking, Mobile Banking, Call

Centre, as well as statistics on regard to internet penetration/usage in Europe, worldwide and

E-banking penetration, in particular.

2.2. Automatic Teller Machines – banking channel

2.2.1. Automatic Teller Machines - Definition

Automatic Teller machines (ATM), also known as a cash point is a computerized

telecommunications device that enables the customers of a financial institutions to perform

the transactions without the need for a cashier. There are two primary types of automated

machines, the basic one allow the customers only to withdraw cash and receive a statement

report, while the more complex machine accept deposits and other services as well. An

automatic teller machine (ATM) allows bank customers to conduct their banking transactions

from almost every automatic teller machine in the world.

The customer is identified by inserting a plastic card with magnetic strip or chip that contains

a unique card number and some additional information’s such as an expiration date or CVVC

(or CVV). Authentication is provided by the customer entering a personal identification

number (PIN). As the new technologies are extremely fast enhancing, there are also new

services in a long-predicted move towards the Smartphone becoming a digital wallet. The

newest ATM at Royal Bank of Scotland operates without a card to withdraw cash up to £100.

They are given a six-digit code to enter into an ATM and release the cash.

(Source: ATMIA, ATM industry associations global).

2.2.2. Automatic Teller Machines - History

The history of the ATM often is open for debate, since the cash dispenser's development

occurred long before the machine was put into use. That written, most historians agree that

Barclay's in the London was the first to deploy an ATM in 1967. It wasn't until the mid to

late 1980s that ATMs gained wide acceptance. Estimates developed by ATMIA ( ATM

Industry associations global) place the number of ATMs in use currently at over 2.2 million

(2010), or 1 ATM per around over 3000 people in the world

From 1967, when the very first ATM was installed in London, it took 33 years (until 2000)

for the ATM industry to reach the 1 million ATMs around the world. To reach 2.2 million, it

has taken only 10 years. Thirty-three years to install 1 million ATMs, while ten years to

install 1.2 million ATMs shows how fast the ATM network is growing in the recent decade.

2.2.3. ATM Network Development in Kosovo

The number of ATMs grew quite fast in our market as well. The figure below shows the

number of ATM development over the years. As we can see the number is growing rapidly,

or almost 100 % over the 5 years period, indicating that usage of self-service channels is

growing very fast, which is also linked to the level of education and trust in electronic

channels.

As I stated above, Kosovo started developing its banking sector and payments infrastructure

from scratch after the war in ’99, much later than the countries in the Southeastern and

Central Europe, however the outstanding progress has been made, not only on the number

of banks and variety of products offered, but also developments of channels and usage.

Figure 14: Number of ATM’s by years in Kosovo

2.2.4. Comparison of ATM’s network- Kosovo with other countries

Following I will present the number of ATMs in different regional countries, even though

this cannot be considered as an indicator for comparison purposes due to the fact that there

are different parameters which leads to the appropriate number of ATM devices such us:

number of population, country area and density, accessibility, number of transactions per

ATM etc.

Figure 15: Number of ATM’s by countries

Even though, we see that there is a huge progress made on regard to ATM and other channels

developments in Kosovo, yet, comparing with other regional countries, we see that still we

are quite behind other regions. As we can see from the table 7 (see below), Kosovo has the

lowest number of ATM per inhabitants, respectively 1 ATM per 4,565 inhabitants, which is

almost four times lower then Croatia, Slovenia and Bulgaria. The best ratio from the

countries shown in the table has Slovenia, 1 ATM per 1,130 inhabitants.

Table 7: Number of ATMs in different countries

Kosovo

Albania

Bosnia

Croatia

FYR

Macedonia

Slovenia

Bulgaria

Turkey

Population

2,100,000

3,195,000

3,843,000

4,489,409

2,057,284

2,050,189

7,504,868

73,000,000

Area (km^2)

10,887

28,748

51,197

56,594

25,713

20,273

110,879

783,562

Density (km^2)

193

111

101

ATM devices

460

771

1,098

3,794

869

1,814

5,718

27,649

Number of ATM

device per

inhabitant

4,565

4,144

3,500

1,183

2,367

1,130

1,312

2,640

ATM per 100

km^2

Source: CBK Annual report, 2011

In order to make the study more comprehensive, I have also analyzed the average ATMs in

EU area. In 2011, there were 437,400 Automatic Teller Machines (ATMs) in the EU-27, an

increase of 1%, or almost 4,100 units since a year before. The number of people per ATM in

Europe fell to 1,148.

Germany, Spain, France, and the UK combined, account for 60% of all ATMs in the EU. The

ATMs are also used more frequently: the number of transactions in the EU grew on average

by 1.3% in 2011; however the number of cash withdrawals grew only by 0.3%

. As far as

convenience and accessibility of banking services in EU countries are concerned, Portugal

leads in term of number of ATMs per inhabitants, the parameter being 620. At the same time

the least number of inhabitants per ATM was registered in the Chezk Republic, Sweden and

Poland. In each of these countries there are between 2,400 and 2,900 inhabitants per device

Figure 16: Comparison of inhabitants per ATM’s in different countries

There is no official benchmark on regard to the number of ATM’s in the respective region.

The figure above summarizes the number of inhabitants per ATM. As shown in the figure

above, in Kosovo there are 4,565 inhabitants per ATM. However, this ratio is much depended

,000

Kosova

Albania

Bosnia

Croatia

FYR

Macedonia

Slovenia

Bulgaria

,565

,144

,500

,183

,367

,130

,312

Number of inhabitants per ATM device

on density in the respective country. As we see in the table above (Table 7), Kosovo has the

highest density, 193 inhabitants per km^2 compared with other countries. Apart from the

ATM network, the outstanding expansion is made on number and usage of point of sales

(POS’s), indicating that cash economy is being reduced and usage of alternative channels

has been increased.

Figure 17: Volume of deposits per inhabitant, Kosovo

,000

Kosova

Albania

Bosnia

Croatia

FYC

Macedonia

Slovenia

Bulgaria

,000

,844

,665

,119

,687

,462

,197

Volume of Deposits per inhabitant

Figure 18: Volume of loans per inhabitant, Kosovo

As presented above, similar to number of different channels per inhabitant, the same position

stand for volumes of deposits and loans. Kosovo has the lowest volumes per inhabitant, 1000

euro deposits per inhabitant, respectively 762 euro volumes of loans.

2.3. E-Banking as an alternative Distribution Channels

In today's society, globally, customers more than ever correlate a bank's value to the services

it provides online. With the growing number of internet users, many banks use internet

banking strategy and variety of services in order to remain competitive, aiming to attract and

retain customers with enhanced online services.

In the recent decade, many banks started to use the internet banking not only as an innovative

banking channel, but the channel/tool to attract customer acquisition, increase customer

satisfaction and convenience, as well as approach to optimize costs and enhance profitability.

Internet Banking seems to be part of the noticeable banking strategies for new entrants in the

banking sector.

,000

Kosova

Albania

Bosnia

Croatia

FYC

Macedonia

Slovenia

Bulgaria

762

,108

,952

,228

,478

,798

,456

Volume of Loans per inhabitant

By integrating business channels and customers point of view, expanding self-service

functionality and improving web site security, financial institutions are creating a seamless

online banking experience. Worldwide, online banking is a critical factor of any bank

business. This is becoming competitive weapon for financial institutions. More than ever

banks customers want to conduct more transactions online. More than ever before, banks are

promoting the E Banking as a component of their multichannel strategy and competitive

advantage.

Looking at the Kosovo market, E banking channels is quite new in the Kosovo financial

market, whereas worldwide the usage of internet banking is much higher in comparison with

our market. However, in the recent years, we see the outstanding progress on regard to the

speed of developments in e-banking channel, yet, it is far behind the EU internet banking

market. I can conclude this by analyzing the growing trend showed in table 4 (see above).

According to the data presented the number of e-banking users is growing continuously year

on year. In 2008 there were only 13,051 e-banking users, despite the fact that banking sector

started in 2000. From 2008 to mid 2011 the number of e-banking users reached 68,992

respectively 429% increase.

It goes without saying, that the number of e- banking users is very much linked to the internet

penetration in the respective countries. In the table above I present the usage of Internet in

European Union, as well as comparison with other part of the world. As we can see, the

penetration in European Union33 is much higher comparing with other part of the world, 73

% of population, whereas rest of the world is 31.3%. World average is 34.3%. I have also

analyzed internet penetration in different countries of the SEE countries (presented in

appendix 2).As shown, according to the figures from Internet World State Statistics, internet

penetration is Kosovo is only 20.5%, which is quite lower compared with all other regional

countries. Consequently, the e-banking users in Kosovo are much lower, although the recent

trend is very promising.

Figure 19: Number of Internet Users and E-banking users by countries

Internet Penetration in European Union34

WORLD

REGION

Population

(2012 Est.)

% Pop.

of World

Internet Users,

30-June-12

Penetration

Population)

Internet

% Users

Facebook 30-

Sept-12

European Union

503,824,373

7.2 %

368,021,986

73.0 %

15.3 %

187,340,360

Rest of World

6,514,022,54

92.8 %

2,037,496,390

31.3 %

84.7 %

749,829,460

TOTAL WORLD

7,017,846,92

100.0 %

2,405,518,376

34.3 %

100.0 %

937,169,820

33 Internet penetration in Europe (total) is 63.2%, for more details please see appendix 2.

34 http://www.internetworldstats.com/stats.htm

Figure 20: Internet Penetration in European Union

The Netherlands is the country with the strongest internet banking penetration in Europe,

,000,000

Kosova

Albania

Bosnja

Croatia

Macedonia

377,000

,471,400

,327,578

,167,838

,180,704

,992

,368

,802

998,862

211,599

Number of E

banking users

Number of Internet Users

Number of

Internet Users and E

banking users by countires

0.0

20.0

40.0

60.0

80.0

European Union

World Average

Rest of the world

73.0

34.3

31.3

Internet Penetration in European Union, June 2012

66.3 percent of Dutch internet users’ access online banking sites. Globally, 423.5 million

people accessed online banking sites (during April 2012), reaching 28.7 percent of the

internet audience. In North America, 45 percent of internet audiences accessed banking

sites

. Globally, 59% of internet users check their bank account online

In conclusion, internet banking as a banking channel has globally experienced strong growth

in recent years; yet, internet remains secondary to branches and call centers as a business

generator and customer usage. Ultimately branches remains good generator for the business

growth, especially in regions where customers are either insufficient familiar with internet

and/or low penetration in internet (i.e. Kosovo), or customers like more taking the financial

advice.

2.4. Mobile Banking

Continues sophisticated mobile technology becoming a perfect chance for banks to improve

service, reduce costs and increased customer engagement and satisfaction.

As it undergoes significant challenges, there’s been no better time for alternative thinking

within the industry

Mobile banking (also known as M-Banking) is a term used for performing check balances,

account transactions, payments, credit applications and other banking transactions. Mobile

Banking as a banking channel is old more than a decade ago. At the beginner, mobile usage

by banking and financial world was used only for the SMS, known as SMS banking.

However with the new advanced technology, mobile banking channel is offering many

dynamic options and functionalities. During the decade, starting from 2000 year, there was

an outstanding progress on regard to Mobile Banking. Mobile Banking advanced from

providing basic text messaging services to more advance services, such are: checking

balance, making transactions, view credit history, fund transfers etc.

Apple's initial success with I Phone and the rapid growth of phones based on Google's

Android have led to increasing use of special customer programs, different applications

downloaded to the mobile device.

Customer and banks have started to transform the mobile phone into a “personal banking

assistant” for customers to help them manage their accounts anytime, anywhere without an

expensive mobile phone upgrade.

On regard to statistics for Mobile Banking, in the EU5 (France, Germany, Italy, Spain and

the UK) 30 million people accessed a bank accounts via their Smartphone (in July 2012), an

increase of 85 percent compared to a year ago. The UK had the largest user base with 7.3

million Smartphone owners accessing bank accounts in the month, nearly twice as many as

just one year ago. Spain showed an even stronger increase with 113 percent more users

making use of service compared to previous year38. While, Mobile Banking is relatively new

in our market, we have lack of data on regard to Mobile Banking in Kosovo and other

regional markets.

2.5. Mobile Bankers/Sales Agents network

Mobile Bankers are defined as a distribution channel with the purpose of increasing branch

sales force by selling bank products and services. An agent helps sell bank product/service,

but will not take ownership of what they are selling at any time. Agents usually work on

commission taking a percentage of the total sales made by them. This channel is quite

developed in Kosovo market as well, however as a benchmark

can be analyzed the Bank

X, where Agents network is very well developed, and around 20 % of sales comes from the

agents network. Sales Agents network is perfect motivation concept. A mobile banker's

activity consists of making regular/daily - visits to market vendors. The Mobile/Agents

network is very cost effective channel as they do not have offices in the branch, consequently

do not have other associated costs, such us: space, desk, computer etc. With the new channel

“Mobile bankers”, customers do not have to visit a bank’s office in order to get a professional

consultation on our retail services. Customers will get a free of charge consultation at place

and time convenient. The role of the mobile bankers is to: visit customers at time convenient

for them, helps customers to prepare the necessary documents in order to apply for the bank

service and brings the customers documents in the Bank office instead of customer come.

Agent’s network is very cost effective channel, as there are only costs linked to the sales

results and no other overhead costs associated with them.

2.5.1. Direct Mail - sales and promotion tools

Direct mail involves sending an offer, message, reminder or other item to a person at a

particular address. Direct mail is a popular medium because its permits very selectively target

group, usually they are personalized, are flexible, and allow early testing and response

measurement.

Figure 21: Steps in Developing a Direct Mail Campaign

Source

: Successful Direct Marketing Methods, 6th ed.(Lincolnwood,IL: NTC Business Books,1996)

Also known as a mail shot, this type of marketing can produce sales on a local, specific bank

branch, national, or even global scale. The businesses would send out, flyers, leaflets,

brochures or catalogues (often targeted to particular consumers) selling different

Set

Objectives

Identify

Targets

Define the

offer

Test the

elements

Measure

the results

product/service. Any interested receivers of the mail would make an order through the

contact details/order form that would be included

Although very effective, there is some cost involved but is considerably cheaper compared

to other sources of marketing such as advertising. Poorly targeted mail shots can also damage

the image of the business; therefore it is very important to build appropriate mailing lists

before the direct mails were sent. Direct mail can be complied and sent directly from the

business, or can be used a professional service to distribute information; however the costs

will be much higher. This method is very common in Raiffeiesen Bank as well, where in

monthly basis there are thousand direct mails distributed to the customers. One thing which

is very important during the direct mail process is to make sure that same customer does not

receive the same offer every month, or different offers from the same bank consisting

different products. On this regard, proper CRM system (Customer Relationship

Management) is curtail, otherwise it may cause the customer dissatisfaction and complains.

2.6. Call Centre as a banking channel

In the recent decade, selling product and services through Call Centre is becoming

increasingly popular. Similar to direct mail, telemarketing allows sales to be made on a local,

national and global scale, although the costs will increase with the time and distance of phone

calls.

A decade ago, most companies didn’t even consider the revenue potential of inbound

customer service calls. But, today call centers generate up to 25 % of total new revenues

(credit cards and cash/small ticket loans) and up to 60% for some telecommunications

companies. Initially, the top priority of agents in this call centers was resolving the issues.

But, today, Call Centre telebankers are also encouraged to initiate conversation to uncover

the needs of customers, and consequently this can lead to sales of new products. Within few

years of starting to implement from service to sales strategy, most bank call centre’s that

already deliver high quality service can boost they sales levels to at least three core products

for every 100 calls

.In order to have the clearer picture on regard to the services provided

by Call Centre, especially on the Banking Industry, I am attaching below main groups of

serviced provided by Call Centre in Raiffeisen Bank Kosovo

.Analyzing the picture below,

we see that one of the main pillars of the Call Centre is telemarketing and outbound calls. If

number of calls is analyzed, there are the same numbers of outbound calls as inbound.

However, in the recent years, the strategy is more oriented toward using more IVR

(interactive voice response) for providing most of the services that the inbound telebanker

offer today, while, telebankers use free capacity for more revenue generated activities,

respectively sales activities.

Figure 22: Group of Service provided by Call Centre

In order to make the study more comprehensive I will further present the impact of social

networking in the banking industry. The information’s provided below are taken from the

survey performed by Ernst & Young, more specifically Global Consumer Banking Survey

2012.

2.7. The role of Social networks in the banking

Social networks are becoming important sources of banking information, especially in

emerging markets. Social networks are also magnifying customer voices, increasing their

power to act as advocates or critics. Globally 44% respondents use social networking sites

as a source of banking information. Customers in emerging markets are particularly likely

to use social media to interact with their banks. Worldwide, almost one-third of customers

who use social networking sites to interact with their bank also use them to comment on the

service they have received and to pass on news about good offers.

Figure 23: Usage of social networking in relation to banking activities

3. Costs of transactions , E-banking and ATMs versus in-branch

Following, I will analyze the costs per unit transaction through different channels, traditional

and electronic channel. Consequently, draw the conclusion on the potential costs savings for

the banks, as well as customers.

According to the analyses made in bank X, estimated bank costs per routine cash transaction

in branch is 1.50 EUR, compared to 0.60 EUR in ATM. As seen, the difference in costs for

one transaction is 0.90 EUR. The analyzes found that on average online transactions costs

are approximately 2.5 times less than those made by branch teller. However, another factor

which needs to be considered is the functionality of ATMs in the banking sector in Kosovo.

As presented above, there are 460 ATMs placed around the Kosovo, while only one ATM

provides the cash deposit function. Thus, when I calculate the costs per transaction, and draw

assumption on possible costs savings in case of bank X, I consider only cash withdrawals

and exclude cash deposits, at this stage. Another important factor to be considered is also the

amount of cash withdrawals per transaction, due to the fact that there are different limits

applied across the banks. Nevertheless, according to my analyses in bank X , over 80 % of

the transactions performed in branch are below the limit allowed to be performed through

ATM machines, indicating that there is a possibility for banks to move these transactions to

less costly channel, for bank and customer as well.

Table 8: Estimated Unit Costs per transactions through different banking channels

Unit costs per transaction ( cash withdrawal)

in different distribution channels

Unit costs per transaction (payments) in

different distribution channels

Channel

Unit costs

Channel

Unit costs

In-Branch

€ 1.50

In branch

€ 1.50

ATM

€ 0.60

E-banking

€ 0.50

*Analyses made in the Bank X. The costs per transactions various from bank to bank due to different processes

and systems across the banks, therefore it is difficult to calculate the possible costs savings for overall market;

The table shows significant difference on costs in different channels, transaction costs

performed in branches are more than doubled compared to electronic channels, ATMs and

Internet Banking. It is very reasonable since it is not that require human resources costs only,

but also facilities costs, costs of offices, maintenance, securities, rent, utilities etc. Analyzing

the bank X, there are over 1 million cash withdrawals yearly executed inside the bank

branches. Assuming that at least 20% of these payments move to Automatic Teller Machines

(ATMs), the bank will decrease transactions costs for approximately € 180 thousands yearly.

Consequently, there will be free resources capacity for more value-added transactions and

financial advisories, which will result with better customer services, efficiency and

profitability. According to CBK quarterly report on cash and non cash payment, in overall

market are over 1.2 million cash withdrawals per quarter inside the banks, nearly 5 million

per year.

Furthermore, I have also analyzed the simple domestics’ payments through different banking

channels (see above table 8). As seen, online bank payment transaction, respectively E-

banking transaction costs approximately 3 times cheaper than traditional transactions costs

concluded in the branch network According to CBK quarterly report, number of payment

processes using e-banking is 424,273 transactions during 2011, whereas number of interbank

payments is 4.2 million during 2011.

The expenses for the domestic payment unit costs

include the following unit costs components: development, HR related costs, IT operational,

marketing, facilitiies, etc. In branch and call centre, mosts of the costs are connected to the

human resources activities (remuneration, staff management, work-place expenses/offices,

fixed assets depreciations).

If we analyze the overall payments in the Kosovo banking market, we see that majority of

payments are still performed in the branch network. According to the Kosovo Payment

Report , during 2011 there were over 4.2 million interbank payments performed , while

number of E-banking still remain low, only 10 % of transactions are performed through the

E-banking (source: Quarterly report on cash & non cash payments, CBK).

In order to make the conclusion on profitability, some investigation on the income side has

to be made as well. For the banks, fee incomes from the ATMs and E-banking transactions

are lower compared to in-branch, while less costly for the clients. Fee for cash withdrawal

inside the branch in Bank X is 0.20 EUR, whereas in ATM is 0.05 EUR, meaning that bank

will earn 0.15 EUR less for the transaction performed in the ATM, but at the same time

difference in costs is much higher, respectively € 0.90 per transaction, consequently net

income is higher.

In summary, I might conclude the following:

• Banks can reduce costs by increasing usage of electronic channels. Electronic

channels banking services can impact cost savings for the banks and higher

profitability, as the unit costs are lower;

• Electronic channels provide costs-savings for the customers as well, as consequently

the fees for the clients are cheaper in online channels. As presented above, ATM

withdrawal fee is three times less compared to in-branch withdrawal.

4. Integration among different banking channels

Banks are developing their multichannel distribution strategies by defining more focused

mission and roles for their channels. The development of a multichannel distribution strategy

is based on three main phases:

• the development of new channels,

• the promotion of new channels usage by customers,

• the integration among channels ;

In terms of channels operation and roles, in most of the cases the branch is the predominant

channel and owns the majority of bank’s customers. ATMs, Internet and Phone Banking/Call

Centre are alternative and more supportive channels to carry out the basic transactions,

focused on cost to serve reduction.The war to win for retail banks is to be excellent in

distribution. As such, the banks distribution models need to get closer to the retail distribution

models, combining better-cost efficiencies and optimizations with effective product ranges

and services.

The branch will remain the groundwork of retail distribution however it will be in the

different approach. Banks will have to “re-invent” the branches to drive down their operating

costs while generating more sales. The branch of future requires customeroriented branch

personnel, supported by new capabilities in terms of informing, advising, selling and serving

the customers, sustained by an integrated CRM (Customer Relationship Management)

solution. The integration among branches and other distribution channels will be a key

success factor in the distribution model of the future, because it will allow banks to:

• Effectively meet customer needs and preferences by offering different choices of

distribution channels, as per customers convenience;

• Use branch for higher value transactions, financial advisory approach and

relationship management ;

• Leveraging cost optimization opportunities arising from low cost innovative

channels;

The integration among branches and other channels should provide the customer with a

consistent customer experience and match the bank mix of products/services and channels

with his needs and preferences. Within integrated commercial actions the branch will still

have the most important role for the overall success of the initiative.

Figure 24: Branch integration with other channels

Customer

5. Three Enablers to Win the Distribution Game

Below I will further analyze three enablers to win the distribution game, or saying on the

other words few important areas of making the retail banking successful:

5.1. Sales Organization

5.2. Distribution Footprint

5.3. Sales Force Effectiveness

5.1. Sales Organization

“People create organizations, and people can destroy them. The most valuable commodity in

business is not technology or capital, but people”. Effective management of people is a

challenge managers will increasingly face in the 21st century.

Return on talent- For decades companies have utilized key metrics like ROI and ROA (return

on assets). Twenty-first century organizations will utilize a measurement called ROT (return

on talent). ROT is expressed as follow: ROT = knowledge generated / investments in talents.

ROT measure the payback from investments in people. It shows if managers are hiring the

right people, and how effectively they use them to achieve businesses success.

A Sales Organization Must Be Focused on:

 As few management layers as possible

 Each person has exactly one superior

 Management span allows for effective control

 Clear roles and responsibilities

5.2. Distribution Footprint

When it comes to new branch buildings different approaches are required. Below are some

specifics on this regard; however on the last part of this chapter I will present the case of new

branch build/opening in Raiffesien Bank Kosovo, in order to get the clear understanding on

the evaluation criteria’s and how the positive decision on new branch opening is taken.

Following, I present some general criteria’s:

Branch penetration and branch density in your country work in your favor – Build. Expand

smartly- Although the distribution is sub- scale, your country already has high branch

density. Utilize alternative distribution channels such as DSAs, E-banking, and ATMs.

Move in line with competitors- You have sufficient distribution. Expand only if your

competitors are expanding and/or you wish to increase your market share substantially. Don´t

build- Your distribution scale is sufficient to compete with the big competitors – you are one

of them.

5.3. Sales force effectiveness

Each company needs to define the specific objectives its sales force will achieve.

Increasingly, companies are setting the objectives for sales representatives based not only on

sales volumes and profitability targets, but also on their ability to create customer

satisfactions47.

Effective management of the sales force is needed to implement the companies’ chosen sales

force design and achieves its sales objectives. Sales force management covers the steps in

recruiting/selecting, training, supervising, monitoring and evaluation (see below figure 25).

Figure 25: Sales force management process

Following, I will present highlights of a project implemented in Raiffeisen Bank Kosovo.

The project called Sales Force Effectiveness consisting of 5 main pillars

Figure 26: Sales Force Effectiveness process

Target setting

In branch measurements

Proper sales tools and sales management

Coaching

Motivation and Compensation program

Some ambitions sales staff is self-starters who will put forth their best, effort without any

special coaching. The majority of sales staff, however, requires more encouragement and

special incentives. This is especially true of field selling, which can be frustrating because

sales people usually work alone, keep irregular hours, are often away from home and

sometimes lose large orders they have worked hard to obtain (Kotler pg 307).

When it comes to motivation tools, in Raiffesien are different financial and non financial

motivation tools. Reward and recognition program is very well accepted, it is not only the

Managing the

sale force

Recruiting

and selecting

Training

Supervising

Motivating

Evaluating

financial bonuses a motivation tool for staff, there are also other non-cash awards which are

much appreciated by the staff, to name few: best seller of the month received the dinner with

the management board, special certificate for best performing, weekend trip with family, a

night shift off for a week for the best performing telebanker etc. However, it is very important

to emphasize quite important factors on regard staff incentives, such us:

• Direct link between sales performance and reward;

• Wide compensation spread between high and low performers;

• Sales performance as main driver of rewards for sellers and managers;

• Individual (majority) and (small) shared component to support team cooperation;

Figure 27: Key Variables that influence Motivation

INTERNAL

(push forces)

EXTERNAL

(pull forces)

Characteristics of

The Individual

Characteristics of Characteristics of

The JOB The Work Situation

(examples) (examples)

NEEDS

For security

For achievements

For power

ATTITUDES

About self

About Job

About Supervisor

About Organization

INTERESTS

Hobbies, Travel, reading

Sports

FEEDBACK SOCIAL ENVIOREMENT

Amount Supervisor

Timing Workgroup members

Subordinators

WORK LOAD ORGANIZATIONAL ACTIONS

Tasks Individual and group awards

Variety Training and development Scope

Pressure to perform

DISCRETION

How job is performed?

6. New branch opening

The openings of new branches have a major impact on the assessment of the company itself.

For this reason it is obvious that an accurate and all planning instrument needs to be

developed and analyzed. The following parameters need to be considered, when the

evaluation for new branch opening is made:

• Location of the branch (capital city, region, small region/town)

• Customer structure ( small business, agro, corporate, individuals)

• Economic environment, un-employment rate, purchasing power;

• Competition;

And the fundamental question is: what nature of the business is expected from the new

branch, whether the branch will be focused on the lending and deposits, financial advisory

approach and relationship management or provides the simple basic transactions which can

be also performed by other alternative channel, ATM, Call Centre and E Banking?

Additionally, the detail feasibility study needs to be done before the new branch is opened.

Some of the key financial ratios on taking the decisions for new branch opening are given

below:

NPV- One of the main factors for making the decision on new branch opening is NPV. The

Net Present Value (NPV), also known as Net Present Worth of a Capital Budgeting project

indicates the expected impact of the project on the value of the company. Projects with a

positive NPV are expected to increase the value. Thus, the NPV decision rule specifies that

all independent projects with a positive NPV should be accepted. When choosing among

mutually exclusive projects, the project with the largest (positive) NPV should be selected.

The NPV compares the present value of money today to the present value of money in the

future, taking into consideration inflation.

“Break-even point” - The break-even point is defined as the point where sales or revenues

equal with costs/expenses. There is no profit made or loss gained at the break-even point.

This figure is important for anyone that manages a business since the break-even point is the

lower limit of profit when setting prices and determining margins.

Payback Period- the Payback Period refers to the period of time required for the return on

an investment to recompense the sum of original investment or, the amount of time that it

takes for a Capital Budgeting project to recover its initial cost. When choosing among

mutually projects, the project with the quickest payback is preferred.

The further analysis consists of: general information of the region, competition and

customers, investments and organization/structure

First part of the analyses is competition and customers. Following will I present the key

evaluation criteria on regard to competition and customer target group:

• Market shares a general overview of the market shares according to each segment;

• Customers, the existing and target customer groups in the region;

• Location of the Branch -the special features of the district and infrastructures;

• Investment and Structure;

• Structure and Staff: How many employees are planned? Which tasks will they take

over? Which organizational structure will be established?

New branch opening - Research study in Raiffesien Bank Kosovo

Below I will present a case study performed for new branch opening in Gjilani city in

Raiffeisen Bank Kosovo. We will see that based on financial analyses made, projections for

new sales volumes, new customers, investment and operating costs, resulting with the key

ratios: NPV, PBP and IRR, the positive decision on new project is made.

Total investment

€ 75,000

PBP (Payback period)

1 year

Staff number

5-8

Total branch costs (cumulative over 5 years)

450 thousand (Operating Cost)

NPAT

Cumulative over the five years: 500 tsd €

Type of branch

Retail

Operative (date)

June’2011

General Information of the region - Population/Area: Gjilan municipality has 133,724

inhabitants, covers an area of with 515 square meters and consists of 63 villages. It is located

47 kilometers southeast of Prishtina, 21 km from Vitia, 25 km from Kamenica and 23 km

from the border with Serbia. Gjilan covers 6 % of Kosovo territory.

Gjilani has approximately 20 % of RBKO loan portfolio, respectively 20 % of deposits and

there are averages of 30,000 teller transactions per month. Gjilani main city has 4 ATMs

throughout the city.

Economic outlook of the region (employment/unemployment): Estimated number of

employees in public sector is 4.184 (Municipality administration, Health and Education,

Police, TMK, PTK, KEK, Courts etc), while in private sector estimated no. is 11,166. There

are another 25,000 people from Gjilan working abroad (out of country). As a strength factor

for this region, we could consider privatized factories. There are 3,722 private businesses

registered: trade 61.7%, production 11%, service/hotels 12.8%, transport and

communication 7%, constructions 5.5%, etc.

Competition (Existing local and foreign banks): There are seven banks operating in Gjilan:

ProCredit Bank, “Nova Ljublanska Banka “, BPB, Banka Ekonomike , TEB, BKT and three

Micro finance Institutions : “FINCA”, “KEP” and “Beslidhja”.

Organizational structure and staff: Perhaps the simplest structure is the functional structure.

This structure is one of the most common organizational structures in part because it

separates the specialized knowledge of each functional area through horizontal

differentiation and can direct knowledge toward the company’s key products and services.

Number of staff in the beginning will be five: Manager, business officers, two individual

loan officers and one teller. The plans for next five years are to increase number of staff from

5 to 8 staff.

Recommendation:

The key fundamental question of this research study is: What is the main target group for

new branch, what type of the business we expect from the new branch: simple/routine teller

transaction or providing products and services that cannot be performed from other

alternative channels (loans)?

A: BUILD - Based on development of the Gjilan branch, business potential (see appendix),

existing Branch capacity, number of new potential customers, business growth, number of

branches in comparison with other competitors, recent privatized companies, and in order to

provide better customer service to our existing and potential customers, the new branch

opening is recommend in Gjilani city. The new sub branch will be located in “Dardania”; it

is old area of the city, residential zone with over 30,000 inhabitants, as well as industrial zone

including few production, trade and service companies.

CHAPTER IV

FINDINGS AND ANALYSES OF INFORMATIONS

Kosovo has made outstanding progress in the last twelve years, especially in reconstructing

the financial sector basically from the scratch and rebuilding confidence in it, much later

than other countries in Southeastern and Central Europe. Moreover, the openness of banking

sector to foreign competitors has shown to be an important component for a successful

strategy of developing the efficient financial system and promoting economic growth.

As illustrated, even though Kosovo Financial Market is almost new after the war, and a

decade of the non proper banking sector, there were different banking channels established,

starting from the branch network as an old and the early channel, moving forward with the

other alternative channels, such us: ATMs, POSs and Internet Banking. However, despite

the fact that there was a huge progress made on regard to channels developments, yet,

Kosovo remain behind in terms of different channels penetration per inhabitants/people, as

well as number of transactions performed thru electronic channels remain quite low.

Electronic channels provide costs-savings for the banks and customers; by increasing usage

of electronic channels banks can reduce costs and increase profitability as the unit costs are

lower in electronic channels versus In-branch costs. Worldwide, role of branches gradually

is changing.

The trend towards opening branches is greater emphasis on automation. Branches will not

disappear, but they will change over the time, more space for consultation, financial advises

and problem solving rather than regular transactions processing. More than ever, today's

banking sector is faced with tough challenges. Worldwide, financial institutions continuously

are increasing relying on self-service technology in order to meet these challenges, automate

branch processes, and at the same time gaining a competitive advantage and enhancing

profitability.

CHAPTER V

CONCLUSIVE CONLUSIONS

According to data and facts presented in the ATM (Automatic and Teller Machines) and

branch network section, number of people/inhabitants per ATM in Kosovo is 4,565, number

of people/inhabitants per branch is 6,796, and fewest POSs (Point of Sales) compared with

the region.

According to the European Banking Reports, fact and figures 2011, the average standard in

Europe Union is 2,300 inhabitants per bank branch (503 mio/215,000 branches). Austria has

a highly developed banking sector. Access to banking services, measured as number of

inhabitants per bank branch is among the highest in Europe, 1,673 inhabitants per branch,

whereas the best ratio in the region has Bulgaria with 1,259 inhabitants per branch.

According to European Banking Reports, the number of people per ATM in Europe is 1,148.

Germany, Spain, France, and the UK combined, account for 60% of all ATMs in the EU.

Based on the Internet World Statistics, Kosovo has low number of internet penetration as

well, respectively 20.5 % of the population or 377 thousand internet users. Consequently,

number of E-banking users remains low.

Based on the CBK annual report 2011, there are only 68,992 E-banking users in Kosovo at

the end of 2011, which is 20% out of 377 thousand internet users in our country. On regard

to number of transactions performed thru electronic channels, the usage remains quite low.

Based on the CBK quarterly report on cash and non cash payments, there are over 5 million

yearly cash withdrawals inside the branch, majority of them can be performed in the ATM

network. Likewise, according to the same report, number of interbank payments is over 4.2

million yearly (2011), greater part of them can be performed through E-banking channel.

RECOMMENDATIONS

Considering the above facts and figures, I recommend the following:

• Banks should further develop, expend and enhance online channels - Based on

facts and figures, Kosovo has the lowest ratio on regard to number of people/inhabitants per

ATM, per Branch, as well as very low number of E-banking users. However, building

branches at this point is quite expenses, and it is difficult to achieve the Pay Back Period

(time to recover the initial investments), therefore the future plans and strategies must be

focused on less costly channels, respectively alternative and electronic channels. One of the

future steps in the Banking sector are enhancing the self service areas, respectively building

so called “bank kiosk”. Considering that having Bank Kiosk is less expense than building an

entire new branch bank, I recommend piloting Self Service Areas/Kiosks in some of the

locations/places where the bank needs to be present, but not with the full range of products

and services. As a potential location for having the Bank Kiosks are municipalities building

i.e. Prishtina. The new financial kiosk terminal should have features and ability to do

standard ATM transactions, in additions: money transfers, bill payments, cash deposits,

statement printing. “Bank Kiosks” will reduce customer’s waiting time and increase

customer satisfaction, improve staff efficiency, enhance revenuegenerating opportunities,

and better customer service by offering 24/7 service to the customers and avoiding waiting

time. As analyzed above, the current ATM network in Kosovo does not have the ability to

provide cash deposits functionality, which is one of the major part of the transactions

performed inside the branch network;

• Streamline and efficient operations - Banks must switch basics transactions from

branches to other alternative and less costly channels, increase efficiency while use existing

capacity for more complex transactions and financial advisory approach for customers.

• Banks should plan awareness program for customers -Taking into consideration

the low usage of electronic channels in Kosovo, banks needs to work on awareness program,

promote electronic channels through different campaigns, brochures, with the main focus on

benefits and convenience of using electronic channels;

• Re-price the transaction services - I recommend that based on the costs per

transactions banks should re-price the transaction fees, making them cheaper for the

customers using ATMs, E banking and Mobile banking;

• Changing incentive schemes for staff - Changing the incentive schemes can also be

a high effective way to move branch employees from fundamental tasks, i.e. cashing to

actually driving revenue growth, i.e. loans;

• Make branches more efficient - Getting the staffing model right and optimizing

operating hours are two of the main components. Analyze the volume of transactions by

hours, identify peak hours, analyze the type of the transactions and whether these

transactions can be performed outside the branch. The questions are: do we still need as many

cashier positions while customers visit the branches less often and perform more routine

transactions in the ATM, Mobile Banking and E banking. Branch re-organization and re-

shifting of the positions to more values added business is recommended, more on lending,

investment opportunities and financial advisories. Consequently operating costs will be

reduced, bank efficiency will be improved and customer satisfaction increase.

In conclusion, even though the banks continue to develop alternative and electronic channels,

physical branches will play a key role in the customer relationship. Branches will continue

to be one of the main distribution channels, however they will look differently over the time,

and teller counters will be replaced with self service area/24 hrs, more space for relationship

management and financial advisors. To sum up, branches will always remain the heart of

distribution, but, with the different role as today.

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