This paper shows how useful the e-payment instruments are for modeling and estimating banking efficiency. The study examines the efficiency of Iran banking sector using the data of top 24 government and private banks. To estimate the banking efficiency, DEA model is employed using three inputs (number of ATMs and POS, bank size, and index of market concentration) and three outputs (return on assets, return on equity, and mean value of e-payment transactions). The findings reveal that five biggest banks (Melli, Mellat, Saderat, Tejarat, and Sepah) are more efficient in VRS model compared to CRS model because of better operating conditions. The empirical results show that the average level of overall technical efficiency is 78% in VRS model and 31% in CRS model, suggesting that Iranian banks could have increased their outputs by 22% with the existing level of inputs. These results also indicate that specialized state banks are more efficient than large banks.

Over the past several decades, the payments industry has undergone significant changes and has played a major role in the conduct of a country’s monetary policy, financial system and economic development. Electronic payment instruments have become increasingly available in everyday commerce. It is widely recognized that a well-functioning payment infrastructure is crucial to enhance the efficiency of the banking industry and the financial system as a whole, boost consumer confidence, and facilitate economic interaction and trade both in goods and services (BIS, 2003; and ECB, 2010 as cited in Hasan et al., 2013).

The performance of the banking sector has gained significance, especially after the introduction of electronic banking services like Automatic Teller Machines (ATMs), Point of Sale (POS), Internet banking, telephone banking, etc. In Iran, performance evaluation of the banking sector has assumed prime importance due to offering of e-banking services such as ATMs and POS, in addition to the reduction of costs, as fewer physical branches are needed and consequently fewer employees.