Banking sectors are very complex, yet versatile. People of all sorts can find banking solutions that can customize themselves according to the consumer’s needs.
Exchange banks are such financial entities. Exchange banks provide a wide range of banking and currency exchange solutions to a specific audience. To know more about the functions and the motives of exchange banks, enjoy the entire conversation.
Exchange Bank Explained
Now, a typical bank conveys its services within the geographical territory of your country. They deal in the native currency or currencies. However, if you want to do any sort of financial transactions with a foreign entity, you either need to accept or provide foreign currencies.
Staying within the territory, you can’t accept the foreign currency. The same goes for your counterpart. So, in such cases, your local banks can’t help you. You will be needing an exchange bank.
An exchange bank provides foreign exchange to importers, exporters, or other financial entities of a specific country. Not only that, but they also provide conversion facilities to their clients.
With the help of exchange banks, you can easily deal with foreign parties and currencies. Such banks work like a conversion agent, where they are exchanging foreign currencies with both the entities of the business.
Functions of Exchange Banks and Income Generation
As you can see, the main function of an exchange bank is to ‘exchange’. Now, to be specific, they aim to provide financial exchange facilities to importers and exporters of a specific country. In this way, the importers and exporters can conduct their business affairs on foreign soil.
Other functions are noteworthy. Here, we will be discussing such 7 functions of exchange banks.
Providing Finance to Exports
Now, if you are in exporting business, you will be needing financial assistance regarding payments for your exported goods. In such cases, exchange banks provide you with certain documents to complete the payment procedure.
For instance, Exchange banks will issue a Document against Acceptance (DA) bill. This bill will be forwarded to the importer. The importer, by receiving all the exported goods, the importer will also issue a return document through the exchange bank which will conclude the entire payment.
Providing Finance to Imports
Just like the exporters, the importers will also need support from the exchange banks. When the exporter ships the goods and generates a DA bill, the importers will have to pay the bills upon receiving the goods.
In such cases, the exchange bank helps the importer to generate a Document Against Payment (DP). These Documents Against the Payment bill are then forwarded by the exchange bank to the exporter. And finally, the exporter receives the payment for the said exported goods.
Providing Financial Services to Internal Trades
Now, coming back within our territory. Take two business entities as an example. These entities want to conduct business between themselves. However, such commercial entities can be a huge deal.
In such cases, the exchange banks slip right in to fill up the void and work as a transactions agent between the two entities. In this way, the transactions stay intact and secure.
What the bank does here is that they provide advance loans to traders and discount their bill of exchange. It is proven to be very convenient for both traders to do business through exchange banks.
General Banking Functions
Even after all these, an exchange bank is still, after all a bank, right? For that core reason, it also provides certain common facilities like the general banks. These functions include deposits, loans, locker facilities, and so forth.
Stimulate Foreign Endeavors and Investments
Conducting business overseas has proven to be very crucial for a country’s economy. To do that regularly, the foreign entities should be motivated properly. Exchange banks play a huge role in attracting and encouraging foreign investment in local endeavors.
Developing Expertise and Innovation in Banking Sectors
Exchange banks have been a huge helping hand in the development of innovations in the banking sector. They have been providing their expertise in areas like trade and finance, payment policies, currency exchange, and risk management.
Improving the Industrial Infrastructure
Exchange banks play a huge vital role in reviving dying sectors and industries with their vast array of the foreign network. Not only that, they can sometimes invest as a financial entity. Loans, financial assistance, maintenance are always some of the native functions.
How Do Exchange Banks Generate Income?
You see, exchange banks provide banking facilities, mainly to business entities that require foreign exchanges. So, typically they charge for the services provided to their clients.
On top of that, they also provide other banking solutions like saving and deposit, loans, credit card facilities, locker systems, and so on. So, generating a hefty income for an exchange bank is not that hard.
Also, exchange banks provide many solutions regarding foreign currencies.
The exchange banks also reserve a large chunk of capital in the Federal Reserve, which allows them to generate revenue from the fluctuating interest rates.
Common Products & Services Offered by Exchange Banks
As we have discussed before, exchange banks are also just like typical banks. So, they provide similar products and services to their clients as well. Such services are:
- Savings and Deposit
- Home Loan
- Business Loan
- Credit Card Facilities
- Locker Services
- Payment Assessment Services
- Fixed Deposits
Final Thoughts
As you can see, exchange banks play a vital role in our economy. The impact can be dissected into two regions. The first impact region is establishing a trustworthy connection with offshore entities.
With the help of exchange banks, local businesses and other financial entities can have the luxury and right set of tools to conduct business with overseas clients. They can ensure the safe passage of transactions upon successful exchange.
On the other side of the spectrum, the other region of positive impact is creating a better infrastructure for foreign investors. Foreign investors can rely on exchange banks on creating a good relationship between the industries of the native territory. These help us in building better financial infrastructure.