CHAPTER 1: BASIC THEORETICAL ISSUES OF DEVELOPING NON-
1.1. OVERVIEW OF SERVICES OF COMMERCIAL BANKS
1.1.3. Classification of banking services by the nature of revenue sources
Based on the nature of revenue sources, it can be divided banking services into two forms: + Credit service + Non-credit service
1.1.3.1. Credit service
Providing credits to organizations in the forms of lending, discounting, guarantee, financial leasing and other forms as prescribed. + Lending based on criteria of customer credit rating, commercial banks consider granting credit at the request of customers. If based on the loan term, the loan consists of two types: short-term loans (usually for investing in current assets), medium and long-term loans for investment in fixed assets, investment and production and business development projects). Project loans: This type of loan is designed to help accelerate the investment in infrastructure and production development. Accordingly, for the State or enterprises’s investment projects of developing production and business, infrastructure, services and life, etc with expected economic efficiency, feasible but lack of capital, banks will provide investment project loans to help the investor have capital to complete it. In essence, object financing is also a credit activity within traditional commercial banks. Co-financing loan: In essence, co-financing loan is a credit product of traditional commercial banks. However, the amount of capital required for a transaction is very large ($ 400-500 million) leading to a high concentration of risk. Therefore, co-financing is a solution for capital providers to share risks for each customer and each transaction. Retail loan: consumer loan, personal loans (study- abroad loans, auto loans, mortgage loans, specialized project financing, etc.), mortgage loans, household loans and SME loans. Together with the
socio-economic development, the proportion of personal and family loans in outstanding loans of commercial banks has been increasing day by day. Personal loans now account for a very important proportion in the portfolio of commercial banks. + Discount: Banks discount other short-term valuable papers for large enterprises and can rediscount other commercial papers and other short-term valuable papers to other banks. With this service, commercial banks help large enterprises restore their solvency, accelerate the capital transfer. This service is preferred not only for customers but also for banks because of valuable paper collateral and low credit risks. Bank guarantee is a commitment of a guaranteeing bank made in writing to commit to the beneficiary (referred to as the guarantee beneficiary). If, upon maturity, the obligee (guarantor) does not perform or improperly performs the commitments stated in the contract, the guaranteeing bank shall perform the obligation on behalf of the guaranteed. In essence, this is a form of credit with signature, no capital but risk because the guaranteeing bank must fulfill the guarantee commitment when the guarantor for some reason fails or performs obligations improperly. + Financial leasing: Financial leasing is a contractual transaction between two entities, including the asset owner and the asset user, in which the asset owner (lessor) transfers the asset to the lessee in a certain period of time and the asset user must pay the rent to the asset owner. The nature of a finance lease is a form of financing where, at the request of the lessee, the lessor acquires assets and transfers them to the lessee for use. + Factoring: This is a form of granting credit to the seller through the acquisition of receivables arising from the sale of goods agreed in the sales contract. This service is provided by a “factor”
company that helps businesses sell their existing debts to have capital. The “factor”
company considers and evaluates the purchasing partner. If agreed to finance, it will sign a “factor” contract with the seller. The difference between the invoiced value and the factoring cost that generates income for “factor” companies is the financial cost of the Seller, which is often not small.
1.1.3.2. Non-credit service
Deposit, Payment Accounts and Treasury
- Deposit service: Receiving deposit means the act of receiving money from organizations and individuals in the form of demand deposits, term deposits, savings deposits, certificates of deposit, promissory notes, bills and other forms of receiving deposits on the principle of full refund of principal and interest to depositors as agreed.
- Account payment service means the type of service in which banks provide payment facilities; payment services for checks, payment orders, collection orders, bank cards, letters of credit and other payment services for customers through their accounts.
Account payment service includes payment services through domestic and international accounts.
Banks are aiming to developing a safe and efficient banking payment system in line with international practices and standards, focusing on upgrading the interbank payment system and internal payment systems of banks to encourage customers to pay via bank, limiting the use of cash in payment. The Bank closely cooperates with agencies, enterprises, organizations in providing services, consumer goods and public services (supermarkets, restaurants, hotels, tourism, water supply companies, electricity compnies, postal services and telecommunications companies, etc). This service helps to exploit customer deposits at low cost meanwhile banks increase revenue from payment fees.
International payment service: as a guarantee from the bank so that customers can buy deferred payment from foreign partners. This service allows banks to charge payment fees and seek profits in the purchase and sale of foreign currencies of various types in payment transactions.
- Treasury service: is beneficial for both customers and banks. The bank provides cash management services for customers. Cash receipt and payment can be made at the bank counter or at the location where the customer requests. This service helps customers save time and effort in collecting and paying amounts with the bank’s safety security and interest payment. The bank benefits from maintaining customers’ account balance.
Card service
Card service is a modern banking service aimed at individual customers. Banks are constantly adding new features to cards such as ATMs, which have been upgraded to debit cards and are now directly linked to the customer’s deposit account.
Customers can also withdraw a larger a mount then their account balance after the signing of the overdraft limit contract with the bank. Customers can gradually use this card to pay for electricity, water, telephone, Internet and meet their shopping needs. They even use this card to pay services and goods in a certain period of time without interest payment. The banks are currently linking to each other to best serve customers. In addition, banks also issue international payment card such as Visa, Mastercard, etc.
- Domestic payment cards are issued by domestic banks and used by customers to pay for goods, services, withdraw and deposit cash at ATMs. To facilitate the cardholders, some banks issue debit cards but at the same time grant overdraft limit to card users.
- International payment cards are non-cash payment instruments circulated worldwide. Currently, the typical international cards are Visa Card; MasterCard;
JCB card; American Express.
E-banking
E-banking is a combination of banking services and utilities and a advance in the field of information technology to create modern and diversified services with various forms of transaction forms. It is the bank’s act of providing banking services through support tools such as Internet, telephone, computer, network services and transmission lines, etc., which customers can carry out transactions at any time anywhere. The bank must provide each customer with a name and passport and the customer is responsible for the confidentiality of the name and passport provided by the bank.
- Internet banking: automatically provides information of products and services through internet. With a personal computer connected to the internet, the customer
can access the bank’s website anytime, anywhere to be informed and carry out transactions.
This service allows customers to transfer money online through the accounts as well as control the operation of these accounts. To participate this service, customers visit the ban’s website and conduct financial transactions and query the information needed. The information is very rich, from customers’ transaction details to other details of the bank. Customers also have access to other websites to purchase goods and make payments through the bank account. However, when connected to the Internet, the bank must have a strong security system to deal with the risks on a global scale, which is a big challenge for banks in Vietnam because it is expensive to invest in such security system.
- Home banking: is a service that allows customer carry out most of their bank transfer and payment transactions via the network and specialized software that the bank has installed for them at home or at the company.
With home banking, customers carry out transactions with the bank through Intranets separately built by the bank. Transactions are carried out at home, office, company through a computer system connected to the computer system of the bank.
Through home banking, customers can make transactions such as money transfer, listing transactions, exchange rates, interest rates, debt note, credit note, etc. To use this service, customers only need having a computer (at home or office) connected to the bank’s computer system via a modem - a dial-up telephone line. Customers have to register the telephone number that is only connected to the Home banking system of the bank.
Phone banking is a 24/24 response system of commercial banks. Customers can use the phone to hear information of banking products and personal account information.
When the customer presses the necessary keys on the phone according to the bank’s regulations, the system will respond to his/her request. Phone banking only provides information already programmed in the bank’s automated information system.
It is a fully automated phone banking product, so all types of information are automatically predefined, including information of exchange rates, interest rates,
securities prices, personal information of customers such as account balance, listing the last five transactions on the account, the latest notices, etc. The system also automatically sends faxes when customers request the above-mentioned types of information. Currently, through phone banking, information is updated more differently than before, customers only have information of the last day.
- Mobile banking: is a banking service through Mobile phone. Customers only need to use mobile phone to text a message in the form prescribed by the bank and send it to the number of services of the bank, their requirements will be satisfied; for example, personal account information, invoice payment, transfer from one account to another, placing securities trading orders, gold trading orders.
This service is designed to address the need to pay for micro payments or unmanned automated services. To join this service, customers must register to be an official member, in which it is important to provide basic information such as cell phone number, personal payment account number. Then, the customer is provided with an identification number (ID) by the service provider through this network. This code is not a phone number and it will be converted into a barcode for sticking to a mobile phone, which helps to provide customer information to make payments faster, more accurately and simply than the terminals of the points of sale or service supply. In addition to the identification number, customers are also given a personal identification number (PIN) to confirm the payment transaction at request of the payment service provider. After completing the necessary procedures, the customers will be an official member who is eligible to pay via mobile phone.
- Call center: Due to the centralized data management, customers with accounts at any branch still call a fixed phone number of this center to be provided every general and personal information. Unlike phone banking, which provides only pre-programmed information, call center can flexibly provide information or answer customer inquiries.
The weakness of the call center is that people have to be on duty 24 hours a day.
Foreign exchange trading service
Foreign exchange trading services include services related to the purchase and sale of foreign currencies, including trading in foreign currencies on the interbank
market and trading in foreign currencies with enterprises, organizations or individuals.
Banks often trade foreign currency with enterprises in the field of import and export. Exporters who receive foreign currency from customers or individuals who receive income or amounts remitted by their relatives abroad will sell foreign currency to buy Vietnam dong in order to meet their domestic spending demand.
The Importers buy foreign currency to pay for the sellers, etc. Individuals buy foreign currency to meet the reasonable demands such as overseas business trip, travel, medical treatment, overseas education, etc.
Foreign exchange services helps banks to earn Revenues from exchange rate differences in purchase and sales activities.
Foreign exchange trading services include:
- Spot foreign exchange transaction: is a foreign currency sales or purchase agreement that the execution date will be two next working days after the transaction date. The execution date may also be the same day or the working day immediately after the transaction date.
- Forward foreign exchange transaction means a purchase or sale agreement of a defined amount of foreign currency to be paid in a local currency or another foreign currency at a specific future date/ period at an agreed exchange rate. This tool helps customers prevent exchange rate risks.
- Foreign currency swap transaction: is a simultaneous purchase and sale of the same currency at two different execution dates. In other words, the buyer receives a currency for a limited time and when this period of time is due, he/she will have to pay this currency and take back the original currency.
- Foreign currency derivatives:
Foreign currency swap: is the simultaneous purchase and sale of the same amount of foreign currency (only two currencies are used in the transaction), where the maturity of two transactions is different and the exchange rate of the two transactions are determined at the time of signing the contract.
Foreign currency option: is a transaction between the buyer (enterprise) and the seller (bank), in which the buyer has the right but no obligation to buy or sell a certain amount of foreign currency at an exchange rate determined within a pre- agreed period. If the buyer exercises his option, the seller is obliged to sell or buy the amount of foreign currency in the contract at the pre-agreed exchange rate.
Future foreign currency transaction: means the foreign currency purchase and sale at the exchange rate determined on the transaction date and the payment will be made at a future time as agreed.
Guarantee (chargeable)
It is the form in which credit institution undertakes to the beneficiary that it will perform its financial obligations on behalf of the customer when the customer fails to perform or performs the committed obligations insufficiently. The customer must acknowledge the debt and return it to the credit institution as agreed. The guaranteed can be the enterprise itself or other organizations/individuals that want to be guaranteed by the bank.
The legal obligations issued letter of guarantee by the bank are usually loan guarantee, payment guarantee, bid guarantee, contract performance guarantee, tax guarantee for import and export goods, advance payment guarantee, retained amount guarantee (Warranty guarantee), Counter guarantee, Guarantee for specific purposes, etc. and the bank shall collect guarantee service charge. Charges from guarantee services are recognized in non-credit services.
Trust service
As defined in the “Commercial Banks” book by Eward W. Reed and Eward K. Gill, the trust relationship arises from an agreement between the truster and the trustee.
This agreement is recognized in the trust contract and is protected by law. A trust is the transfer of property from the truster to the trustee so that the trustee manages and administers the property for the interest of the truster, one or more beneficiaries.
So, trust is an activity that clearly demonstrates the intermediary of trust service providers, including commercial banks.
Personal customer trust services include asset liquidation, personal trust management, asset custody and preservation, representation trust, etc.
Corporate customer trust services include retirement benefits, profit and dividend disstribution, bond issuance, fund redemption, payment, etc.
The contents of the trust service include capital trust, investment trust, work performance trust.
Consultancy
The bank provides customers with consultancy services such as consultancy on deposit, term and effective amount of deposits; evaluation and re-appraisal of investment projects, financial options, economic and technical indicators of the project, risks of the project and financial options of the project; consultancy on financial investments in projects or enterprises; equitization consultancy; listing consultancy, securities registration consultancy; tax consultancy, etc.
Supervision banking services:
The bank provides depository services and supervises the management of public funds and securities investment companies. Supervision banking services include depository assets of public funds and securities investment companies; separate management of assets of public funds, securities investment companies and other assets of the custodian bank. Supervision is aimed at ensuring that the fund management company, director or general director of the securities investment company manages the assets of the company in accordance with the provisions of the Law on Securities and the Articles of Assocation; carries out the payment and transfer of money and securities related to the operation of public funds or securities investment companies at the lawful request of the fund management company or the Director/General director of the securities investment company.
Other non-credit services
Other non-credit services: Study abroad consultancy, multi-currency bankdraft, overseas remittance services, warehouse leasing and management services, asset valuation, brokerage and agent, insurance services, gold trading services, etc.