International payment methods in military bank hai ba trung branch trends and concerns,graduation thesis

Graduation thesis Banking Academy of Viet Nam MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIET NAM BANKING ACADEMY OF VIET NAM -& & - GRADUATION THESIS Topic: INTERNATIONAL PAYMENT METHODS IN MILITARY BANK – HAI BA TRUNG BRANCH - TRENDS AND CONCERNS Professional supervisor: Dr Nguyen Thi Hong Hai Linguistic supervisor: MA Bui Le Minh Student: Pham Thi Minh Phuong Class: ATCA-K11 – Banking Academy of Viet Nam Faculty of foreign languages HA NOI, June, 2012 By: Pham Thi Minh Phuong ATCA – K11 Page Graduation thesis Banking Academy of Viet Nam DECLARATION I hereby declare that I am the sole author of this thesis This is a true copy of the thesis, including quotations and citations which have been duly acknowledged I also declare that it has not been previously or simultaneously submitted at Banking Academy or other institutions Signature Pham Thi Minh Phuong By: Pham Thi Minh Phuong ATCA – K11 Page Graduation thesis Banking Academy of Viet Nam ACKNOWLEDGEMENT This thesis would not have been possible without the guidance and the help of several individuals who in one way or another contributed and extended their valuable assistance in the preparation and completion of this study The author wishes to express her gratitude to her supervisors, Dr Nguyen Thi Hong Hai and MA Bui Le Minh who were abundantly helpful and offered invaluable assistance, support and guidance Special thanks also to Ms Nguyen Mai Anh, Ms Nguyen Thi Nam and all the officers of supporting department of Military Bank – Hai Ba Trung Branch (MB – HBT), who had kind concerns and considerations regarding academic requirements The author would also like to convey thanks to all the lecturers of the Faculty of Foreign languages and Banking Department of Banking Academy of Viet Nam, for their untiring efforts in our professional growth Last but not the least, the author wishes to express her love and gratitude to her beloved families and friends; for their understanding & endless love, through the duration of her studies By: Pham Thi Minh Phuong ATCA – K11 Page Graduation thesis Banking Academy of Viet Nam EXECUTIVE SUMMARY How to pay or be paid becomes a crucial choice once beginning to business across borders When doing business internationally, there are ways of paying which might never be heard about when you business in just one country This lens outlines the most common methods that Vietnamese importers and exporters tend to prefer these days and questions around, i.e this thesis helps to draw a picture of new trends of selecting IP methods in VN, taking MB – HBT Branch into the case Times ago, businessmen used to select L/C where banks played most roles On the contrary, today, they favor less bank‟s roles methods more Because it helps reduce transaction costs, and enhance competitive preferences Recent survey tells that open account is the most favorite method in most developed countries in the world whereas in Viet Nam, remittance takes a larger proportion of all The main theme behind this thesis is to help banks to find the best way to serve their clients (importers and exporters) as well as help them to select an appropriate method of payment The thesis consists of five parts The first part named “introduction” which plays a role as a „starter‟ for readers to know instantly why the author selects the topic and what she is going to Besides, the author reviews some past research on this topic in this part The second part is “Theoretical framework” which gives you the basic knowledge about IP methods and analyzes the roles of banks in each method The main parts in this thesis are put in the third and forth part Particularly, part three as its name “details of research in MB – HBT Branch” will see and analyse the situation of IP methods in MB – HBT Branch It will cover all the data collection and the author‟s findings After analyzing the situation to grasp the overall picture of the trends of IP methods, part four, namely “solutions and recommendations”, will offer some By: Pham Thi Minh Phuong ATCA – K11 Page Graduation thesis Banking Academy of Viet Nam solutions and recommendations to reach a synchronized set of measures and implications to MB – HBT Branch itself, to MB and State bank Last but not least, part five will be named “conclusion” which is drawn as a general statement and it will send the author‟s message through the research By: Pham Thi Minh Phuong ATCA – K11 Page Graduation thesis Banking Academy of Viet Nam LIST OF ABBREVIATIONS Number Abbreviations Original ATM Automatic Teller Machine BAV Banking Academy of Viet Nam B/E Bill of Exchange D/A Documents against Acceptance EU Europe HBT Branch Hai Ba Trung Branch ICC International Chamber of Commerce IP International Payment L/C Letter of Credit 10 MB Military Bank 11 SBV State Bank of Viet Nam 12 SWIFT Society for Worldwide Interbank Financial Telecommunication 13 USD United State dollar 14 US United States 15 VN Viet Nam 16 WTO World Trade Organization By: Pham Thi Minh Phuong ATCA – K11 Page Graduation thesis Banking Academy of Viet Nam LIST OF TABLES AND DIAGRAMS Tables and Name of tables and diagrams Page Table 2.1 Factors to affect enterprises once choosing IP methods 11 Table 3.1 Amount of IP transactions per method in MB – HBT 13 diagrams Table Branch Table 3.2 IP volume per method in MB – HBT Branch 14 Table 3.3 Amount of export transactions per method in MB – 15 HBT Branch Table 3.4 Volume of export transactions per method in MB – 16 HBT Branch Table 3.5 Amount of Import transactions per method in MB – 16 HBT Branch Table 3.6 Volume of Import transactions per method in MB – 17 HBT Branch Table 3.7 Compare methods of payment 22 Table 3.8 Vertical comparision of selecting IP methods in MB – 26 HBT Branch Table 3.9 Vertical comparision of IP volume per method in MB – 26 HBT Branch Diagram Diagram 2.1 Arrow shows the level of Roles of banks By: Pham Thi Minh Phuong ATCA – K11 10 Page Graduation thesis Banking Academy of Viet Nam Diagram 3.1 The changes in using payment methods 13 Diagram 3.2 Proportion of revenue of IP transactions per method 14 Diagram 3.3 Changes in using payment methods for export goods 15 Diagram 3.4 Changes in using payment methods for import goods 17 By: Pham Thi Minh Phuong ATCA – K11 Page Graduation thesis Banking Academy of Viet Nam TABLE OF CONTENTS DECLARATION ACKNOWLEDGEMENT EXECUTIVE SUMMARY LIST OF ABBREVIATIONS LIST OF TABLES AND DIAGRAMS TABLE OF CONTENTS PART I: INTRODUCTION………………………………………….1 1.1 Problem description 10 1.1.1 Significance of topic 11 1.1.2 Research questions 12 1.2 Overview of thesis 12 1.2.1 Scope and focus 12 1.2.2 Research methodology 12 1.2.3 Purpose of research 12 1.2.4 Thesis structure 13 1.3 Literature review 13 1.3.1 Nationally 13 1.3.2 Internationally 13 PART 2: THEORETICAL FRAMEWORK 15 2.1 Definition of IP methods 15 2.2 International payment methods and the roles of banks 15 2.2.1 Cash in Advance 15 2.2.2 Open Account 15 2.2.3 Collection of payment 16 2.2.4 Documentary Credit 16 2.2.5 Remittance 17 2.3 Factors to affect enterprises on choosing IP methods 18 By: Pham Thi Minh Phuong ATCA – K11 Page Graduation thesis Banking Academy of Viet Nam SUMMARY OF PART 20 PART 3: DETAILS OF RESEARCH IN MILITARY BANK – HAI BA TRUNG BRANCH 21 3.1 Data collection 21 3.1.1 Performance of International payment 21 3.1.2 Rate of using International payment methods 22 3.1.3 Proportion of export goods 24 3.1.4 Proportion of import goods 25 3.2 Findings 27 3.2.1 Trends of IP methods 27 3.2.2 Causes 27 3.2.3.Concerns 30 SUMMARY OF PART 35 PART 4: SOLUTIONS AND RECOMMENDATIONS 36 4.1 Solutions 36 4.1.1 Reducing moral hazard problems 36 4.1.2 Making IP services highly competitive and attractive 37 4.1.3 Improving banking technology 38 4.1.4 Diversifying professional skills for IP officers 38 4.2 Recommendations 39 4.2.1 To the State Bank of Vietnam 39 4.2.2 To Military Bank 39 4.2.3 To the customers 40 SUMMARY OF PART 41 PART 5: CONCLUSION 42 REFERENCES PART 1: INTRODUCTION 1.1 Problem description By: Pham Thi Minh Phuong ATCA – K11 Page 10 Graduation thesis Clean collection Banking Academy of Viet Nam Non-payment Exporters fake documents or Importers might go bankrupt or be commercial fraud on purpose badly reputed Documentary collection Documentary credit Non-payment Lose prestige Price and foreign exchange risks Lose business opportunity Transportation, transaction costs Inadequate or faked documents Lose documents Lose documents Unable to comply with L/C terms, Non-delivery counterfeit L/C, Goods received with inferior Issuing bank's failure risk and quality issuing bank's country risk Exchange rate risk and the issuing bank's bankruptcy risk Remittance Non-payment Depending on Little or none importers (Source: self - synthesized) 3.2.3 Concerns Such trends are new and necessary in such occasion of globalization Neverthless, there araise some concerns about MB – HBT Branch in particular and VN commercial banks in general So as to fully serve customers, our banks need to take these concerns into consideration: 3.2.3.1 Advantages As mentioned in part 2, banks play different roles in different payment methods New trends create new changes in banks‟ roles Obviously, the movement from L/C to collection of payment and remittance can help reduce risks bore by banks in each international transaction Risks structure can be said to reverse a Reducing operational risks Previously, when L/C took a huge proportion of international payment methods in VN, IP risks were mainly documentary credit risks such as technical risks, moral hazard risks, systematic risks, political risks, exchange rate risks, etc Such risks By: Pham Thi Minh Phuong ATCA – K11 Page 30 Graduation thesis Banking Academy of Viet Nam involved in all parties as: Issuing bank, Advising bank, Confirming bank, Negotiating bank, etc Nowadays, the increase in remittance and collection of payment makes some changes in types and level of risks Usual risks are political risks of importing countries and moral hazard risks The level of risks in remittance and collection of payment are no longer a big worry as that in L/C Risks in remittance and collection of payment are often resulted from technical errors of payment system or external attack such as: wrong address transfering, non-performing error, hacker, etc b Transfering risks to importers/ exporters If risks in remittance and collection of payment are pieces of cake to banks, they become hard jobs to importers and exporters Simply, remittance and collection of payment are only effective when sellers and buyers have strong relationships Banks in these methods are intermediators and receive bank commission or fees They bear no responsibilty or obligation in case of non-payment They, therefore have no force against importers or exporters If there are any disputes or uncertainties of nonpayment, banks bear no risks, but exporters and importers All things considered, risks are transferred from banks to importers and exporters Understanding thoroughly about each method can help banks to build approriate strategies to effectively finance international trade 3.2.3.2 Disadvantages Not only positively but also negatively new trends impact banks Less or more, banks face some chaos a About risks Risk structure has reversed, which shows a decrease in operational risks and a movement from bank risks into corporate risks, yet it creates an increase in moral hazard risks Moral hazard risks seem not to have any impact on banks but they In the context when collection of payment and remittance wins the top positions, banks lose their control against non-payment as in L/C„s era Bad or fraud importers may By: Pham Thi Minh Phuong ATCA – K11 Page 31 Graduation thesis Banking Academy of Viet Nam take this advantage to delay payment or possess exporters‟ capital illegally Banks may not collect their fees or commission Moreover, moral hazard risks can bring about adverse selection and asymmetric information, which affect bank‟s decision whether to finance import-export or not b About International Payment Revenue IP revenue consists of all fees and commission from bank‟s providing IP methods, including L/C, remittance and collection of payment (as in MB – HBT Branch) When IP methods move from L/C to collection of payment and remittance, ie from higher – income method to lower ones, IP revenue tends to drop Nonetheless, total IP revenue in 2010 and 2011 increased as shown in table 3.8 and 3.9 (synthesized by the author, taken 2009 as original year) which shows the vertical comparision of selecting IP methods and revenue per method in MB – HBT Branch This doesn‟t appear to be in conflict with the statement above because total number of IP transactions increased, too It is obvious that if new trends didn‟t take effects, IP revenue would be much higher Namely: L/C transaction costs are absolutely higher than those of collection of payment and remittance Proportion of L/C transactions dropped sharply in 2010 and 2011, so IP revenue dramatically fell, too Banks play a variety of roles in L/C transactions (issuing, negotiating, advising, confirming,etc), transaction fees from L/C are indeed higher than those for collection of payment and remittance (where banks‟roles are poor and limited) By: Pham Thi Minh Phuong ATCA – K11 Page 32 Graduation thesis Banking Academy of Viet Nam Table 3.8: Vertical comparision of selecting IP methods in MB – HBT Branch Method Remittance Letter of credit (L/C) % Collection of payment % Total % % Year 2009 480 132 12 624 2010 + 170 +35.4% –2 -1.52% +3 + 25% + 171 + 27.4% 2011 + 20 +3.07% -9 -6.92% +6 + 40% + 17 + 2.14% (Source: self – synthesized) Table 3.9: Vertical comparision of IP volume per method in MB - HBT BRANCH Method Remittance Letter of credit (L/C) Collection of payment Total Year (USD) % (USD) % 2009 50,033,850 59,223,418 584,000 109,841,268 2010 +16,366,150 +32.7% -2,856,418 -4.82 % +146,000 +25% +13,655,732 +12.4% 2011 +7,765,700 +11.7 % -3,902,331 -6.92 % -29, 500 -4% +3,833,869 (USD) (Source: self – synthesized) By: Pham Thi Minh Phuong ATCA – K11 Page 33 % (USD) % +3.1% Graduation thesis Viet Nam Banking Academy of c About banking technology in IP New trends require a better IP technology in MB – HBT Branch as well as in any commercial banks in VN Actually, an extreme increase in remittance transactions raises a big question to those who are directly concerned with IP The question is of using a centralized payment system Because centralized system helps to speed up the transferring process However, MB – HBT has made payment by regional payment system up to now, they have connected computer network from the Head quarter to almost all branches nationwide and provided a system of banking services including e-telegraphic transfer, international credit card, ATM, international payment by SWIFT Nonetheless, SWIFT is definitely not enough in this booming era of science and technology IP infrastructure in MB as well as MB – HBT Branch needs improving by additional applications as: computerizing the accounting system, statistical reports on IP, etc d About organisation structure of IP department IP department is strongly unbalanced when a large number of IP officers who are major in L/C become free and abundant while those who are responsible for remittance and collection of payment become busy as bees By: Pham Thi Minh Phuong ATCA – K11 Page 34 Graduation thesis Viet Nam Banking Academy of SUMMARY OF PART After all, part has met its requirements set by the author That is to show the real situation of trends of IP methods in MB – HBT Branch in particular, and in VN commercial banks in general, and then she aims to raise concerns in such context of IP Different countries have different business features and will have different trends in using IP methods in the era of globalization However, a common feature is that all exporters and importers tend to select the cost-effective methods, which means the method of less bank‟s roles, on the basis of minimizing transaction costs As part has revealed, remittance has won the top position of preferrable IP methods in MB – HBT Branch Yet, such trends has brought about so many advantages and disadvantages to MB – HBT Branch By: Pham Thi Minh Phuong ATCA – K11 Page 35 Graduation thesis Viet Nam Banking Academy of PART 4: SOLUTIONS AND RECOMMENDATIONS 4.1 Solutions In order to cope with the disadvantages that new trends bring about, it‟s necessary for MB – HBT Branch in particular and our commercial banks in general to take immediate actions These are some solutions that the author could raise: 4.1.1 Reducing moral hazard problems a Improving internal and external control operations Moral hazards are one of the potential risks facing all parties in IP transactions MB – HBT Branch needs serious control internally and externally They should closely monitor all steps in the payment process For instance, signatures, documents, information, credit assessment, etc must be exact The more carefully could MB – HBT Branch control, the less moral hazards risks they could avoid b Building firm relations with customers Building firm relations with customers is like customer caring Good customer-caring officers will know thoroughly about their customers‟ business features, and then advise them the best ways to avoid and prevent risks in international trade We all know that banks have their own creditassessing system which classifies customers into certain levels of creditworthiness Firm relation bases can help banks to most closely approach their clients and business partners, which dramatically helps reduce moral hazard problems in trading By: Pham Thi Minh Phuong ATCA – K11 Page 36 Graduation thesis Viet Nam Banking Academy of c Expanding good relationships with correspondent banks Correspondent bank plays a vital role in IP processing It helps to speed up and improve the IP quality Imagine if one IP transaction involves in a bank not in correspondence with your bank, IP operations must be much more costly and extremely slowed down (It‟s unavoidable to bridge one or more correspondent banks so as to make payment, which can increase or even double the IP transaction costs) That‟s one of the reasons why clients prefer banks with more correspondences than those with less ones Moreover, good relations with correspondent banks help squeeze the payment process, which significantly reduces moral hazard problems Because the banks with more and closer correspondent relations can be better consultants for importers and exporters in international trade, significantly minimizing moral hazard problems All things considered, MB needs to expand correspondent relations in terms of both quality and quantity 4.1.2 Making IP services highly competitive and attractive Because of the movement from L/C to remittance and collection of payment, the IP revenue reduces, in tireless efforts of increasing IP revenue, banks in general and MB - HBT BRANCH in particular need to make their IP services highly competitive and attractive to customers The author proposes to make better financial consults for customers and diversify IP services Particularly, making better financial consults for customers means distinguishing advantages and disadvantages once using each method of IP, or advising them in certain cases, etc Simultaneously, diversifying the International payment services is urgent in such a highly competitive business environment now Along with remittance, many banks serve their customers with various services as forfaiting, factoring, leasing, Letter of Guarantee, By: Pham Thi Minh Phuong ATCA – K11 Page 37 Graduation thesis Viet Nam Banking Academy of Performance Bond, document negotiating, etc Exporters and importers will select those with better preferences and treatment 4.1.3 Improving banking technology New trends require a centralized payment system, so it‟s urgent to modernize technology in IP system to be centralized and well- structured, in line with the changing trends of IP methods Then money transferring transactions will be much faster and more professional than ever before, which satisfies customers and enhance bank‟s prestige Beside SWIFT, MB needs applying more applications on IP management and operations They should computerize the accounting system, statistical reports on IP, etc In other words, it‟s necessary to invest in modern IP equipments and facilities For instance: buying softwares for IP, training or recruiting more informatic specialists, visioning at electionic banking network, etc 4.1.4 Diversifying professional skills for IP officers From the fact that new trends has made uneven working volume between staffs in IP department, the author suggests planning to train IP officers, aiming at building a strong team of those who are professional, flexible and versatile Moreover, MB – HBT Branch should make their nonstop efforts so as to search, discover and fully motivate potentiality of human resources It‟s suggested that they need to build an ideal working environment where all staffs have the same chance to learn, compete, promote themselves and be warmly and fairly treated There should be awards and fines for positive and negative distributions into the development of IP activities as well as others in MB – HBT Branch Specially, IP officers should be periodically trained in English, informatics and operational skills, in line with new trends and with working requirements By: Pham Thi Minh Phuong ATCA – K11 Page 38 Graduation thesis Viet Nam Banking Academy of 4.2 Recommendations The solutions above aims at MB – HBT Branch, yet it would be a great shortcoming if the author skipped the recommendations to relevant parties such as MB, SBV and customers 4.2.1 To the State Bank of Vietnam SBV should closely monitor, inspect and control IP operations of commercial banks, aiming at finding and timely preventing risks for them Besides, SBV need to tightly control foreign exchange because SBV plays their roles as both an official state organ (manging financial, credit and monetary operations) and a bank of commercial banks Meanwhile, managing foreign exchange is one of the important operations of SBV Thus, it‟s high time to have obvious legal documents or regulations which clearly identify responsibilities and obligations of relevant parties in transferring money overseas 4.2.2 To Military Bank Firstly, MB should distribute human resources in a reasonable way They may appoint those staffs whose heads are buried in the sand in branches to payment centers, they will surely hit the point if they are located in the right positions Secondly, MB should enhance internal control by internal regulations and rules; or else, they can make advanced control by technology and others Thirdly, MB need better-organised training center who must point out right from the beginning that human resources should be trained not only professional but also soft skills There should be rules on warmly serving styles and polite communicating attitudes By: Pham Thi Minh Phuong ATCA – K11 Page 39 Graduation thesis Viet Nam Banking Academy of Last but not least, MB diversify their business financing on the basis of risks analysis and control Such new services as Factoring, Forfaiting, Letter of Guarantee, Performance Bond, document negotiating, etc, should be made common because it will become the major operations of commercial banks in the future when banks‟roles are limited 4.2.3 To the customers Export and import enterprises need to improve professional skills of foreign trade officers who should be periodically trained and updated with new national as well as international legal framework on international trade Additionally, they should be smart and flexible in grasping business opportunities along with carefully negotiating an agreement It‟s necessary to establish a legal department to tighten the international trading process and reduce potential risks to the minimum Besides, ex-importers should be more active in managing their foreign currency reserves and avoiding foreign exchange risks However, they also need a feasible plan to buy and sell foreign currencies to commercial banks, in order for the currency to both actively be held by im-exporters and flexibily run in bank system Moreover, ex-importers also need to be wise enough once deciding to any transactions with any partners They should consult and search for partners‟ information through a variety of subjects such as VN Chamber of Commerce and Industry, Credit Information Center of SBV, their banks or foreign organizations In transacting with commercial banks as well as with partners, they should be absolutely sincere and truthful because it will help to embellish their prestige in international market By: Pham Thi Minh Phuong ATCA – K11 Page 40 Graduation thesis Viet Nam Banking Academy of SUMMARY OF PART Overall, part composes of solutions to MB – HBT Branch and recommendations to SBV, MB and the import – exporters in the context of new trends of IP methods In order for IP method trends to quietly flow, there should be wholehearted contributions from SBV, MB and the government organs as well Hopefully, those subjects will joint hands and pay special attention to IP activities, propering the import – exporting of VN By: Pham Thi Minh Phuong ATCA – K11 Page 41 Graduation thesis Viet Nam Banking Academy of PART 5: CONCLUSION In conclusion, IP activity is extremely important to the integration and development process of a country Meanwhile IP methods are inevitable factors interested by exporters and importers Along with the development of the economy, the choices of businessmen between IP methods have changed In VN, it‟s of remittance that businessmen use in international trade, whereas most of businessmen in the other countries in the world favor open account Any movements can bear its pros and cons to relevant parties Thus it‟s high time that banks paid strong attention to their IP trends, and then found best ways to survive and properly thrive in new contexts Researching trends of IP methods and its concerns in MB – HBT Branch as well as in VN commercial banks, the author has answered all the questions raised from the beginning Firstly, the thesis points out the new trends of IP methods in MB – HBT Branch in particular and in VN commercial banks in general Secondly, based on the facts of MB – HBT Branch, the author raises big concerns to relevant parties, esspecially commercial banks Lastly, the author makes some recommendations and solutions, so as for MB – HBT Branch as well as VN commercial banks to confront the new trends All things considered, may IP activities in VN be more and more professional and move the mountain of IP obstacles in international trade in the future The thesis can‟t help containing shortcomings, invisibly by the limitation of the author‟s knowledge and her researching experience Hopefully, it will be included with strong contributions from all lectures and students so as to make it a better research By: Pham Thi Minh Phuong ATCA – K11 Page 42 Graduation thesis Viet Nam Banking Academy of REFERENCES Books and rules International Chamber of Commerce: The uniform customs and practice for documentary credit, 2007 revision, ICC publication No 600, Paris International Chamber of commerce: International standard banking practice for the examination of documents under documentary credit, ICC Banking commission, 2002 Professor Nguyen Van Tien, 2009, IP and foreign trade finance – workbook, cultural ethics Publisher Theses and reports Annual report of MB in 2009 – 2011 Report of IP operation of MB – HBT Branch in 2009 – 2011 Dr Nguyen Thi Hong Hai, 2009, BAV, Banking department, science research Maciej Makowski, MSc in European Union Business and Law Department of Law, Master‟s thesis Bachelor Chu Thi Bao Van, 2010, BAV, Banking department, Graduation thesis No KL001810 Bachelor Hoang Tuong Minh, 2011, BAV, Banking department, Gradution thesis No NH.000210 By: Pham Thi Minh Phuong ATCA – K11 Page 43 Graduation thesis Viet Nam Banking Academy of Websites and news http://www.banksepah.ir/English/ http://importexport.about.com/od/Financing/a/Factors-To-ConsiderWhen-Choosing-An-Export-Payment-Method.htm http://www Suntrust-How-to-Get-Paid-2010.com http://www.paymentstalk.com/2009/11/23/trends-in-internationalpayments www.militarybank.com.vn/en http://www.commercial.hsbc.com.hk/ http://www.squidoo.com/international-payment-methods http://www.eximguru.com/exim/guides/how-toimport/ch_13_methods_of_payment_in_import_trade.aspx By: Pham Thi Minh Phuong ATCA – K11 Page 44