RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO FEBRUARY 2022 FINANCE, COMPETITIVENESS & INNOVATION GLOBAL PRACTICE PAYMENT SYSTEMS DEVELOPMENT GROUP The World Bank Group The Central Bank of the Republic of Kosovo 1818 H Street NW Address: Rr. Garibaldi nr. 33, Washington, DC 20433 USA Prishtinë, Kosovë www.worldbank.org www.bqk-kos.org paymentsystems@worldbank.org E-mail: info@bqk-kos.org Telephone: +1 202 473-1000 Telephone: +383 38 222 055 Fax: +383 38 243 763 This volume is a product of the staff of the World Bank and The Central Bank of the Republic of Kosovo. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. RIGHTS AND PERMISSIONS The material in this publication is subject to copyright. Because the World Bank and The Central Bank of the Republic of Kosovo encourage dissemination of their knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution is given. TABLE OF CONTENT 07 EXECUTIVE SUMMARY 09 11 I. METHODOLOGY II. ELECTRONIC PAYMENTS ACCESS II.1 CONSUMERS 11 II.2 BUSINESSES 13 15 III. FLOWS OF RETAIL PAYMENTS 23 III.1. CONSUMERS 15 III.1.1 Payments Received 15 III.1.2. Payments Initiated 16 IV. COSTS OF III.2. BUSINESSES 19 RETAIL PAYMENTS III.2.1. Payments Received 19 III.2.2. Payments Initiated 21 IV.1. CONSUMERS 23 IV.2. BUSINESSES 25 IV.3. PAYMENT SERVICE PROVIDERS AND PAYMENT INFRASTRUCTURE 28 PROVIDERS 26 V. ECONOMIC COSTS AND SAVINGS 30 VI. CONCLUSION 32 ANNEX TABLES, FIGURES, AND BOXES Table 1: Bank account access distribution (%) overall and by industry and business size...................... 14 Table 2: Online banking usage distribution (%) overall and by industry and business size..................... 14 Table 3: Percentage distribution of annual payments received (by industry, business size, and payment instrument).......................................................................................................................... 19 Table 4: Percentage distribution of annual payments initiated (by industry, business size, and payment instrument).......................................................................................................................... 21 Table 5: Substitution scenarios and savings (at 50 percent and 100 percent conversion rate for different use cases)...................................................................................................................... 29 Table 6: Business sample distribution by industry, business size, and administrative district.................. 35 Table 7: Business sample distribution by municipalities........................................................................... 35 Table 8: Cash cost components............................................................................................................... 36 Table 9: Debit card cost components....................................................................................................... 36 Table 10: Credit card cost components................................................................................................... 37 Table 11: Credit transfer cost components.............................................................................................. 37 Table 12: Direct debit cost components................................................................................................... 37 Table 13: Cash cost components............................................................................................................ 38 Table 14: Debit card cost components..................................................................................................... 38 Table 15: Credit card cost components................................................................................................... 39 Table 16: Credit transfer cost components.............................................................................................. 39 Table 17: Direct debit cost components................................................................................................... 39 Figure 1: Bank account access across gender and settlement categories.............................................. 11 Figure 2: Bank account access by age group.......................................................................................... 12 Figure 3: Debit and credit card ownership across gender and settlement categories (for adults with access to a bank account)...............................................................................12 Figure 4: Debit and credit card ownership by age group (for those adults with access to a bank account)..................................................................... 13 Figure 5: Distribution of annual payments received (by instrument (%)).................................................. 15 Figure 6: Distribution of annual payments received (by use case (%)).................................................... 16 Figure 7: Distribution of annual payments received (by access channel (%)).......................................... 16 Figure 8: Distribution of annual payments initiated (by instrument (%))................................................... 17 Figure 9: Distribution of annual payments initiated (by use case (%))..................................................... 17 Figure 10: Distribution of annual payments initiated (by access channel (%))......................................... 18 Figure 11: Percentage distribution of annual payments received (by instrument for each business industry)................................................................................. 20 Figure 12: Percentage distribution of annual payments received (by instrument for each business size)....................................................................................... 20 Figure 13: Percentage distribution of annual payments initiated (by instrument for each business industry).................................................................................. 22 Figure 14: Percentage distribution of annual payments initiated (by instrument for each business size)........................................................................................ 22 Figure 15: Per transaction costs by payment instrument (in Euro).......................................................... 23 Figure 16: Time (in minutes) to get to an access channel, wait in-line, and perform a transaction...................................................................................................... 24 Figure 17: Total annual consumer costs as % of 2019 GDP (by payment instrument)............................ 25 Figure 18: Total annual business costs as % of 2019 GDP (by payment instrument)............................. 25 Figure 19: Total annual supply-side cost as % of 2019 GDP (by payment instrument)........................... 26 Figure 20: Supply-side select industry cost indicators............................................................................. 27 Figure 21: Total annual economic cost as % of 2019 GDP (by payment instrument).............................. 28 Figure 22: Gender (proportion of survey respondents)............................................................................ 32 Figure 23: Settlement (proportion of survey respondents)....................................................................... 32 Figure 24: Education levels of survey respondents................................................................................. 33 Figure 25: Employment type of survey respondents................................................................................ 33 Figure 26: Age categories of survey respondents.................................................................................... 34 Box 1: Survey administration for the different actors interviewed............................................................. 10 ACKNOWLEDGMENTS This report would not have been possible without the generous support of the Swiss State Secretariat for Economic Affairs through the Remittances and Payments Program in the Balkans and the Central Bank of Kosovo (CBK). The report's lead authors are Holti Banka (World Bank) and Siyi Wang (World Bank). Oya Ardic, the Task Team Leader of the World Bank Remittances and Payments Program, Maria Teresa Chimienti and Francesco Di Salvo (both World Bank), provided valuable comments as peer reviewers. Editorial and layout assistance was provided by Edlira Dashi and Gert Zenelaj. EXECUTIVE SUMMARY 07 RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 This report is based on a study of the costs the national retail payments system of retail payments in Kosovo, using a regarding the costs of different payment methodology (A Practical Guide for instruments to better guide system Measuring Retail Payment Costs) development and enable high-impact developed by the World Bank's Payment changes. Ef ciency gains resulting from System Development Group (PSDG), part migration to lower-cost retail payment of the Finance, Competitiveness, and instruments and more ef cient use of those Innovation Global Practice. The study is instruments could have signi cant bene ts based on survey data, with questionnaires for economic development and growth as administered to a sample of households the transaction costs of exchanging goods and businesses on the demand side, as and services are reduced. Lower costs of well as to 9 commercial banks operating in retail payments can also fundamentally Kosovo; the Central Bank of Kosovo (in its extend the access of electronic payment role as currency issuer and as the operator services to lower-income households and of the Automated Clearing House); 4 money further improve the ef ciency of the national transfer operators; and the Post Of ce on payments system as access to modern the supply side1. The study aims to payment instruments is broadened. establish a sound economic baseline for The key findings of the analysis of the data collected via surveys for individuals are as follows: • Bank account access by Kosovar adults is around 61.0 percent, with 47.0 percent and 14.0 percent of those having access to accounts also owning a debit and a credit card, respectively. • There is a gender gap (male to female) of 15 percentage points in bank account access, 13 percentage points in debit card ownership, and nine percentage points in credit card ownership. • There is an urban-rural divide in bank account access: the urban population is 9, 11, and 7 percentage points more likely than the rural population to have access to a bank account, own a debit card, or a credit card, respectively. • Of all annual payments initiated by adults, 97.7 percent are in cash and are concentrated at the point of interaction2 to purchase groceries and essential goods3. • In terms of annual payments received, 71.8 percent of those are received in cash. The other reported payment instrument used to receive payments is credit transfer. 1 The demand side surveys were done in January-February 2020 and the supply side surveys were done in 2018. 2 The point where the payer and the payee converge (typically the point of sale). 3 This includes groceries and food supplies, bread and baked goods, gas and transportation, newspapers and magazines, and alcohol and tobacco. • The total annual retail payment costs incurred by individuals amount to 2.43 percent of Kosovo's 2019 GDP. • Cash cost accounts for 1.49 percent of GDP, while electronic payment instruments costs (collectively) account for less than 0.65 percent of GDP • Service channels more strongly associated with the use of cash and other paper-based payment instruments (e.g., pay of ce, agent outlet, bank branch) are the costliest for users compared to other service channels such as the Internet due to the time spent to arrive at the service location, wait in line, and undertake the transaction. 08 The key findings of the analysis of the data collected via surveys for businesses are as follows: • Among businesses, about 96.2 percent have access to a bank account, and of those, 54.3 percent have used online banking over the past three months. RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 • Of all payment volumes initiated by businesses, exactly half of those are in cash. In terms of business size, most transactions initiated by micro and small businesses are in cash, accounting for 63 percent and 43 percent, respectively. • On the receiving side for businesses, 55 percent of payments are conducted in cash, and the remaining are divided among debit or credit cards, credit transfers, and direct debits. • In total, businesses in Kosovo incur annual costs equal to 1.65 percent of GDP (2019) in the context of receiving and initiating payments across all payment instruments, with cash alone accounting for 1.03 percent of GDP. • The top three most important cost components of cash are related to reconciliation and fees for services outsourced4. The key findings of the analysis of the data collected via surveys for the supply side are as follows: • Overall total supply-side costs associated with all payment instruments are estimated at approximately 0.37 percent of Kosovo's 2019 GDP. • Cash costs make up approximately half of all supply-side costs. Consistent with the increase in debit card issuance and debit card transactions, debit cards costs account for about 30 percent of overall costs. • The key cost components of cash are time use and logistics5. For debit and credit cards, it is data processing fees and interchange fees. The main cost components for direct debits and credit transfers are associated with over-the-counter manual activities and archiving. The key findings of the analysis of the data collected via surveys for the entire economy are as follows: • From an aggregated economy perspective, the Kosovar economy bears annual costs of about 4.4 percent of GDP across all retail payment instruments, actors, access channels, and use cases, with cash accounting for about 2.7 percent of GDP, or 60 percent of all costs. • Electronic payment instruments are jointly associated with costs accounting for about 1.4 percent of GDP (or 32 percent of all costs). Signi cant savings can be achieved for the Kosovar residents in the transition process from paper-based to digital payments, reaching up to 1 percent of GDP. For example, a 50 percent substitution of remittance cash payments with electronic credit transfers would generate annual savings of €30.7 million. 4 Speci cally, they include the costs of managing and reconciling cash funds; emptying and balancing cash registers/cash accounts and back-of ce cash management; and paying professional money transporters for transporting cash. 5 This includes over-the-counter deposits/cash-in and withdrawals/cash-out (in bank branches and agents) and back-of ce cash handling, as well as ATM maintenance and transportation costs. 05 I. METHODOLOGY 09 Strengthening the security and reliability of the national payments system and fostering the use of ef cient payment instruments are important public policy goals. Greater use of electronic payments rather than cash and other paper-based instruments has signi cant RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 economic and social bene ts, including lowering costs and thus raising economic ef ciency and broadening access to nancial services for those currently excluded. The methodology applied in this study for Kosovo is based on the World Bank's A Practical Guide for Measuring Retail Payment Costs6. It aims to examine payment transactions in the overall context of their use by including key factors likely to affect retail payment costs, i.e., payment type, transmission method, and use case. The two main transmission methods/access channels are in-person payments (for example, point of interaction, ATM, bank branch, pay of ce, agent) and remote payments (the Internet, telephone/mobile phone network). Different use cases are also considered in the context of consumers (remittances, payments for goods/services, recurring bills, salaries, pensions, and so forth). Furthermore, the following are considered in terms of payment instruments: cash, debit card, credit card, credit transfer, and direct debit (paper-based and electronic for the latter two). Speci cally, on the demand side of retail payment actors, consumer analysis provides insights into potential savings that may arise when migrating from paper-based to electronic processing of payments. Savings in each scenario are shown by using the annual cost gures and considering speci c reduction projections resulting from the migration of one payment instrument (e.g., paper-based credit transfer) to another (e.g., electronic credit transfer) for the various use-cases like retail payments, remittances, salary and pension payments. For the supply side, deposits and withdrawals (own account and third-party accounts) are also examined, separately from actual payments/transfers, both by the payment instrument used (i.e., debit card, credit card) and the access channel (i.e., bank branch, ATM). Regardless of the intermediate instrument used during the withdrawal, all withdrawal costs are linked to cash in the analysis. Consumer and business surveys (demand side) were conducted in January/February of 2020, while the payment service and infrastructure provider surveys (supply side) in the spring of 2018. However, given that no substantial changes have occurred in the retail payments market of Kosovo from the supply side over those two years, it is safely assumed that volumes and costs reported by payment service and infrastructure providers are also valid for 2019 (before COVID-19). As such, 2019 is used as a reference year for analyzing the demand and supply sides7. 6 For an in-depth read of the methodology, please see World Bank (2016). http://documents1.worldbank.org/curated/en/255851482286959215/pdf/111216-WP-P155382-PUBLIC-ABSTRACT-SENT.pdf 7 All data collection for this exercise was conducted pre-COVID and therefore, there are no implications in terms of the data being treated to represent an extraordinary period. Moreover, the time gap between demand and supply side data collection has also been observed in other similar exercises but does not have any implications for analysis or inferences. Box 1: Survey administration for the different actors interviewed Consumers: In terms of data collection, a survey rm (UBO Consulting) administered the survey through face-to-face interviews using computer-assisted personal interviewing (CAPI) between February 18 and March 18, 2020, in all thirty-eight municipalities across Kosovo. The sample population units were chosen using a strati ed multi-stage process of identi cation and selection to ensure minimal variance and costs for all estimates while also preserving the ability to obtain valid point and variance estimates for population parameters of interest. Weights were implemented to re ect the structure of the population, in terms of ethnicity and age group. The analysis included a total of 1,001 respondents with a representative sample of randomly selected 10 adults (ages 18 and above) of different genders and ethnicities, and across settlement areas (i.e., urban and rural). RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Businesses: UBO Consulting administered the business survey through eld research between January 20 and February 28, 2020, covering businesses from both urban and rural areas in all seven administrative districts of Kosovo. The list of the registered businesses provided by the Kosovo Agency of Statistics (ASK) to the Central Bank of the Republic of Kosovo (CBK) was used as a basis for the sampling frame of the business survey. A strati ed sampling technique was used to select the sample, with a nal sample size of 395 businesses. Strata were based on ve economic sectors (construction, manufacturing, services, trade, and transportation) and four business sizes (micro, small, medium, and large). Considering the importance of Pristina, the capital city, as the country’s main economic center, around 30 percent of the companies in the sample were located there. Of the 395 businesses selected to be interviewed, 192 completed the interview, 139 refused to participate, while 64 businesses were shut down, idle, or no contact could be established. The responding businesses came from all ve economic sectors; the largest sector was trade. In terms of the geographic spread, the responding businesses were allocated across rural and urban areas, covering twenty-seven municipalities of all seven administrative districts of Kosovo. The limited number of businesses interviewed also limited the granularity in the analysis and of business data, including the nuances on the costs in the different payment instruments and use cases on a transaction basis. PSPs/PIPs: For the supply side of the payments market in Kosovo, no sampling technique was used given the small number of supply side actors in the market. Data was gathered from: nine commercial banks (out of eleven operating in Kosovo); the Central Bank of Kosovo (in its PSP role as and in its PIP role as the operator of the Automated Clearing House); four money transfer operators (MTOs); the Postal Of ce. Customized questionnaires were sent electronically to each participating institution. Respondents were given two months’ time to ll out the questionnaires (given that data from the different departments had to be put together) and return them to the CBK and the World Bank. CBK and World Bank experts addressed the issues/questions that came up during that period. Data quality control followed, where in some cases additional information and clari cation was requested from the responding institutions, particularly where inconsistencies and errors were detected. It should be emphasized that the data is analyzed and presented by payment instrument, aggregating all different types of institutions, so that anonymity and con dentiality are preserved. II. ELECTRONIC PAYMENTS ACCESS 11 II.1 CONSUMERS According to the survey ndings, 60.9 percent of Kosovar adults have access to a bank RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 account8. The gender gap in account ownership is 15.2 percentage points, with 53.2 percent females vs. 68.4 percent males reporting having access to a bank account. Moreover, bank account ownership falls to 56.6 percent of the adult population in rural areas compared to 65.5 percent in urban areas. Figure 1: Bank account access across gender and settlement categories 68.4% 65.5% 60.9% 56.6% 53.2% Total Female Male Urban Rural Across age categories, adults aged 65 years and above present the highest ratio for bank account access at 74 percent, followed by those in the age group of 25 to 34 (69 percent) and 55 to 64 years (64 percent). The ndings for the senior group (65+) could be explained by the fact that all retired seniors receive their pensions directly to bank accounts and, as such, need to have access to a bank account by default. 8 De ned as an account held at private commercial banks which enable the user to make deposits and initiate/receive payments. Figure 2: Bank account access by age group 73.7% 69.3% 63.8% 60.0% 57.1% 49.7% 12 RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 18-24 25-34 35-44 45-54 55-64 65+ Furthermore, 47.6 percent of those with access to a bank account reported owning a debit card, while 14.4 percent reported owning a credit card. The gender gap in debit card ownership is 13.6 percentage points (40.7 percent among females vs. 54.2 percent among males). Adults living in urban areas are 11.6 percentage points more likely to own a debit card than those living in rural areas (53.5 percent vs. 41.9 percent). The gender gap in credit card ownership is lesser at 9.2 percentage points. Rural respondents are about 7.5 percentage points less likely to own a credit card than their urban counterparts (11.4 percent vs. 17.9 percent). Figure 3: Debit and credit card ownership across gender and settlement categories (for adults with access to a bank account) 54.2% 53.5% 47.6% 41.9% 40.7% 19.3% 17.9% 14.4% 11. 4% 10.1% Total Female Male Urban Rural Debit Card Credit Card Across age categories, for those adults with access to a bank account, the highest debit card ownership ratio was observed for ages 25 to 34 years (58.4 percent). Figure 4: Debit and credit card ownership by age group (for those adults with access to a bank account) 58.4% 57.9% 50.0% 46.9% 40.0% 37.1% 20.0% 13 14.2% 11.9% 11.6% 11.7% 1.9% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 18-24 25-34 35-44 45-54 55-64 65+ Debit Card Credit Card Kosovars formally employed in the public sector are most likely to have access to a bank account at 88.0 percent, followed by the self-employed at 77.8 percent. Adults who were unemployed or studying were much less likely to own a bank account at just 34.5 percent and 50.6 percent, respectively. Debit card ownership is also higher among those employed in the formal sector - 69.0 percent among public-sector employees and 67.0 percent for those employed in the non-public sector. The self-employed respondents followed at 58.0 percent. Credit card ownership is highest among those employed in the public sector at 48.0 percent, followed by the self-employed and those employed in the non-public sector (32.0 and 30.0 percent, respectively). Education levels also play a role in bank account ownership. Those with completed university or post-university education are most likely to have access to a bank account at 92.1 percent and 80.3 percent, respectively. Those with secondary education or vocational training are less likely to own a bank account (57.0 and 58.0 percent). Credit card ownership also increases with higher education levels – adults with a university (36.0 percent) or post-university (51.0 percent) are much more likely to own a credit card compared to those with just a primary (11.0 percent) or secondary level (20.0 percent) education9. II.2 BUSINESSES According to the survey ndings, an overwhelming majority of surveyed businesses in Kosovo (96.2 percent) have access to a bank account. The account access gap, based on the size of the company, is not signi cant. Small, medium and large enterprises have universal access to a bank account, while only 5.5 percent of micro-businesses report not having access to a bank account. However, the ownership varies based on the type of industry. All businesses in the construction & manufacturing sector have access to a bank account, compared to 96.3 percent and 91.1 percent of those in the trade and services industry, respectively. 9 Income data was not asked in individual surveys given the sensitivity of the information. Such information, however, is not critical to the core analysis of this exercise. Table 1: Bank account access distribution (%) overall and by industry and business size Account Access (%) All businesses 96.0% Construction & Manufacturing 100.0% By sector Services 91.1% Trade 96.3% Micro 94.5% By Firm Size Small 100.0% Medium 100.0% 14 Large 100.0% In terms of the overall online banking use, over half (54.3 percent) of those with an account RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 use online banking10. When segmented by industry type, approximately half of businesses in services and trade sectors use online banking, and this number increases to 57.6 percent for rms in the construction & manufacturing industry. It is worth noting that usage of online banking varies relative to business size. According to the sample analysis, all large businesses in Kosovo use online banking, compared to approximately 90.9 percent, 73.7 percent, and 39.1 percent for medium, small, and micro-businesses. Table 2: Online banking usage distribution (%) overall and by industry and business size Account Access (%) All businesses 54.3% Construction & Manufacturing 57.6% By sector Services 53.3% Trade 52.4% Micro 39.1% Small 73.7% By Firm Size Medium 90.9% Large 100.0% 10 Online banking usage is de ned as a business having used online banking services at least once over the past three months. III. FLOWS OF RETAIL PAYMENTS 15 III.1. CONSUMERS Costs are a function of the volume of transactions, among other variables. Hence, the RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 consumer section is analyzed by the volume of payments (both received and initiated) across the different payment instruments, use cases, and access channels. Consumers/individuals in Kosovo initiate and receive around 233.8 million payments annually (across various payment instruments, use cases, and access channels). That is 176.9 payments/adult annually, of which 87.4 percent are in cash11. III.1.1 Payments Received Consumers in Kosovo receive around 23.4 million payments annually, or 17.7 payments/adult, of which 72.0 percent are in cash while the remaining 28.0 percent are received via electronic credit transfer. Figure 5: Distribution of annual payments received (by instrument (%)) Cash 71.8% Electronic Credit Transfer 28.0% In terms of use case distribution, most payments are received in exchange for goods and services provided to individual consumers account for 34.6 percent. Salary payments follow with 30.2 percent, while remittances and pension transfers account for 18.9 and 12.3 percent respectively, and social assistance bene ts for 3.8 percent. 11 Population information drawn from the World Bank database: https://data.worldbank.org/indicator/SP.POP.GROW?locations=XK Figure 6: Distribution of annual payments received (by use case (%)) 34.6% 30.2% 18.9% 12.3% 16 3.8% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Payment recieved in Salary Payments Remittances Pension Payments Social Assistance exchange for from Government goods/services offered Of the payments received for goods and services, 93.0 percent are made in cash. Cash is also the principal instrument used for remittances (72.0 percent). Pension payments, on the other hand, are done via credit transfers. When analyzing the ow of the received payments according to access channel, a sizable portion is received at the point of interaction – among individuals (51.3 percent), followed by bank accounts at 37.4 percent. The remaining payments are received via agent of ces (4.8 percent) and government of ces (1.2 percent). Figure 7: Distribution of annual payments received (by access channel (%)) 51.3% Cash-in-hand 37.4% Bank Account Agent Office 4.8% Government Pay Office 1.2% III.1.2. Payments Initiated Adults in Kosovo initiate around 210.4 million payments annually, or 159.2 payments/adult, of which 97.7 percent are in cash. Debit card transactions follow at 1.7 percent of the total payments initiated, and credit card transactions at 0.4 percent. Credit transfers and direct debit payments account for negligible proportions of the overall transactions at 0.05 and 0.04 percent, respectively. Figure 8: Distribution of annual payments initiated (by instrument (%)) Cash 97.71% Debit Card 1.75% Credit Card 0.37% Electronic Credit Transfer 0.04% Paper-Based Direct Debit 0.03% 17 Electronic Direct Debit 0.01% Paper-Based Credit Transfer 0.01% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 When the data is analyzed by use case, most of the payments are triggered for purchasing essential goods12 at 78.1 percent, followed by services13 at 20.3 percent. Payments initiated towards durable goods14, fund transfers15, and government payments16 are at a lower volume at 1.0, 0.2, and 0.1 percent, respectively. Figure 9: Distribution of annual payments initiated (by use case (%)) 79.7% 19.0% 0.9% 0.2% 0.1% Essential Goods Services Durable Goods Transfer of funds Government Payments 12 Essential goods: This includes groceries and food supplies, bread and baked goods, gas and transportation, newspapers and magazines, and alcohol and tobacco. 13 Services: This includes payments towards pharmaceutical products, restaurants, hairdressers, household services (plumbers, electricians etc.), house-helps, health and dental visits, entertainment, long distance travel, vehicle maintenance, utilities (water, electricity, phone, school fees, and mortgage), and insurance (health and other insurance). 14 Durable goods: This includes goods like clothes, footwear, school supplies, electronic appliances, furniture, livestock, and equipment (agricultural and non-agricultural). 15 Fund transfer/ remittances: This includes transfer of funds between friends and relatives (within and outside the country) without the exchange of goods and services. 16 Government payments: This can include, among other things, tax and loan repayments for payments initiated by consumers; and social and welfare assistance, nancial aid, and government subsidies for payments received by consumers. Furthermore, most payments made to purchase essential goods or services are initiated in cash at 98.0 percent each. Eighty-seven percent of remittances or money transfers between friends and relatives are cash, while 13.0 percent are credit transfers. Two percent of the payments towards durable goods are made with credit cards. Debit and credit cards account for the remaining payments across various use cases. Regarding distribution across access channels, payments initiated at the point of interaction account for 94 percent and those via the Internet for 3.0 percent. The remaining 3.0 percent of payments/transfers are initiated at agent outlets (1.0 percent), bank branches 18 (1.0 percent), or government pay of ces (1.0 percent). Among all internet payments, 79.7 percent are initiated with debit cards, 16.7 percent with credit cards, 2.0 percent via credit transfers, and 1 percent via direct debit. RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Figure 10: Distribution of annual payments initiated (by access channel (%)) Point of Sale 94.0% Internet 3.0% Government Pay Office 1.0% Agent Office 1.0% Bank Branch 1.0% III.2. BUSINESSES On average, businesses in Kosovo initiate and receive around 131.8 million payments/transfers annually (across different payment instruments, use cases, and access channels), of which 52.9 percent are in cash. III.2.2 Payments Received Kosovo businesses receive approximately 88.8 million payments annually, over half17 (55.0 percent) of which are conducted in cash, 18.6 percent via credit transfers, 12.6 percent with debit cards, 8.4 percent through direct debits, and 5.4 percent with credit cards. 19 When disaggregated by industry, businesses in the trade sector receive the largest volume RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 of payments compared to construction & manufacturing or services, accounting for 56.0 percent of the total transactions. According to business size, large and micro-enterprises together contribute to the overwhelming majority (approximately 99.0 percent) of the payments received. Table 3: Percentage distribution of annual payments received (by industry, business size, and payment instrument) Account Access (%) Construction & Manufacturing 20.0% By sector Services 24.0% Trade 56.0% Total 100.0% Micro 31.2% Small 0.2% By Firm Size Medium 0.7% Large 67.9% Total 100.0% Cash 55.0% Debit Card 12.6% By payment Credit Card 5.4% instrument Credit Transfer 18.6% Direct Debit 8.4% Total 100% The share of received cash transactions in the construction & manufacturing and services sectors is estimated at 46.3 percent and 37.9 percent respectively. This gure may be affected by the small number of micro and small businesses surveyed, given that more than 17 50% of the sample could not be interviewed (were not found/did not answer). Figure 11: Percentage distribution of annual payments received (by instrument for each business industry) 67.6% 46.3% 37.9% 24.7% 20 21.8% 20.4% 17.1% 14.7% 13.5% 8.2% 7.7% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 6.1% 6.0% 5.4% 2.8% Construction & Manufacturing Services Trade Cash Debit Card Credit Card Electronic Credit Transfer Electronic Direct Debit Furthermore, cash contributes to the largest shares of transactions received from businesses regardless of their size. In micro-businesses, 61.5 percent of the transactions received are cash, while this percentage falls to 35.8 percent for large enterprises. Figure 12: Percentage distribution of annual payments received (by instrument for each business size) 61.5% 43.2% 39.4% 35.8% 28.0% 24.8% 23.1% 19.7% 17.2% 15.3% 14.5% 14.1% 11.3% 11.7% 10.0% 8.1% 8.6% 6.0% 4.0% 3.6% Microbusiness Smallbusiness Medium business Large business (1-9 employees) (10-49 employees) (50-249 employees) (250 employees and above) Cash Debit Card Credit Card Electronic Credit Transfer Electronic Direct Debit III.2.2. Payments Initiated Kosovo businesses initiate approximately 43 million payments annually, of which half are in cash, 32.0 percent via credit transfers, 11.0 percent through direct debits, 5.0 percent with debit cards, and 2.0 percent with credit cards. When breaking down initiated payments by industry, it emerges that businesses in the service industry conduct the largest share of payments, accounting for 61.0 percent of the total transactions. And when broken down by business size, micro-businesses initiate most payments (67.0 percent). 21 Table 4: Percentage distribution of annual payments initiated (by industry, business size, and payment instrument) RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Account Access (%) Construction & Manufacturing 7.0% By sector Services 60.0% Trade 33.0% Total 100.0% Micro 67.0% Small 1.0% By Firm Size Medium 11.0% Large 21.0% Total 100.0% Cash 50.0% Debit Card 5.0% By payment Credit Card 2.0% instrument Credit Transfer 32.0% Direct Debit 11.0% Total 100.0% As the study shows, half the payments initiated by businesses are cash regardless of the industry, with electronic credit transfer following in the second place. Based on the analysis, construction & manufacturing and trade companies initiate over half their transactions in cash, compared to approximately 42.0 percent by the services industry. Furthermore, around 30.0 percent of the payments are initiated via electronic credit transfers by businesses in all three types of industries. Figure 13: Percentage distribution of annual payments initiated (by instrument for each business industry) 54.1% 50.9% 37.9% 34.9% 31.9% 30.1% 22 15.4% 10.8% 10.4% 8.3% 4.3% 3.2% 2.6% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 0.8% 0.3% Construction & Manufacturing Services Trade Cash Debit Card Credit Card Electronic Credit Transfer Electronic Direct Debit Instrument usage varies among different types of businesses. The largest number of transactions initiated by micro and small enterprises are estimated to be cash, accounting for 63.1 percent and 43.3 percent, respectively. Electronic credit transfer is the most used payment instrument for medium and large enterprises, contributing to 40.3 percent and 65.6 percent of their transactions, respectively. Figure 14: Percentage distribution of annual payments initiated (by instrument for each business size) 65.6% 63.1% 43.2% 40.6% 40.3% 25.6% 24.1% 22.6% 19.7% 14.9% 9.2% 8.5% 5.4% 4.0% 3.4% 2.9% 2.9% 2.4% 1.4% 0.0% Microbusiness Small business Medium business Large business (1-9 employees) (10-49 employees) (50-249 employees) (250 or more employees) Cash Debit Card Credit Card Electronic Credit Transfer Electronic Direct Debit IV. COSTS OF RETAIL PAYMENTS 23 IV.1. CONSUMERS Costs are a function of the volume of transactions, among other variables. Hence, the RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 consumer section is analyzed by the volume of payments (both received and initiated) across the different payment instruments, use cases, and access channels. Costs per transaction for all payment instruments include: • fees to initiate a payment (where relevant), in-person or remotely • fees associated with a given access channel • time-based costs - the time invested in getting to the access channel, waiting in line, and performing the transaction (converted into monetary terms). The highest per-transaction costs are associated with paper-based credit transfers and paper-based direct debits at €2.49 and €2.30, respectively. Cash follows with a per-transaction cost of €0.45. In contrast, electronic credit transfers and direct debits have the same and the lowest per-transaction cost, equivalent to €0.11. Figure 15: Per transaction costs by payment instrument (in Euro) Paper-based Credit Transfer 2.49 Paper-based Direct Debit 2.30 Cash 0.45 Debit Card 0.24 Credit Card 0.24 Electronic Direct Debit 0.11 Electronic Credit Transfer 0.11 The xed costs associated with the different payment instruments include annual fees for maintaining a bank account and the payment instrument itself and the costs incurred from the time invested in examining bank and credit card statements. As the analysis reveals, Kosovar consumers face the highest aggregate costs when traveling to, waiting in line, and undertaking a transaction at a government pay of ce at 32 minutes18, followed by a bank branch at 29 minutes. Agent of ces and Automated Teller Machines (ATMs) follow at 24 and 22 minutes, respectively. It is worth mentioning that 18 Government pay of ces demonstrate the highest cost associated with a cash collection procedure. Agent of ces are also largely employed for cash payment purposes. Bank branches were primarily used for credit transfers and direct debits. the long distances that individuals need to travel in rural and semi-rural areas to get to a physical access channel also drive these averages. Kosovo has the second-lowest number of ATMs per one million inhabitants (after Albania) in the Balkans, at 279, with North Macedonia having the highest at 500.19 Figure 16: Time (in minutes) to get to an access channel, wait in-line, and perform a transaction 36 34 32 29 29 28 27 24 24 24 22 20 17 RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Bank Branch ATM Agent Office Government Pay Office Total Urban Rural Based on the time spent getting to the various access channels, the time spent waiting in line, and the time taken to perform the transaction, the average cost per transaction via each access channel is calculated using the minimum wage as a proxy.20 By combining payment instruments with access channels, the analysis reveals that paper-based instruments (i.e., paper-based credit transfers, paper-based direct debits, and cash) are more costly than electronic payment instruments (1.8 percent of GDP vs. 0.6 percent of GDP). For initiated payments, the costliest combination appears to be cash payments at the government pay of ce. In contrast, the least expensive are electronic credit transfers and direct debits, or debit/credit card payments made via the Internet. Overall, Kosovar consumers incur annual economic costs of 2.43 percent of the country's GDP21 across all payment instruments, access channels, and use cases, considering variable and xed costs. Cash alone accounts for 1.49 percent of the annual GDP.22 Debit card and paper-based credit transfers follow at 0.39 and 0.26 percent of the country's GDP. It is worth pointing out that some of these overall costs are driven by a high per-transaction cost while others by a high volume (e.g., debit cards), but for cash, both hold true. It is not surprising that most costs associated with paper-based instruments are time-based opportunity costs because they require the physical presence and traveling of the payer/payee in nearly all instances. Similarly, most costs for electronic payment instruments are direct monetary costs stemming from the different fees charged. 19 Annual Report on Payment Instruments. CBK, 2020. https://www.bqk-kos.org/repository/docs/SistemiIPagesave/Annual%20comparative%20report%20on%20electronic% 20instruments.pdf 20 The average monthly minimum wage was taken as €150 (https://www.tiranatimes.com/?p=144135), and assuming 40-hour work weeks, the monetary cost of a minute was calculated to be €0.02 21 Kosovo 2019 GDP. 22 The 2019 GDP for Kosovo is estimated at: € 6.9 billion. Figure 17: Total annual consumer costs as % of 2019 GDP (by payment instrument) Cash 1.49% Debit Card 0.39% Paper-based Credit Transfer 0.26% Credit Card 0.13% Electronic Direct Debit 0.11% Paper-based 0.03% Direct Debit 25 Electronic Credit Transfer 0.02% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 IV.2. BUSINESSES When aggregating the costs (by payment instrument) irrespective of the size of a business, the costliest payment instrument is cash. The annual cost of cash for all businesses in Kosovo amounts to approximately €72.5 million, followed by the cost of debit cards at €16.6 million, credit transfers at €13.9 million, electronic direct debits at €7 million, and credit cards at €6.3 million. In terms of weight of each instrument relative to total costs, cash accounts for 62.3 percent, debit card at 14.3 percent, electronic credit transfer at 11.9 percent, electronic direct debit at 6 percent, and credit card at 5.4 percent. In total, businesses in Kosovo incur annual costs of €116.3 million, equal to 1.6 percent of GDP in the context of receiving and initiating payments across all payment instruments, with cash alone representing 1.0 percent of GDP or over half of the total costs. In comparison, the cost of debit cards is estimated at 0.2 percent of GDP, electronic credit transfers at 0.2 percent, electronic direct debits at 0.1 percent, and credit cards at 0.09 percent. Figure 18: Total annual business costs as % of 2019 GDP (by payment instrument) Cash 1.03% Debit Card 0.24% Electronic 0.20% Credit Transfer Electronic 0.10% Direct Debit Credit Card 0.09% When breaking down the cost components of each instrument for businesses, the study rst indicates that reconciliation costs and fees for services outsourced constitute a sizable portion of the total cost, accounting for 70.4 percent combined. Speci cally, they include the costs of managing and reconciling cash funds, emptying and balancing cash registers/cash accounts and back-of ce cash management, paying professional money transporter for transporting cash, and paying payment service providers for collecting payments. IV.3. PAYMENT SERVICE PROVIDERS AND PAYMENT INFRASTRUCTURE PROVIDERS The main actors in the retail payments market of Kosovo comprise the Central Bank of Kosovo (CBK) as the licensing, regulatory, supervisory, and oversight authority of financial institutions and the owner and operator of the Real-Time Gross Settlement (RTGS) system and the Automated Clearinghouse (ACH), commercial banks, and the non-banking financial institutions (including money transfer operators). As for access 26 channels, there were 497 ATMs and 13,769 POS terminals in the country, according to the latest (2020) report of CBK. RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Overall annual supply-side costs associated with retail payment instruments are estimated to be €24.9 million, approximately 0.4 percent of Kosovo's GDP for 2020. Cash costs make up half of all supply-side costs, accounting for 49.3 percent. Figure 19: Total annual supply-side cost as % of 2019 GDP (by payment instrument) Cash 0.20% Debit Card 0.10% Credit Card 0.03% Electronic Credit Transfer 0.03% Electronic Direct Debit 0.01% Cash costs approximately 0.37 percent of the GDP across all institutions – commercial banks, non-bank nancial institutions (NBFIs), and the Central Bank. Approximately 20.0 percent of the processes generating cash costs at these institutions are outsourced. The logistics of making cash available to customers around the country accounts for a large share of cash costs: ATM management represents over a quarter of all cash costs, while transportation costs account for 15.0 percent of cash costs. Back-of ce and over-the-counter costs account for about 11.0 percent combined. Regarding the cost components associated with cash, about 50.0 percent of all cash costs, on average, are associated with logistics (i.e., ATM, transportation, safety). A sizable portion of the cost is related to other activities related to the central bank, alongside statement costs and fees. Over-the-counter and back-of ce costs, that is, time-based staff costs, are also considerable since they account for about 11.0 percent of the total. Different cost components account for divergent shares of the total cost of each instrument. For example, over-the-counter costs are highest among debit cards, while safety costs (mainly insurance) account for over three-fourths of direct debit costs. At 54.0 percent of the total, IT costs were the highest for credit transfers. Compared to credit cards, debit cards had higher shares of costs attributed to IT, data processing, and settlement charges, while licensing and interchange fees are higher for credit card costs. Most costs associated with debit cards stem from data processing/clearing (30.0 percent). Interchange fees and settlement costs jointly also account for a substantial portion of costs (29.0 percent). Over-the-counter and IT-related costs are also signi cant since, jointly, they account for 34.0 percent of costs. Other costs such as loyalty programs and licensing are at much lower levels of about 2.0 percent (for detailed cost component breakdown by instrument for the supply side, see Annex A). 27 The analysis also presents cost indicators related to various important activities and infrastructures of Kosovo's retail payments supply side. RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Figure 20: Supply-side select industry cost indicators23 Average costs (select indicators) Maintaining an Maintaining a Maintaining an ATM annually: POS terminal NBFI agent €2840 annually: €73 annually: €5825 Debit card Credit card issuance cost: issuance cost: €1.78 €1.94 23 Debit and credit card issuance costs are comprised of production and issuance costs V. ECONOMIC COSTS AND SAVINGS 28 The analysis allows for the derivation of economic costs by amassing the costs borne by individual actors but accounting for the transfer costs (typically associated with outsourced RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 activities; for some, these represent costs, for others, bene ts, so they offset each other). The aggregated economic cost derivation shows that the Kosovar economy annually bears costs equivalent to 4.4 percent of GDP across all retail payment instruments, actors, use cases, and access channels. More speci cally, cash accounts for the largest portion of all costs (60.0 percent) at approximately 2.7 percent of GDP. All other instruments account for smaller portions of overall costs and the GDP. Moreover, paper-based instrument costs account for close to 3.0 percent of GDP (or 68.0 percent of all costs), while electronic instrument costs account for about 1.4 percent of GDP (or 32.0 percent of all costs). Figure 21: Total annual economic cost as % of 2019 GDP (by payment instrument) Cash 2.68% Debit Card 0.72% Electronic 0.34% Credit Transfer Paper-based Credit Transfer 0.26% Credit Card 0.25% Electronic 0.13% Direct Debit Paper-based Direct Debit 0.03% The analysis also allows for projected savings for particular use cases. Speci cally, a 50.0 and 100.0 percent conversion rate (based on the methodology) is used to derive potential savings. The substitution scenarios are constructed to consider the most plausible electronic payment instruments for the particular use cases. The most frequent types of payments and use cases are considered: remittances, payments for durable goods, services and utility bills and salaries. The savings shown are derived by multiplying per transaction average savings with the annual number of payments for the four different use cases across relevant access channels, using 50.0 and 100 percent conversion rates. The most signi cant annual savings are associated with shifting cash-based services and utility bill payments to electronic credit transfers, leading to savings of €34.4 million and €68.7 million per year when considering 50.0 percent and 100 percent conversion rates, respectively. Interestingly, remittance recipients in Kosovo could save up to €61.4 million per year if they were to use electronic credit transfers instead of cash (i.e., at a 100 percent conversion rate). Other observations include: • If half of the current sent and received cash remittances were instead channeled through electronic credit transfers, consumers would save about €30 million annually. In addition to the transaction fee, this estimate factors in time-based costs (about 60 percent, as lost productivity) for getting to the physical access points to send and collect the cash. 29 RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Table 5: Substitution scenarios and savings (at 50 percent and 100 percent conversion rate for different use cases) Substitution Savings: 50% Conversion Rate Savings: 100% Conversion Rate Scenario/Savings Domain Euro % of 2019 GDP Euro % of 2019 GDP Remittances/Transfer of Funds Cash > Electronic Credit Transfer 30,717,233 0.44% 61,434,465 0.89% Durable goods Cash > Credit/Debit 20,437,039 0.29% 40,874,079 0.59% Card Cash > Electronic Credit Transfer 33,024,883 0.48% 66,049,765 0.95% Services/Utilities Cash > Credit/Debit 21,271,243 0.31% 42,542,486 0.61% Card Cash > Electronic Credit Transfer 34,372,899 0.50% 68,745,799 0.99% 30 VI. CONCLUSION RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 The analysis of the cost of retail payments lower-income households and small suggests substantial ef ciency retailers, thereby improving the ef ciency improvements can be achieved in Kosovo of the national payment system, as access if cash and other paper-based payments to and usage of modern payment were migrated to lower-cost electronic instruments is broadened. retail payment instruments, in part or full. The current cost of paper-based payments It is important to note that certain early at the economy level amounts to about 3.0 developments signify advancements in the percent of the country's GDP, while Kosovo payments market. To ef ciently electronic payment instrument costs are increase the execution of electronic about 1.4 percent of GDP. Overall, the transactions, the Central Bank of Kosovo savings could reach up to around 1.0 (CBK) has envisaged to incentivize and percent of GDP under a combination of support the implementation of an instant scenarios (e.g., one of them being where payment system by the private sector. The 50.0 percent of current paper-based overall use of electronic credit transfers, remittances and services are paid direct debits, and payment cards has electronically). demonstrated substantial improvements; however, the volume of these transactions Limited bank account access among is still fairly low compared to the total individuals (about 40.0 percent of Kosovar volume of cash and other paper-based adults still do not have access to a bank transactions. The industry, government account) inevitably limits the payment authorities, and CBK can use the hard options. The lack of e-money accounts, evidence of cost ef ciency presented in now operationalized since the introduction this analysis, coupled with incentives for of an E-Money Regulation by CBK in 2020, materializing the necessary changes on also hampers ef ciency. Even among the ground that will sustain the shift to account owners/cardholders, cash electronic payments. Speci cally, CBK continues to prevail; only about 48.0 can use their oversight tools to regularly percent of the banked own a debit card. collect and monitor costs associated with electronic payment infrastructures, As the transaction costs of exchanging services, and instruments. Monitoring is goods and services are reduced, more important because the cost aspects will be ef cient use of electronic payments could signi cant to advance the adoption and signi cantly bene t the country's usage of electronic payment instruments. economic development and growth. Lower costs of these services might The current momentum for electronic potentially boost the reach of non-cash transactions should be maintained and and electronic payment services to further increased. It is certainly promising that debit card payments have had the increased. Ensuring interoperability of POS largest growth rate among all retail payment terminals will also encourage more instruments. However, the widespread use merchants to install POS terminals. of cash is still an obstacle to the overall Furthermore, acquirers should promote the electronic payment momentum, given that usage of light electronic acceptance the supply side in Kosovo continues to bear infrastructures such as QR codes or cash costs associated with 0.2 percent of NFC-based light POS to expand adoption. the country's 2019 GDP (almost half of all retail payment supply-side costs). The introduction of new electronic payment methods, such as transaction accounts, 31 From a market perspective, banks and instant payments, and e-money transfers non-bank payment service providers must channeled through innovative solutions, RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 effectively meet the target population's could also be of importance to the retail broad range of transaction needs at a payments market of Kosovo in shifting retail reasonable cost. The current account and payments from the more costly cash to the payment product offerings might need to less costly electronic payment instruments. be reviewed in the light of improving overall design and affordability. Public and Furthermore, the automation of cash private-sector strategies should align with management, particularly for businesses the needs of the unbanked and the and payment service providers, will be underserved (individuals and businesses essential to reduce some of the current alike). Technological and business model inef ciencies given the high cost of cash innovation that leverages ubiquity should handling. That would imply deploying new be encouraged. For a signi cant technological solutions, among others, for substitution of cash with electronic counting, sorting, and dispensing physical payments to take place, existing electronic cash. payment products must be offered for more use cases, such as e-commerce, public Overall, even though cash still dominates transportation, domestic and international and is quite costly for Kosovo, there are remittances, to mention a few. promising signs of innovation and transition away from cash. The industry and relevant Moreover, encouraging the use of POS authorities should use the hard evidence of terminals by merchants will be necessary. cost ef ciency presented in this analysis, At the same time, though, the rst step is to coupled with incentives, in order to equip businesses with enough POS materialize the necessary changes on the terminals around the country. Indeed, while ground that will sustain the shift to the growth rate of POS terminals at the electronic payments. national level has been signi cant, the pace needs to be maintained and further ANNEX 32 RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Figure 22: Gender (proportion of survey respondents) 50.6% Female Male 49.4% Figure 23: Settlement (proportion of survey respondents) 51.0% Urban Rural 49.0% Figure 24: Education levels of survey respondents 47.0% 21.8% 16.7% 33 5.1% 6.4% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 1.6% 1.5% No School Primary Secondary University Post-University Vocational Other / No response Figure 25: Employment type of survey respondents 28.7% 24.6% 12.2% 12.5% 10.1% 7.9% 4.1% Unemplyed Self-Emplyed Employed Employed Retired Student Other / (Public Sector) (Non-Public No response Sector) Figure 26: Age categories of survey respondents 65+ Years 1.9% 55 - 64 Years 9.4% 34 45 - 54 Years 15.9% 35 - 44 Years 24.5% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 25 - 34 Years 27.4% 18 - 24 Years 21.0% Business sample distribution24 Table 6: Business sample distribution by industry, business size, and administrative district Sample Sample Administrative Sample Industry Business Size Distribution Distribution District Distribution Microbusiness (1-9 employees) 69% Pristina 30% Construction 32% & Manufacturing Prizren 19% Small business (10-49 employees) 10% Ferizaj 18% 35 Gjilan 10% Services 24% Medium business 12% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 (50 – 249 employees) Mitrovica 9% Large business Gjakova 8% Trade 44% (250 or more 9% employees ) Peja 6% Total 100% Total 100% Total 100% Table 7: Business sample distribution by municipalities Sample Municipalities Sample Municipalities Distribution Distribution Prishtinë/Priština 21% Rahovec/Orahovac 1% Prizren 15% Graçanica/Gračanica 1% Ferizaj/Urоševac 15% Skenderaj/Srbica 1% Gjilan/Gnjilane 9% Obiliq/Obilić 1% Gjakove/Đakovica 6% Istog/Istok 1% Vushtrri/Vučitrn 4% Hani i Elezit/General Janković 1% Peje/Peć 4% Dragash/Dragaš 1% Podujeve/Podujevo 4% Shtime/Štimlje 1% Suharekë/Suva Reka 3% Viti/Vitina 1% Fushë Kosovë/Kosovo Polje 2% Malishevë/Mališevo 1% Lipjan/Lipljan 2% Leposaviq/Leposavić 1% Kaçanik/Kačanik 2% Klinë/Klina 1% Deçan/Dečani 2% Kamenicë/Kamenica 1% Mitrovicë/Mitrovica 2% TOTAL 100% 24 Of the 192 responding businesses, six of them were transportation businesses. They were excluded from the nal sample analysis as nearly all their key variables relevant for this study were coded as nonresponses or other eld problems. Moreover, considering the small number of businesses from the construction and manufacturing industries, construction and manufacturing are merged as “Construction & Manufacturing.” Breakdown of costs for businesses by payment instrument Table 8: Cash cost components Cash Costs Component Breackdown Percent Managing and reconciling cash funds 20.60% Pay to the professional money transporter for transporting cash and security 18.70% Pay to payment service providers for collecting payments on your behalf 16.80% 36 Emptying and balancing cash registers/cash accounts and back-office cash management 14.30% Charges/fees to banks for depositing the cash 7.60% Transportation 25 5.10% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Maintaining a bank account 3.80% Maintaining a safe 3.20% Maintaining cash registers, banknote authentication machines, and/or tills 2.70% Examine bank account statements 2.30% Business losses due to fraud or theft26 and insurance costs 2.20% Preparing the cash registers/card terminals before opening the shop 1.60% Verifying banknote validity and authentication 0.70% Changing rolls of paper in cash registers 0.40% Total 100% Table 9: Debit card cost components Debit Card Costs Component Breackdown Percent Pay to payment service providers (banks) for accepting debit cards 63.90% Telecommunication costs charged for the online connection of card or e-money terminals 11.00% Printing, reconciling, checking, filing the daily overviews of receipts, and reconciling associated accounts 8.90% Business costs (e.g., transaction costs, additional fees) charged for purchases using debit cards 8.00% Using online banking 3.80% Maintaining a bank account 1.90% Examine bank account statements 1.20% Business losses due to fraud and insurance costs 1.00% Changing rolls of paper in card terminals 0.30% Total 100% 25 Annual average cost for employees to go and come from the nearest bank or ATM to withdraw money, deposit sales, make payments, etc. The monetary cost is calculated using the average cashier’s salary as a proxy. Based on the sample analysis, the average salary of cashier per minute is 0.03 euro (1.77 euro/hour), with a typical assumption of ve working days a week and 8 hours a day. 26 Business losses due to counterfeit cash, cash theft, and/or errors/mismatches between cash register balances and cash account. Table 10: Credit card cost components Credit Card Costs Component Breackdown Percent Pay to payment service providers (banks) for accepting credit cards 47.20% Business costs (e.g., transaction costs, additional fees) charged for purchases using credit card 21.80% Telecommunication costs charged for the online connection of card or e-money terminals 12.30% Printing, reconciling, checking, filing the daily overviews of receipts, and reconciling associated accounts 10.00% Using online banking 4.40% 37 Maintaining a bank account 2.20% Examine bank account statements 1.40% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Changing rolls of paper in card terminals 0.40% Business losses due to fraud and insurance costs 0.30% Total 100% Table 11: Credit transfer cost components Credit Transfer Costs Component Breackdown Percent Pay to payment service providers (banks) for accepting credit transfers 51.60% Using online banking 19.90% Maintaining a bank account 10.00% Business losses due to fraud and insurance costs 9.10% Examine bank account statements 6.10% Business costs (e.g., transaction costs, additional fees) charged for purchases using credit transfer 3.20% Total 100% Table 12: Direct debit cost components Direct Debit Costs Component Breackdown Percent Pay to payment service providers (banks) for accepting direct debit 68.50% Using online banking 14.10% Maintaining a bank account 7.10% Examine bank account statements 4.30% Business costs (e.g., transaction costs, additional fees) charged for purchases using direct debit 3.80% Business losses due to fraud and insurance costs 2.20% Total 100% Breakdown of costs for the supply side by payment instrument Table 13: Cash cost components Cash Costs Percent Outsourced 21% Component Breackdown27 Percent Administrative 34.00% ATM 29.00% 38 Transportation 15.00% Safety 11.00% Over the Counter 7.00% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Back Office 4.00% IT 2.00% Total 100% Table 14: Debit card cost components Debit Card Costs Percent Outsourced 14% Component Breackdown28 Percent Data Processing 30.00% Settlement 18.00% Over the Counter 17.00% IT 17.00% Interchange 11.00% Safety 4.00% Licensing 2.00% Other Administrative 2.00% Loyalty Programs 1.00% Total 100% 27 Component breakdowns for cash are comprised of the following costs: ATM – maintenance and interchange fees. Back Of ce – commercial back-of ce cash processing costs; central bank vault staff costs. Over the Counter – commercial bank staff costs to process transactions, open and close accounts; NBFI staff costs for dispersing and collecting cash. Safety costs – vault maintenance, insurance, loss, and fraud prevention costs for commercial banks, NBFIs, and the central bank. IT – network connectivity, hardware and software maintenance, and central bank banking system costs. Transportation – all transportation costs for commercial banks, NBFIs, and the central bank. Other - commercial bank inquiry and statement costs; and NBFI printing, advertising, and fees. 28 Component breakdowns for debit cards are comprised of the following costs: Over the counter – production, issuance, and transportation. IT – card IT systems and POS costs. Safety – insurance, loss, and fraud prevention costs. Other - inquiry costs, statements, and fees. Table 15: Credit card cost components Credit Card Costs Percent Outsourced 16% Component Breackdown29 Percent Interchange 20.00% Over the Counter 18.00% Data Processing 17.00% Settlement 13.00% Licensing 12.00% 39 IT 10.00% Other Administrative 5.00% RETAIL PAYMENT COSTS AND SAVINGS IN KOSOVO | 2021 Safety 4.00% Loyalty Programs 1.00% Total 100% Table 16: Credit transfer cost components Electronic Credit Transfer Costs Percent Outsourced 8% Component Breackdown30 Percent IT 54.00% Other Administrative 30.00% Over the Counter 8.00% Processing 5.00% Safety 3.00% Total 100% Table 17: Direct debit cost components Electronic Direct Debit Costs Percent Outsourced 1% Component Breackdown31 Percent Administrative 30.00% IT 28.00% Safety 20.00% Processing 15.00% Over the Counter 7.00% Total 100% 29 Component breakdowns for credit cards are comprised of the following costs: Over the counter – production, issuance, and transportation. IT – card IT systems and POS costs. Safety – insurance, loss, and fraud prevention costs. Other - inquiry costs, statements, and fees. 30 Component breakdowns for credit transfers are comprised of the following costs: Over the counter – collection and inquiries related to credit transfers. Safety – insurance, loss, and fraud prevention costs. Processing – commercial bank fees paid for authorization, clearing, network access, and interchange; central bank processing costs. Other - central bank software costs; commercial bank archiving and remote channel inquiry costs. 31 Component breakdowns for direct debits are comprised of the following costs: Over the counter – collection and inquiries related to direct debits. Safety – insurance, loss, and fraud prevention costs. Processing – commercial bank fees paid for authorization, clearing, network access, and interchange; central bank processing costs. Other - central bank software costs; commercial bank archiving and remote channel inquiry costs. 29