The implementation of the international payment systems at the joint stock comercial bank for foreign trade of vietnam,graduation thesis

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIET NAM BANKING ACADEMY OF VIET NAM -& & - GRADUATION THESIS Topic: THE IMPLEMENTATION OF THE INTERNATIONAL PAYMENT SYSTEMS AT THE JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM Professional supervisor: Dr Nguyễn Thị Hồng Hải Linguistic supervisor: MBA Nguyễn Thị Minh Hằng By: Nguyễn Việt Hà Class: ATCA, Faculty of Foreign Languages June, 2012 DECLARATION I hereby declare that this graduation thesis is based on my work except for 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 Nguyễn Việt Hà ii ACKNOWLEDGEMENT During the completion of this thesis, I have received remarkable support from many people and I am grateful to all of them I would like to express my special thanks to my supervisors, Dr Nguyễn Thị Hồng Hải, Faculty of Bank, and Ms Nguyễn Thị Minh Hằng, Faculty of Foreign Languages, who have given me valuable advices and guidance from the beginning to the perfection of this thesis Without their help, I can hardly finish my thesis within such a limited time I am also grateful to Ms Nguyễn Thanh Phương, staff of International Payment Department at the Operations Center of the Joint Stock Commercial Bank for Foreign Trade of Vietnam, who has spared her precious time and created a welcomed condition for me during the time I was taking field study there For the valuable knowledge and studying encouragement, my gratitude goes to all my teachers of Banking Academy, particularly teachers in the Faculty of Foreign Language, who have provided me with worthy lessons throughout years of study My last thanks come to my parents and friends for their supports to accomplish this thesis iii ABSTRACT This thesis provides an analysis and evaluation of the current international payment systems in Vietcombank In particular, the Head Office is using a centralized system and the Operations Center is using a decentralized Methods of the research include taking field study, collecting and analyzing primary and secondary data Results of the research show that both systems in general are well utilized In more details, the centralized system gives the Head Office high consistency, security and rapidity; while the decentralized system benefits the Operations Center with flexibility, economy and time-saving The report points out that the prospects of the systems are positive However, the major areas of weakness require further study and action by management Finally, after discussing some suggestions for banks to choose a suitable international payment system, the thesis proposes several recommendations to improve the systems’ efficiency including: - Maintaining and keeping facilities and technology updated - Improving staffs ability - Developing management of operations and human resources iv TABLE OF CONTENTS ACKNOWLEDGEMENT .iii ABSTRACT iv LIST OF ABBREVIATIONS vii LIST OF TABLES .viii LIST OF DIAGRAMS ix INTRODUCTION 1 Problem Description Related Works Objectives of Study Research Questions Research Methodologies Scope and Focus Structure of The Thesis CHAPTER THEORETICAL FRAMEWORK 1.1 Notion and Role of International Payment in Commercial Banks 1.2 Methods of Payment for International Transactions 1.2.1 Remittance 1.2.2 Collection of Payment 1.2.3 Documentary Credit 1.3 International Payment Systems 1.3.1 The Centralized System in International Payment 1.3.2 The Decentralized System in International Payment 11 Chapter summary 13 CHAPTER 14 THE INTERNATONAL PAYMENT SYSTEMS AT VIETCOMBANK 14 2.1 Development History of Vietcombank 14 v 2.2 The Centralized International Payment System in The Head Office of Vietcombank 15 2.2.1 International Payment Performance 16 2.2.2 Analysis of The Centralized System 17 2.3 The Decentralized International Payment System in The Operations Center of Vietcombank 19 2.3.1 International Payment Performance 19 2.3.2 Analysis of The Decentralized System 22 Chapter summary 23 CHAPTER 25 GENERAL ASSESSMENT AND RECOMMENDATIONS 25 3.1 General Assessment 25 3.2 Recommendations 26 3.2.1 Ways to Choose a Suitable International Payment Systems 26 3.2.2 Ways to Improve the Efficiency of International Payment Systems 27 Chapter summary 29 CONCLUSIONS 30 vi LIST OF ABBREVIATIONS Number Abbreviation Original CB Commercial bank IP International Payment L/C Letter of Credit Vietcombank The Joint Stock Commercial Bank for Foreign Trade of Vietnam vii LIST OF TABLES Number Table Table 2.1 Table 2.2 Table 2.3 Name International Payment systems in major CBs in Vietnam Vietcombank's total import and export turnovers (2009-2011) International payment revenue in Vietcombank’s Head Office (2009-2011) International payment revenue in Vietcombank’s Operations Center (From 2009 to 2011) viii Page 15 16 20 LIST OF DIAGRAMS Number Name Page Diagram 1.1 Management pyramid in a centralized system 10 Diagram 1.2 Management pyramid in a decentralized system 12 Percentage of International Payment activities in Diagram 2.1 overall profits of Vietcombank's Operations Center (2009-2011) ix 21 INTRODUCTION Problem Description Under the influence and tendency of integration and globalization, International Payment (IP) activities have grown more and more in importance in commercial banks (CBs) They bridge buyers with sellers from different countries all over the world, greatly contributing to foreign trades and national economic growth For that reason, ways to improve IP services are what commercial banks constantly seek for One of the first concerns lays on choice of a suitable processing system In reality, two different systems are widely employed by CBs in Vietnam, providing different levels of efficiency depending on each bank’s condition Nearly fifty years in the market, the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) has always maintained its position as the leading bank providing a wide range of financial services in international trade in Vietnam For its long establishment, Vietcombank has gained tremendous confidence and loyalty from customers To reply to customers’ support and expectation, the bank has never stopped working on developing its IP services, becoming the best in its field Currently, Vietcombank is holding two IP systems due to its large demand and capacity (chartered capital of over VND 19,000 billion) Hence, it would be practical and comprehensive to observe these systems to better understand their application and competency During the time of writing this thesis, weeks at the International Payment Department in Operations Center of Vietcombank as an intern has given me a chance to observe its decentralized processing system I have also 2.3.2.2 Shortcomings a Customer Management Cost Though the cost on facility and human resource can be lower, cost on customer management is higher for this type of system There is a need for the Center to build and maintain an effective system to store, examine and update client information b Overlapping Risk Although not yet occurred, the risk of overlapping stays as a possibility in the Center Because unlike the centralized system where every decision, information or data is issued or released once from one office; under the decentralized system, internal conflicts in data between departments may arise, redundant or repeated tasks may take place and some may be mixed up or omitted In that case, inefficiency is accompanied with high cost c Management Dependence The Operations Center functions as an independent entity but it is a division of Vietcombank, thus has to report all its business results to the Head Office Besides, the Center still operates under the Head Office’s control and supervisory Chapter summary To sum up, this chapter takes a closer look at the two IP systems in reality Examining the situation in the Operations Center and Headquarter of Vietcombank, the author has come up with an analysis of how each system performs, what benefits they bring and what constitute their deficiency 23 Specifically, on one hand, the centralized system applied in the Head Office of Vietcombank affords high consistency, reliability and proficiency but at the same time requires considerable investment On the other hand, the decentralized IP system in the Operations Center possesses a small size, simple structure and easy management However, when the Operations Center grows to an extent scale, the costs might constitute inefficiency 24 CHAPTER GENERAL ASSESSMENT AND RECOMMENDATIONS 3.1 General Assessment Given the background of global economy in general and Vietnam’s economy in particular with continued depression, Vietcombank has had an outstanding performance, confirming its top position in IP in Vietnam Revenue from IP is of a record amount at $USD 38.8 billion, increasing by more than 30% from 2010 In addition, IP turnover accounted for 19.2% of Vietnam’s total turnover from import and export activities 10 As mentioned earlier, both systems in both entities have impressive performances, providing abundant benefits, though also endures marginal drawbacks Each system works well in its condition and environment and thus shows good results There are four main reasons for this Firstly, both the Operations Center and Head Office of Vietcombank have capacity for high technology and sophisticated facility Both are making good use of frequently maintained and upgraded equipments This helps the transaction to be done with high accuracy, rapidity and security Secondly, policies and instructions from the board of management are effective and timely This means the board has been working hard to provide practical decisions and policies on important issues 10 Bank for Foreign Trade of Vietnam (2012), “Annual Report 2011” 25 The third reason for the effective systems is having highly qualified, responsible, enthusiastic and ethical staffs This is the most important contribution of the success of the IP systems in the two entities Last but not least, customer service has improved significantly over the years Vietcombank in general is a reliable name in foreign trade in Vietnam Therefore, customers’ choice of payment through the Bank is a motivation for as well as a confirmation of its prestige, security and quality Generally, the major obstacle for Vietcombank’s IP operations is the lack of a model to appropriately evaluate the efficiency of its systems Practically, proper examinations and revision will help the bank have an insight into where the potentials and weaknesses lay Based on that, the bank can set up strategies and plans that strengthen the weak chain and smooth the whole process The rest of this chapter proposes some recommendations on what constitute a suitable choice of IP system and what support an effective one 3.2 Recommendations 3.2.1 Ways to Choose a Suitable International Payment Systems When choosing which system to apply for its IP activities, a bank has to consider many factors and conditions such as costs, risks, quality, availability, customers’ preference, location and capital In the following part, some main ideas are presented to help a bank make the best decision of choosing an IP system 3.2.1.1 Considering costs First of all, cost is the most important issue for any firm The choice of system depends on each bank’s size and financial status 26 The centralized system requires large investment and also consumes high periodic expenses However, efficiency is apparent with time saving and accuracy Additionally, in the long run, it assures the whole system to work with consistency, continuity and durability because most of the cost only incurs initially The decentralized system, in contrary, takes up smaller investment in comparison with the centralized But if the size of the bank is moderate, the amount can be relatively significant When a bank has sufficient capacity and when the Headquarter is already overloaded, the decentralized system might be in more favor 3.2.1.2 Evaluating Human Resource While technology is fundamental for a system’s use, human resource is crucial to make it effective For both systems, employees must have excellent qualification They should be able to offer clients suitable options for their needs or work out problems if such occur Especially, technicians in a centralized system have to face with pressure and responsibility from the heavy workload Therefore, banks should take a look at what their staff has to to support the system they are going to use 3.2.1.3 Researching Customers Banks cannot survive without customers For that reason, banks have to rely on how customers work and trade to develop their operations Because ultimately, satisfying demand is where and how banks earn profit 3.2.2 Ways to Improve the Efficiency of International Payment Systems 3.2.2.1 Updating Facilities 27 To run a good IP system, banks should pay attention to maintain and support its facility Modern and advanced technology always brings advantages For instant, the Scan-Imaging system saves a lot of time and cost It also plays a role in managing and evaluating quality of the work The Security Fax, in addition, is effective in transferring confidential information 3.2.2.2 Expanding Range of Products and Services To continue profitability, banks need to understand what customers look for in their products and services Besides improving existing products, banks should also seek for new ways to attract and keep customers Factoring and refinancing are two among many innovative methods to answer the everincreasing demand Furthermore, convenience is a complimentary that can easily satisfy customers So banks should work on how to make clients feel comfortable and confident in their service quality Internet Banking, for example, is becoming more and more popular 3.2.2.3 Training Staff Technology develops constantly and rapidly Therefore, it is essential that bank staff should be constantly trained and retrained In particular, banks should make latest technology and equipments available to their staffs and encourage staffs to stay active in learning new skills Especially, employees who directly work with customers should have both sufficient knowledge and good social and communicating skills 3.2.2.4 Developing Management System The management team is of great importance because they have to observe the system, control risks and design operating plans 28 The system cannot perform well unless it has a good evaluating model We need to know if the system is actually earning profit If it is, how can it be developed and if not, should it be changed? Those are the questions that managers should be able to answer Another responsibility of the management team is to control risks We have learned that both types of systems contain certain degree of risks And it is better to avoid than to work through troubles Therefore, managers need to study what the potentials and their significance are and how to prevent them Combining all the research, management teams will build strategies to operate the system with maximized efficiency This includes incentives to stimulate staffs and encourage contributing ideas 3.2.2.5 Developing Risk Assessing System The duty and responsibility of each employee and department should be divided and clearly assigned Otherwise, when error or trouble incur, it is difficult to identify where to fix the problem For instant, documents should be double-checked; there should be cooperation between International Payment Department and Underwriting Department, etc Chapter summary In brief, this chapter gives a general assessment of the two IP systems in Operations Center and Head Office of Vietcombank and the reasons for their achievements After that, the chapter presents several recommendations for banks on how to choose a suitable IP system and how to improve its performance Finally, some remarks of the whole thesis are given in the conclusions 29 CONCLUSIONS In conclusions, this thesis has studied the IP systems in Vietcombank Particularly, the research focused on the centralized system in the Head Office and the decentralized system in the Operations Center With analysis of the benefits and shortcomings of each system, this writing hopes to provide a fair review of the situation in the study field and useful suggestions on how to apply and develop an effective IP system In particular, the thesis finds that both types of systems are well utilized by the two offices The centralized IP system in the Head Office promotes stability, reliability and rapidity with specialization and computerization The decentralized system, with its simple structure, supports the Operations Center’s ability to adapt to special conditions quickly, answer individual’s demand and save time and cost, ultimately to offer customers convenience at low costs Given the positive business results of IP activities in Vietcombank, it can be seen that the efficiency of an IP system depends on each firm’s status and environment For instance, the Head Office has to answer a nation-wide customer base Hence, the centralized system guarantees its service quality and maintains its reputation Whereas, the Operations Center operates in a concentrated market which brings about high flexibility and timeliness in transactions Therefore, the decentralized system there is beneficial Having understood the nature and application of the two IP systems in Vietcombank, the study then suggests some recommendations to make better use of them To choose a suitable system, a bank needs to consider its own conditions and assets of both materials and human resource In addition, market research should be taken seriously to find customers’ expectation Once a suitable choice is made, the bank has to work hard to improve the system’s 30 efficacy Keeping both facilities and employees updated and, especially, developing a practical management system are of great importance In this thesis, I have tried my best to achieve my objectives with perfection However, due to my limited knowledge, experience and time, my thesis may not cover all aspects of the IP systems employed in the network of Vietcombank There may still be some gaps in analyzing the situation in the branches and subsidiaries under the centralized system in the Head Office Other than that, I hope my writing provides an adequate observation and helpful understandings of the subject 31 REFERENCES - Books and articles  Bank for Foreign Trade of Vietnam (2012), “Annual Report 2011”  Prof Đinh Xuân Trình (2006), “International payment curriculum”, Labor and Society Publications, Hanoi, Vietnam  Hoa Mai Dung (2010), “The centralized international payment system in banks of Vietnam: real situation and solution”, Foreign Trade University of Vietnam, Hanoi, Vietnam  Dr Nguyễn Văn Tiến (2010), “International payment and Trade Financing” (4th edition), Statistics Publications, Hanoi, Vietnam  Dr Rhys Bollen (2007), “International Payment history and development”, RMIT University, Melbourne, Australia  The Operations Center of Vietcombank (2012), “Annual Report 2011”  Dr Tô Ngọc Hưng (2009), “Commercial Banks”, Statistics Publications, Hanoi, Vietnam - Rules and regulations  International Chamber of Commerce (ICC), (2007), “International Standard Banking Practice for the Examination of Documents under Documentary Credits” (ISBP)  International Chamber of Commerce (ICC), (2007), “The Uniform Customs and Practice for Documentary Credits” (UCP 600) - Websites:  www.bis.org  www.cfronline.org 32  www.exportfinance.gov.au  www.gafin.vn  www.tailieu.vn  www.tinnhanhchungkhoan.vn  www.swift.com  www.vietcombank.com.vn  www.wikipedia.org 33 APPENDICES Appendix 1: Documentary collection process Notes: Sale contract is signed The Exporter ships the goods to the Buyer The Exporter submits financial and commercial documents to the its bank The Exporter’s bank forwards the documents to the Buyer’s bank to The Buyer’s bank advises the Buyer and asks for payment The Buyer pays its bank The Buyer’s bank transfers documents to the Exporter’s bank The Exporter receives money 34 Appendix 2: Documentary credit process Notes: Sale contract is signed The Importer asks its bank (the Issuing Bank) to issue a letter of credit The Importer’s bank (Issuing Bank) issues the L/C to the Exporter’s bank The Exporter’s bank (Advising Bank/Negotiating Bank) forwards the letter of credit to its client The Exporter sends the goods to the buyer The Exporter provides to its bank the documents required by the letter of credit The Exporter’s bank sends the documents to the Issuing bank The Issuing bank pays the Exporter’s bank after checking compliance of documents The Exporter receives money 10 The Importer pays the Issuing Bank 11 The Issuing Bank releases documents to the Importer 35 Appendix 3: Example Fee Schedule Vietnam Joint Stock CB for Industry and Trade (Vietinbank) Fee Schedule (Excerpt) FEE/CHARGE RATE (Excluding VAT) RATE MINIMUM ITEM V DOCUMENTARY CREDIT Exports 1.1 Advice of L/C 20 USD 1.2 Advice of amendments 15 USD 1.3 Advice of L/C received from the 15 USD + fees payable requested bank other than the issuing bank by other banks 1.4 Settlement of a set of documents 1.5 Confirmation of L/C issued by correspondent banks 1.6 L/C transfer 20USD 1.6%/year 50USD 40 - 50 USD 1.7 Processing a set of documents 1.8 Advice of export L/C cancellation 0.18% Subject to agreement 20USD 15 USD + message fee (if any) 1.9 Preparation of a set of export L/C documents for customer Subject to agreement 30 USD 0.15%/ value of L/C 50 USD 0.15%/ of the increased value 20 USD Imports 2.1 Issuance of L/C 2.2 Issuance of amount increase amendment 2.3 Other amendments 15 USD /time 2.4 Cancellation of L/C 15 USD 2.5 Acceptance of usance draft 1.2%/year /draft value (from the draft acceptance date to ( Not applicable to usance L/C with settlement date) tenor less than 30 days after the Bill 36 20 USD of Lading date or 30 days after sight) 2.6 Settlement of a set of documents 0.2% of the value of a payment item 2.7 Commitment of payment for non cash-cover portion of the import L/C 0.05%/month 2.8 Guarantee for receipt of goods (in case bill of lading is not yet available) 30 USD 30 USD 50 USD 2.9 Penalty for late returning of guarantee for receipt of goods - Returning within 60 days since the date of guarantee issuance - Returning later than 60 days since the date of guarantee issuance Waived 0.1%/month/guarantee amount 2.10 Bill of Lading endorsement/ Issuance of authorization letter for receipt of goods according to L/C 50 USD USD 2.11 Processing of a set of documents Subject to agreement Forwarding L/C to the second advising bank 15USD 37 10 USD