[Commercial Banking Assignment] Non-Cash Payment in Vietnam
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Transcript of [Commercial Banking Assignment] Non-Cash Payment in Vietnam
Foreign Trade University
Faculty of Banking & Finance
2011
Nguyen Duc Tien Anh
0853040007
A1 – BSc of Banking & Finance
Batch 47
The Reality of Non-cash Payment
in Vietnam
“Non – cash payment in Vietnam” Nguyen Duc Tien Anh - 0853040007
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CONTENTS
Preface .................................................................................................................................... 3
Part 1 –
Fundamentals of Non-cash payment .................................................................................... 4
1.1 Concept of Non-cash payment ................................................................................... 4
1.2 Necessity and impact of non-cash payment in the modern economy ......................... 5
1.3 Modern form of non-cash payment: ........................................................................... 6
1.3.1 Payment by Cheque ........................................................................................... 7
1.3.2 Payment by authorized payment - payment orders ............................................. 8
1.3.4 - Payment by authorized collection – collection order .......................................... 9
1.3.5 Payment by letter of credit: ............................................................................... 10
1.3.6 Payment by bank card (payment card).............................................................. 11
Part 2 –
The reality – Limitation of non-cash payment application in Vietnam and causes ......... 13
2.1 The limitations of non-cash payment: ....................................................................... 13
2.2 The cause of the limitations: .................................................................................... 15
Part 3 – Conclusions ............................................................................................................ 17
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Preface
Nowadays, along with the emerging economy and the advancing technology,
the fast-developed production and circulation of goods and commodities has lead to
the development of payment methods. New methods always inherit and improve the
older methods to higher levels. Overcoming the disadvantages of cash payment, non-
cash payment provides new means of payment that is more convenient, preeminent
and better respond to the needs of economic development. Therefore, commercial
banks, of which payment intermediaries is an important function, are required to
touch the trend and to have effective measures to facilitate and expand non-cash
payment.
While in many countries in the world, non-cash means of payment have
become quite popular, in Vietnam, however, the portion of non-cash payment in total
volume of payment is still relatively small. Due to several reason, both subjective and
objective, non-cash payment operation of commercial banks are not commensurate
with the its potentials, earning from non-cash payment services is smaller than from
other services. Many people have never ever seen any real cheque or credit card.
Thus, to some extents, we did not take full advantages of non-cash payment to
promote economic development.
In the current situation of Vietnam that cash is the dominant mean of
payment, it is very necessary to find out a comprehensive solution to encourage
growth of non-cash payment, although finding a good way out is not easy at all.
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Part 1 –
Fundamentals of Non-cash payment
1.1 Concept of Non-cash payment
Non-cash payment refer to all the methods of payment which is made by transferring
an amount of fund from the payer’s or disburser’s account to the beneficiary account
through an intermediary financial institution, without the presence of cash, in
exchange for goods and services or to fulfill a legal obligation. Non-cash means of
payment are the opposite of cash (i.e. banknotes and coin)
Intermediary financial institutions which offer the payment service are often
commercial banks.
A series of operations is required to make non-cash payments and transfer funds from
payer to payee. The following diagram describes the main stages of a non-cash
payment.
The transaction phase includes the creation, validation and transmission of a
payment order. Depending on the type of instrument, the payment order may be
initiated by the payer or by the payee. A number of operations occurs during this
phase, aiming mainly at verifying the identity of the parties involved in the
transaction, the authenticity of the payment instrument and the integrity of
transaction data.
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During the clearing and settlement phase, intermediary financial institutions
exchange their respective claims arising from non-cash payments and settle the net
balance of claims.
1.2 Necessity and impact of non-cash payment in the modern economy
Together with the development of economy and society, production capability has
been growing strongly and the circulation of goods and services has been expanded in
both scale, scope and frequency aspects, as well. Then cash payment eventully failed
to meet the demand of payment. One of the main reason for this is that cash payment
helps amplify the volume of cash in circulation to very high levels, then it makes the
cash-circulation management more difficult. Increasing amount of cash in circulation
will, in turn, place a pressure of price level and inflation. On the other hand, cash
payment requires a large expense for printing, packaging, counting, shipping,
preservation, storage… money in cash.
Besides, the function of being mean of payment of money allows money flows to be
separated from the movement of goods. And based on this important characteristic, a
new more advanced method of payment has come up, which is non-cash payment or
payment on accounting entry. In this new payment method, the Bank stands as an
intermediary between 2 parties of the transaction.
With the born of non-cash payment, the volume of cash in circulation decreases, costs
of printing, preserving, transporting, counting cash are saved. It also helps improve
the efficiency of economy, increase the rate of turnover of capital and promote the
circulation of goods and services.
Regarding the impact to payer and payee, two direct parties to the transaction, non-
cash payment make the transaction faster and better secured. The parties would be
released from concern of typically risks along with payment in cash, such as lost of
money, crimes, mistake in counting cash, etc…
Another impact of non-cash payment is that it facilitate the development of other
economic services. For example, e-commerce would never grow if it is not supported
by a strong non-cash payment system.
Impacts of non-cash payment on commercial bank
- Non-cash payment helps raise the source of funds of bank:
With non-cash payment services, the bank can attract more customers to open payment accounts (checking accounts) and get benefits from free money deposited in these account.
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- Non-cash payment promote the bank’s lending out:
Because the bank could gather an amount of low-interest-bearing deposit, it would lower the lending out interest rates, and then, encourage bank’s customer to borrow fund from the bank. Thus the bank can make more profits.
- Non-cash payment helps increase bank’s revenue from payment services:
Non-cash payment provides a safer, more accurate, more reliable and time-saving payment services and ultimately builds the trust among bank’s customers. When customers realize the benefits from this payment method, they will prefer the new services than directly paying in cash. The more customers join bank’s payment network, the more revenue gained by the bank from its payment services.
- Non-cash payment encourage other services of bank
To improve the efficiency of its business and maximize profits, the bank continuously designs new banking products. These products often required a basis of effective non-cash payment. A well-organised non-cash payment system will facilitate the bank to make large volume payment transactions more quickly and accurately, thereby to attract more customers to use bank’s new products.
Impact of non-cash payment on Central bank and Financial regulation authority
Because non-cash payment reduces the amount of cash in circulation, it helps the State Bank of Vietnam control the cash supply in the economy better, and therefore better manipulate the volume of cash in circulation as well as distribution of goods and services.
This method of payment promote the dicisive role of Government in regulating the economy and appling national economic policies.
Non-cash payment also helps financial authority such as tax bureau to easily monitor, control and inspect a firm’s revenue, expense, income, etc... The tax bureau can easily define an appropriate amount of tax that the firm has to pay, because all transaction are now recorded by the bank in its accounting document. Therefore, non-cash payment prevents the implication of “underground” economic transaction, reduces negative effects of those activities. In other words, a developed non-cash payment system would encourage the transparency of a society.
1.3 Modern form of non-cash payment:
According to Decree 64/CP of the Government and the decision 226/2002/QD-NHNN of the State Bank Governor, there are five forms of non-cash payment applied in payment for goods and services are: + Payment by cheque
+ Payment by authorized payment - payment orders (Ủy nhiệm chi)
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+ Payment by authorized collection – collection order (Ủy nhiệm thu)
+ Payment by letter of credit
+ Payment by bank card
1.3.1 Payment by Cheque
Cheque (or check) payment is an unconditional order of issuers on the printed form
prescribed by the State Bank of Vietnam, asked the organization providing payment
services to deduct an amount from issuer’s deposit account to pay to the beneficiary
named on the cheque or to the cheque bearer.
Cheque is a payment instrument which is widely used in all countries in the world. The
rules for using cheque have been standardized in commercial laws and in international
conventions.
Cheque can be used as a direct mean of payment for goods and services exchange
between buyers (or the payer) and seller (the beneficiary), for tax payment ... or to
withdraw cash at bank branches. All customer who open accounts at the bank have
the right to use checks for payment. In the form of payment by check, the payment is
initiated by the payer and ended when the amount on the check comes to the payee's
account.
Time of validity of the check is 30 days from the date account holder issues cheque to
the date the payee submits cheque to the bank (including Sundays and holidays). If
the end of the validity period is Sunday or holiday, the time limit is extended to next
working day.
Although the forms of a cheque vary between different bank, there are some must-
have elements on any cheque:
- The word “Cheque” as title
- Number of the cheque
- The payer or issuer
- The amount of payment in both word and figure
- Place of payment
- Issuing date
- Sign of the issuer
An eligibility cheque must ensures the following elements:
- The check must include all required contents, not erased or edited, the
amount in words and in figures must match with each other.
- To be submited in the period of validity of payment.
- No order of suspending payment.
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- The signature and seal (if any) of the check issuer must match with the
registered form at the bank.
- Not issue cheque that is beyond the provisions in authorization documents.
- Issuer's account balance must be sufficient for the payment.
- The signature assignment (for a named check) must be continuous.
1.3.2 Payment by authorized payment - payment orders
Authorized payment is the payment order of the account holder, made on
bank’s printed form, to request the bank (where the payer opens his payment
account) to transfer an amount from the payer’s account to the benificiary.
- Applying Conditions:
Authorized payment or order of payment are used to pay the amount found or
services or transfer money to the same system or another banking system.
In the form of authorized payment, payer initiates the payment by issuing 4 copies of
payment order, submit to the payer’s bank, request to deduct from his account and
pay for the beneficiary. On all copies payment orders, the payer must fully and
accurately include all required content, sign and seal on all the copies.
When receiving payment order, within one working day, the paying bank has to
complete the payment order or refuse it if the customer's account is not enough or
the order is invalid.
Diagram of Payment process:
a – Within the same bank
(1) – Seller deliver goods or services to Payer
(2) – Payer submit order of payment to the Bank
(3) – Bank debit the payer’s account
(4) – Bank credit the seller’s account
Payer
(or Buyer)
Beneficiary
(or Seller)
BANK
(1)
(3) (2)
(4)
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b – Between different bank
(1a) – Seller deliver goods or services to Payer
(1b) – Payer issues 4 copies of payment order to payer’s bank.
(2ab) – The payer’s bank verify the issuing procedure, payer’s account balance.
If the order is eligible, bank debit payer’s account and transfer money to
Payee’s bank.
(3) – After receiving document from payer’s bank, bank of payee credit payee’s
account according to the payment order copies.
1.3.4 - Payment by authorized collection – collection order
Authorized collection is credential to collect money, issued by the beneficiary (the
seller) and submitted to the Bank for collecting the amount due under the delivery of
goods or services supplied to the buyer.
- Conditions for application and content of payment:
Collection orders applies to payment for goods and services between parties whose
accounts are opened in the same bank or other bank systems.
The parties to payment transaction must agreed to use a form of authorized collection
for payment, with specific terms and conditions stated in the contract. Parties must
notify in writing to the banks to make basis for implementation of the payment.
After completion of delivery or provison of goods and services, the beneficiary issues 4
copies of collection order, which is attached to the invoices, and submits documents
to their bank or submit directly to bank of Payer to request for authorized collection.
The beneficiary must fully and accurately include all required content, sign and seal on
all the copies of order. In order to speed-up the process, beneficiary may specify on
Payer
(or Buyer)
Payer’s Bank
Beneficiary
(or Seller)
Payee’s bank
(3)
(1b)
(2a)
(2b)
(1a)
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the collection order that request the Payer’s bank to use telegraphich transfer or fax,
at the beneficiary’s cost.
Upon receiving collection order, within one working day, bank of the payer must
deduct the payer's account to pay immediately to the beneficiary in order to complete
the payment.
When using collection order, late payment sometimes would happen. Due to the fact
that the payer’s account balance does not exist or is not sufficient for the payment.
1.3.5 Payment by letter of credit:
A standard, commercial letter of credit is a document issued mostly by a financial
institution, used primarily in trade finance, which usually provides an irrevocable
payment undertaking. The letter of credit can also be payment for a transaction,
meaning that redeeming the letter of credit pays an exporter.
Letters of credit are used primarily in international trade transactions of significant
value, for deals between a supplier in one country and a customer in another. In such
cases, the International Chamber of Commerce Uniform Customs and Practice for
Documentary Credits applies (UCP).
They are also used in the land development process to ensure that approved public
facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a
letter of credit are usually a beneficiary who is to receive the money, the issuing
bank of whom the applicant is a client, and the advising bank of whom the beneficiary
is a client.
Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled
without prior agreement of the beneficiary, the issuing bank and the confirming bank,
if any.
In executing a transaction, typically, the documents a beneficiary has to present in
order to receive payment include a commercial invoice, bill of lading, and documents
proving the shipment was insured against loss or damage in transit.
In comparison with other means of payment, such as cheque, payment order or
collection order, terms and conditions of letter of credit are of the most strict, which
reflect fully all the payment engagement stated in the contract.
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1.3.6 Payment by bank card (payment card)
The term payment card covers a range of different cards that can be presented by a
cardholder to make a payment.
Payment card, which is a payment instrument issued be a bank to its customers, can
be used to make payment for goods, services and other transactions or to withdraw
cash at bank’s branches or bank’s automatic teller machines (ATMs). Typically a
payment card is backed by an account holding funds belonging to the cardholder, or
offering credit to the cardholder.
Payment card is consider to be a modern means of non-cash payment due to the
requirement of many advance information technologies integrated in payment card
operation.The standard size of payment card is defined as 85.60 × 53.98 mm.
Payment cards can be classified into types depending on how this account is
managed. The two most-common type of payment card, credit card and debit card,
are described as follow:
a – Credit cards:
A credit card is part of a system of payments named after the small plastic card issued
to users of the system. It is a card entitling its holder to buy goods and services based
on the holder's promise to pay for these goods and services. The issuer of the card
grants a line of credit to the consumer (or the user) from which the user can borrow
money for payment to a merchant or as a cash advance to the user.
A credit card is different from a charge card, where a charge card requires the balance
to be paid in full each month. In contrast, credit cards allow the consumers to
'revolve' their balance, at the cost of having interest charged.
b – Debit cards:
A debit card (also known as a bank card or check card) is a plastic card that provides
an alternative payment method to cash when making purchases. Functionally, it can
be called an electronic cheque, as the funds are withdrawn directly from either
the bank account, or from the remaining balance on the card. In some cases, the
cards are designed exclusively for use on the Internet, and so there is no physical
card.
The use of debit cards has become widespread in many countries and has overtaken
the cheque, and in some instances cash transactions by volume. Like credit cards,
debit cards are used widely for telephone and Internet purchases, and unlike credit
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cards the funds are transferred from the bearer's bank account instead of having the
bearer to pay back on a later date.
Debit cards can also allow for instant withdrawal of cash, acting as the ATM card for
withdrawing cash and as a cheque guarantee card.
Other types of payment cards include:
- Charge card
- Fleet card
- Gift card
- Eletronic purse
- …
According to technology used in the card, payment card are classified into:
- Magnetic stripe card
- Smart card, and
- Proximity card
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Part 2 –
The reality –
Limitation of non-cash payment
application in Vietnam and causes
Recently, the Government’s Decree on Implementation of non-cash payment
and SBV’s project on “Development of non-cash payment in the period of 2006-2010
and a vision to 2020” would be a strategic solution and a legal framework for
electronic transactions (including transactions of non-cash payment) consonant with
socio-economic circumstances in general and the situation of cash payment in
particular, meeting urgent requests of the payment market progressed significantly.
Many new, modern, convenient payment means and services have been offered to
meet customer demand, with their scope expanding to serve individuals and citizens
However, the non-cash payment system of Vietnam still has to face up with
many limitations.
2.1 The limitations of non-cash payment:
In general, payment in cash is still very popular in the economy. Cash
payment still account for a high proportion of business sector and the majority of
payment transactions in the individual sector. The convenience of non-cash payment
is quite significant, but 85 percent of people have not been keen on the via-account
payment mode. In Vietnam, card payment has covered only one percent of individual
expenses.
Through an assessment survey reflected the actual situation of payment in
2003, the results showed that among 750 enterprises in Vietnam at both three
geographic area North, Central, South: in the sector of private company has over 500
employees, about 63% of their transactions are processed through the banking
system, for enterprises has fewer than 25 workers, this percentage is 47%. For state-
owned enterprises, just over 80% of transactions are made through banks; almost all
state enterprises and private transaction are paid in cash. In sector of sole
proprietorship, 86.2% of the business still pays for goods and commodity in cash,
75% pays for services in cash, 72% pay business tax in cash.
The number of users of banking services mainly are in large companies, labor
in the area of foreign invested enterprises, office staffs with high and stable income.
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The vast majority of the population, civil servants and employees of the government
sector, employees in small and medium enterprises have not accessed to the new
facilities and modern payment services. There is a fact that many people have never
seen a real cheque or a credit card or never been aware of that services in Vietnam.
Infrastructure and technical equipment facilitating the payment services are
old, poor and less efficient. In 2005, there are only about 2154 ATMs amount
allocated mainly in big cities and industrial areas. With a population of more than 80
million people in our country, on average, 45,000 people use an ATM. That ratio of
population on ATM is too low in comparison with neighboring countries at that time.
For example: in China, the ratio is 19,000 people/ATM, in Singapore: 2638
people/ATM.
Before 2010, when the ATM networks in Vietnam have not been connected
with each other, ATM can only serve a small group of banks, not capable of general
use for many banks as fact in many countries, making the network of automated teller
machines more limited scope of service. With the system of equipment at point of sale
(POS), the situation is the same. There always been the coexistence of multiple POS
devices of different banks in a store’s cashier. This significantly narrowed the scope of
use of non-cash payments.
Besides, the quality, utility and service diversity of non-cash payments is not
plentiful. According to Ms Duong Thu Huong, the secretary of Banking Association,
83% of ATM cards are used only to withdraw money. The ability to meet the needs of
a variety of user are still very limited. Means of non-cash payments stille do not
achieve the utility and scope enough to substitute for cash. The situation of “out of
service ATM” or “out of cash ATM” are quite often.
Transaction methods are mainly direct contact and face to face. To receive a
products and services of the bank, the owner usually have to go to the bank's office to
make transaction. Remote-transaction methods, based on modern information
technology such as Internet banking, mobile banking, homebanking ... are
undeveloped or only on small scale. Many customers are not familiar with those kind
of services.
The competition on market of services are still low and at alevel below the
potential. Competition by brand, quality of service is not popular. The organization
providing payment services, instead of creating new products or create value in the
product market, focusing only on price factors in order to beat competitors. This not
only undermine the profitability of the organization providing payment services, but
also damage to the link between banks itself and the customers, where guests found
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not notice to the differences between products of different banks, so that they easily
give up a product or service brand to come to a different brand name products;
- The services of non-cash payment only focuses on the development in big
cities, industrial zones and export-processing zones. There is lack of organization
providing professional payment services that serve at remote areas, and rural
localities with less developed economies;
- The fees for payment services is relatively high and difficult to accept for
payment transaction average, particularly for inter-bank transactions. For example,
customers have to pay a fee of 3,000VND when withdrawing money at a ATM not
belong to the bank issuing that card. In addition, a number of means of payment
requires customers to pay additional charge which does not exist when they use cash;
- The professional staff working in the field of payment did not meet the
requirements for professional qualifications, working style and professional ethics.
2.2 The cause of the limitations:
a - Habits and awareness:
With the renovation of the banking industry, all of the cash management
requirements applied previously have been removed. Cash become an unlimited
payment instruments. Most of costs arising from using cash, such as printing,
distribution, collection of destruction, transportation, storage, security are paid by the
Government. Individuals pay only a small fraction of the costs relate to cash (countint,
transportation), while cash has its hugh advantages which are immediate payment,
anonymous state, simple procedures. So, cash has become a very popular tool in
payment and it has become difficult to change the habits of consumers and many
businesses.
The habit of using cash might be considered to be big hindrance in the development
of non-cash payment.
b – The lack of economic incentives which are strong enough to encourage non-cash
payment:
To many customers, non-cash payment is not shown to offer superior economic
benefits in comparison with cash. In contrast, non-cash payments charge fee, even
very high fee. Non-cash means of payment are not welcomed at the many cashiers.
Only 50 percent of hotels, 10 percent of restaurants, 6 percent of airline booking
offices, and 1 percent of supermarkets have accepted card payments. This rate is
about 80-90 percent in developed countries and 10-25 percent in developing ones.
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c - The legal framework in the field of non-cash payment is not complete
Although in recent time, the legal framework in the field of payment has been
improved, but it still is considered to be incomplete and unsynchronization, especially
the issues related to electronic payment and electronic commerce
On November 19, 2005, the Electronic Transactions Law was passed by Congress, this
is a step toward a breakthrough in Vietnam in the application of information
technology for socioeconomic development. It creates a platform for the legal
framework of professional, modern banking services, banks facilitate broad
participation in the activities of electronic commerce, provides payment services to
users in the online business network within the whole society. However, for this law
come to life as a process of striving not only for banking but the entire society.
System of legal documents relating to the field of payment still needs to be modified
further, to be placed in line with international practice and the needs of users.
d - The structure of determining fee of payment services is irrational. Many recent
initiatives of commercial banks to charge new fees on card transactions have posted a
lot of arguement among customers.
e – The information dissemination and communication are not focus appropriately:
The authority does not have an appropriate strategy in communicating to the public
about the benefits and advantages of the new method of payment. Many banks are
also lack of a suitable PR or advertising strategy. Therefore, not only individual
customers but also enterprises are lack of information about these new payment
services, new means of non-cash payment, its benefits, etc…
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Part 3 –
Conclusions
Although transferring from a completely manual payment foundation, in which all
transactions are based on a paper invoice system, to a semiautomatic processing
method using electronic invoices, the latter has increasingly represented a moderately
high proportion so far.
Despite all of the obstacle mentioned before, the commercial banking system’s
individual account services have developed considerably. The number of individual
accounts at the end of 2004 was two million, an increase of 10 times compared to the
year 2000. The annual average growth rate is 150 percent in terms of account and
120 percent in terms of balance.
Many new regulations of the Government, such as paying salary to government staff
through payment card systems, have achieved initial success. From end of 2007 to
early 2008, the number of organisation paying salary through account system
increased by 4 times, from 5.200 to more than 21.000 orgranisations. More than 1.1
million people receive salary through account. Until end of June 2009, there are about
nearly 9.000 ATMs, 28.300 POS and more than 17 millions of payment cards issued.
Through all of those figure, we can see an optimistic prospects of the non-cash
payment in Vietnam. Gradually, the new payment services have proved its advantages
to customers.
However, as a matter of fact, there is still a long distance ahead for the non-cash
payment system to catch the development level of other industrial countries in the
world and in the Asian region.
In my opinions, I make a recommendation of 5 factors that need to be focused in
order to develop non-cash payment in Vietnam, which are:
1 – Technology infrastructure
2 - Comprehensive policies and mechanisms of the Government
3 – Quality and plentifulness of services
4 – Clearly and systematic information and communication strategy
5 – Information security for customers
Thank you!