Interview for Business Magazine: All goals of the payment operation reform have been fulfilled

Just over 20 years ago, the payment systems of the Central Bank of Bosnia and Herzegovina were established, which completely transferred the internal payment operations in our country from the former payment bureaus, that inherited the socialist system payment services, to commercial banks. Since then, around 623 million transactions have been made via the CBBH payment systems, with a total value of close to KM 1.4 billion. Saša Lemez, the Head of the IT Support Section of the Central Bank of BH Payment Systems Department, explains what this reform has brought to the participants in the payment system of Bosnia and Herzegovina, that is, what are all the advantages of the current system in relation to the former system along with his views on the current reach of the Registries of accounts and loans maintained by this umbrella BH financial institution.

BM: Based on 20 years of experience with the existing concept of payment transactions in BH, what would you specify as its main advantages compared to the old payment bureaus system, and what are its possible shortcomings?

LEMEZ: The transformation of payment transactions that took place during 2000 is basically related to changes in the economic system and financial subsystem. The settings of the payment system were adopted in 1998, when in Madrid, the Entities governments agreed that the existence of the payment bureaus was unnecessary and that the deadline for their abolition was 31 December 2000. The Central Bank of BH, in accordance with its role defined by the Law on CBBH - "duties, tasks and obligations of the CBBH are to support or establish and maintain appropriate payment and accounting systems", took over the function of managing the entire process, and established the RTGS (real time gross settlements) and gyro clearing systems. On January 5 2001, payment transactions were successfully transferred to commercial banks. The abolition of the payment bureaus and the transfer of payment transactions to banks is the result of broader social changes that are in line with the development of the market economy and the operation of economic laws and mechanisms.

The goal of these changes was reflected in faster transactions between payment system participants, reduction of payment transaction costs, development of the money market, strengthening of the crediting function of banks, a more efficient system of public revenues collection and a higher coefficient of money supply turnover. I am of the opinion that these goals have been successfully met.

The main advantages of the existing payment system compared to the old payment bureaus system are reduced payment system costs, more efficient and faster payment systems, elimination of monopolies and a more modern system (electronic and mobile banking, card business, digital services).

The shortcomings of the payment system reform, which arose from the abolition of the payment bureaus, and which related to the problem of forced collection and the possibility of opening accounts with several commercial banks and cases of blocked accounts, have been resolved. By establishing the Single Registry of Accounts of Business Entities, the CBBH provided insight into the status (active, blocked, closed) of all business entities' accounts opened with commercial banks. The Entities’ ministries of finance, according to their duties, have legally regulated the process of forced collection, hence the initial problems of forced collection due to the payment evasion have been overcome.

BM: How well-founded is the impression that the current payment system is primarily benefit for the commercial banks, which on that basis, through commissions, earn exceptionally high incomes, whilst payment participants (both legal entities and individuals) have no special benefits?

LEMEZ: I would not agree with your statement because the benefits that the current payment system provides to users (legal entities and individuals) are multiple:

lower payment order prices - the principle that applies is the formation of fee price per order, regardless of the amount, unlike the former principle that was based on the amount of the order. Due to this principle and due to the fact that even on small orders a fixed fee is paid, a wrong impression is obtained that payment transactions are more expensive than before. However, large payments are exempt from large amounts of commissions, because a fixed fee is paid for those amounts as well. In general, analyses have shown that the system, as a whole, is many times cheaper than the old system; the possibility to choose a commercial bank - there is no monopoly on payment services and clients can choose which commercial bank to work with; availability of services - clients have at their disposal an extensive network of commercial bank branches, ATMs and POSs; modern trends - the use of electronic and mobile banking and card business, payment services become even cheaper, faster and more accessible.

BM: In the context of the previous question, what is the total income commercial bank annually acquire by collecting commissions for payment services? Is there room for lowering their service prices of this type and how much are they in line with European standards?

LEMEZ: The CBBH does not have data on income that the commercial banks generate from payment services fees, because it has no authority in the supervision of commercial banks.

The Central Bank cannot react to the determination of fees of commercial banks, because it is a market competition, where changes in the established habits of consumers using these services and mass introduction of electronic banking are crucial for reducing these fees.

It is important to note here that the CBBH is guided by international principles and rules in the management and administration of payment systems which it established and maintains. These principles include the Principles for Financial Market Infrastructures, adopted by the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS) in Basel.

One of these principles refers to determining the fee limit for payment services, which stipulates that it is necessary to keep the accounting of the payment system maintenance on an annual level and to revise prices so that the system is financially self-sustainable. Respecting this principle, the Central Bank of BH reviews the costs and adjusts fees, hence the current prices for payment orders in RTGS are 1.20 KM for orders executed by 12 o’clock, or three KM for orders after 12 o’clock. Gyro clearing order prices are 20 fenings for the first settlement, 25 fenings for the second settlement, 30 fenings for the third settlement and 35 fenings for the fourth settlement. I note that these prices apply only to interbank domestic payments and that in the case of intrabank payments (payment between two clients of the same bank) there are no such costs.

The fee price for the execution of a payment order that the client pays to the commercial bank includes other costs that the commercial bank has, as well as the business policy of that bank. Therefore, it is recommended that clients perform a market and institution analysis on which commercial bank is providing the most favourable conditions for payment services and that they use electronic and mobile banking, which provides significantly lower prices for these services.

BM: When it comes to the relationship the commercial banks have towards clients, what is your view on the practice of gyro clearing orders generally being received only until 12 o'clock on the same day, whilst settlements are made until 15:30 – can the CBBH do something about that, and what?

LEMEZ: As they stated themselves, the CBBH, in an effort to extend the working day as much as possible and enable payment on the same day when the order was submitted to the commercial bank, introduced the fourth settlement in the gyro clearing system, which is executed until 15:30. All orders that arrive in the gyro clearing system by this time are executed on the same day. Also, the orders in the RTGS system are executed until 16 o’clock.

The CBBH has no authority in the control of commercial banks' operations and is not able to influence the execution time of orders.

I remind you that this is not the practice in all banks, because in the RTGS system the ratio of transactions by 12 and after 12 o’clock is 50-50 percent, while in the gyro clearing system in the third settlement, which is at 13:30, 23 percent of the total number of transactions is executed, i.e. 16.5 per cent in the fourth settlement (15:30 o’clock).

BM: Insight into the data on transactions in the CBBH payment systems shows that the value of RTGS transactions is growing much faster than their number (since 2001 their number has approximately tripled, and the value has increased by almost nine times), while in gyro clearing the trend is reversed (the number of transactions has increased by four times, and their value by about two and half times) - what can be deduced from such indicators (in layman's view, the growth of RTGS transactions indicates strengthening of the economy, and the reduction of specific values of gyro clearing payments to an overly bureaucratized system, as a result of which, the specific transactions, that can be executed at once, are unnecessarily broken down into several)?

LEMEZ: The growth in the number and value of RTGS transactions definitely indicates strengthening of the economy. With the gyro clearing system, there is also an increase in the number of transactions, which may be the indicator of increased use of payment services, instead of the cash payment so far. The trends of using electronic and mobile banking, which is faster, simpler and cheaper, and therefore more attractive to clients, have undoubtedly contributed to this.

With the gyro clearing system, one cannot expect a proportional increase in the value of transactions, I must remind you that these are "low value" transactions up to KM 10.000, so the growth of the value of this transaction leads to a transaction change from gyro clearing to a RTGS transaction, and then this is reflected through an increase in the value of RTGS transactions.

BM: How useful has the Central Registry of Credits been so far in terms of proving the creditworthiness of the financial institutions’ clients) who are applying for loans and, consequently, reducing the percentage of bad loans? In regards to this, how justified are the objections that banks and other financial institutions do not keep up-to-date records on the credit history of their clients?

LEMEZ: The system for recording debts has been established in April 2006 for legal persons, and in January 2007 for natural persons. The establishment and a number of upgrades which followed were initiated by the needs of financial institutions for reliable, unique and comprehensive date source, on the basis of which good quality and comprehensive information could be obtained quickly and simply, to be further used to assess customers’ creditworthiness. As financial institutions which are engaged in lending achieve the highest percentage of their income through interest based on loans, the purpose of existence, maintenance and development of the Central Credit Registry, as a source of data for further good quality business decisions, is justified.

The establishment of such system is useful not only for financial institutions extending loans, but also for other institutions engaged in analyses, regulations and supervision of financial system.

Finally, the establishment and maintenance of CRC is useful for customers (legal and natural persons), as it helps to quicken, simplify and lower the prices of the process of extending funds. On the other hand, if reports offered by CRC are used for business decisions, customers with adverse credit reports are indirectly protected from excessive debt, while financial institutions are protected from risky investments.

The possibility to have insight into personal credit report, for legal and natural persons, has made it possible that frauds related to debt amounts and misuses of personal data could be identified easier, if not prevented by this system.

The reliance of financial institutions on CRC system in making business decisions is seen in the data on the number of taken over reports from the system, exceeding one million since the beginning of 2021.

Adequate use of the data presented by CRC should decrease bank exposure to costs and risks of non-performing claims, as it offers information which can be used as early detection mechanisms for customers representing a systemic risk for the institution.

As financial institutions delivered their entire credit portfolios in the initially established CRC, it was found that the percentage of debts which were repaid irregularly and approved before the establishment of CRC was 13 per cent for legal persons and nine per cent for natural persons. Currently, the situation is quite different, so non-performing debts account for 9.5 per cent for legal persons and eight per cent for natural persons out of the total extended debts.

Without adequate control by financial institutions, customers are inclined to incurring excessive debt, which results in certain consequences for the customer and the overall credit portfolio quality and risk assessment of financial institutions in extending new loans. On the other hand, customers with positive financial reports are significantly helped by the system to build a reputation collateral giving them stronger power in negotiating the terms of loan.

Regarding the updating of the records, the Central Bank carries out an active monitoring and stimulates the institutions found not to be updating data in the system to deliver updated data. In addition to financial institutions, the competent Banking Agencies and customers who regularly follow up with and get informed on their credit reports can make major contributions to the updating of credit records.

BM: To what extent the Single Registry of Legal Persons’ Accounts has been organised? More precisely, how much space is still left for manipulators that have several blocked accounts but also the same number of open accounts for undisturbed performance of transactions?

LEMEZ: The issue of debt enforcement was solved by the adoption of the law on internal payment transactions at the Entity level. These laws define keeping of the main account, blocking of the main and other accounts and a prohibition to banks for opening new accounts for business entities with blocked accounts. In this way, opening of new accounts, i.e. operations in accounts which are not blocked has been prevented, because, if there are no sufficient funds in the main account to settle the debt enforcement order, there is a clear defined procedure to block all other accounts of a business entity.

BM: Close to 400,000 legal persons’ accounts have been closed in BH, which are the main reasons for that? At the same time, around 100,000 accounts have been blocked - which kind of blocking is prevailing and what is the total debt amount which the accounts were blocked for?

LEMEZ: The data on account holder, account number, account status (active, blocked, closed) and the date of the status change are collected in the CBBH Single Registry of Legal Entities Accounts. In the SAR, there are no data on balances of these accounts, the blocked amount in case of blocked account or the reason of the blocking. There is also no information on the reasons of closing the account, however, a high number of closed accounts is related to account closing during bank status changes. In case two bank merge, all accounts of the bank merged to another bank are closed.

BM: At this moment, how far or close are we to the introduction of registry of natural persons’ accounts - to what extent the attitude within the CBBH towards this issue is undivided and what are the main arguments for the introduction, i.e. counterarguments related to the objections of those opposing to the registry?

LEMEZ: The Central Bank of BH, assessing the need for the existence of the registry of natural persons’ accounts, has prepared technical conditions for the establishment of the registry. In the meantime, laws on amendments and supplements of laws on internal payment transactions were adopted at the Entity level, establishing such registries at the Entity level.

There is undoubtedly the need for the registry with the data on natural persons’ accounts which would be used for the needs of law enforcement institutions, and citizens having problems in various court processes (inheritance process, debt enforcement and similar). I believe this issue will be solved in a satisfactory way in the near future.