[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.

http://en.wikipedia.org/wiki/Financial_institution

http://en.wikipedia.org/wiki/Financial_institution

http://en.wikipedia.org/wiki/Trade_finance

http://en.wikipedia.org/wiki/International_trade

http://en.wikipedia.org/wiki/Uniform_Customs_and_Practice_for_Documentary_Credits

http://en.wikipedia.org/wiki/Uniform_Customs_and_Practice_for_Documentary_Credits

http://en.wikipedia.org/wiki/Advising_bank

http://en.wikipedia.org/wiki/Commercial_invoice

http://en.wikipedia.org/wiki/Bill_of_lading


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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

http://en.wikipedia.org/wiki/Payment

http://en.wikipedia.org/wiki/Payment

http://en.wikipedia.org/wiki/Plastic

http://en.wikipedia.org/wiki/Line_of_credit

http://en.wikipedia.org/wiki/Consumer

http://en.wikipedia.org/wiki/Merchant

http://en.wikipedia.org/wiki/Cash_advance

http://en.wikipedia.org/wiki/Charge_card

http://en.wikipedia.org/wiki/Credit_card_interest

http://en.wikipedia.org/wiki/Cash

http://en.wikipedia.org/wiki/Bank_account

http://en.wikipedia.org/wiki/Credit_card


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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!

[commercial banking assignment] non-cash payment in vietnam

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