Nature and Types of Services

We generally associate buying with goods. But in a ​market​ a customer

also buys services. Everyone from your doctor to your plumber is
selling you a service. Let us learn in detail about business services and
their nature as well as types of services.

Nature of Services

The definition of service is “any intangible product, which is

essentially a transaction and is transferred from the buyer to the seller
in exchange for some consideration (or no consideration). Let us take
a look at some of the characteristics of a service.

● Intangibility: A service is not a physical product that you can

touch or see. A service can be experienced by the buyer or the
receiver. Also, you can not judge the quality of the service
before consumption.
● Inconsistency: There can be no perfect standardization of
services. Even if the service provider remains the same, the
quality​ of the service may differ from time to time.
 ● Inseparability: One unique characteristic of services is that the
service and the service provider cannot be separated. Unlike
with goods/​products​ the ​manufacturing​ and the consumption of
services cannot be separated by storage.
● Storage: The ​production​ and ​consumption​ of services are not
inseparable because storage of services is not possible. Being
an intangible transaction there can never be an ​inventory​ of
services.

Types of Services

Let us take a look at the kinds of services that we come across in the
economy. There are basically three types of classification of services.

Browse more Topics under Business Services

 ● Banking and E-Banking
● Insurance
● Life Insurance, Fire Insurance and Marine Insurance
● Communication Services, Transportation and Warehousing

1] Business Services

The first type of service is business services. The most basic definition
would be services that support the daily functioning and activity of
any business but is not a commodity. Take for example IT services. In
this day and age, every business will require technological setup. The
people who provide IT support to a ​business​ are providing a service in
exchange for consideration.

There are other similar services that any business enterprise may
require for the smooth functioning and management of its activities.
Some such services are Banking, warehousing, insurance,
communication, transport etc.

2] Personal Services

Personal services are commercial activities that are provided to

individuals according to their individualistic needs. The service here is
extremely personalised to the customer. So there can be no uniformity
in the ​services​. The service provider will alter his service according to
the personal needs of each customer.

Some examples of personal services are catering, hotel and

accommodation, medicine, any kind of artistic endeavour (like
painting, sculpting etc). As you will notice all these services fulfil
personal needs of the customers.

3] Social Services

And when talking about types of services, we come to social services.

These are essential public services. They are provided by the
government or other such non-profit organisations. These services aim
to achieve social equality in the society by providing the backward
sections with the help they need. The service is not provided for a
profit motive but as a social cause. Social services include services in
the sector of education, sanitation, medical facilities, housing etc.

Solved Question for You

Q: Participation of the actual customer is necessary for service. True

or False?
Ans: This statement is True. When we talk about a service, it is an
intangible exchange or transaction. Hence the involvement of both the
service provider and the customer both is necessary. Take for example
the service provided by a doctor. If the patient (customer) is not
present or involved, the service cannot be provided.

Banking and E-Banking

Can you guess which is the largest bank in India? It is actually the
State bank of India​ (SBI), which is also incidentally the oldest ​bank in
India​. The SBI has some 13,361 branches across the country. Banking
is one of the most important sectors of the ​Indian economy​. Let us
educate ourselves about banking and e-banking.

Banking

A bank can be defined as an institution that accepts deposits from the

public and gives out loans. However, this is also a broad sense of the
many ​services​ the banking industry provides. In would not be
incorrect to say that business and trade would come to a near standstill
without banking services.
A bank helps in running the economy by promoting various economic
activities. It collects the savings of people and mobilizes them by
turning them into capital for businesses and companies. Money lying
idle is not good for the economy and the banks help generate wealth
from savings.

Types of Banks

There are broadly four types of banks that function in India. They are
as below,

● Commercial Banks​: The main functions of these banks is to

accept deposits from people and make loans to those that
require finance. Private commercial banks focus on financial
objectives and returns. Government-owned Public sector banks
tend to fulfil their social objectives before their financial
objectives. Example: SBI, ICICI, HDFC, PNB etc
● Cooperative Banks:​ These bank’s main function is to provide
cheap credit to those who do not have access to funds. They are
governed by the State Cooperatives Societies Act. These banks
are the main source for rural credit given to farmers and
peasants.
 ● Specialized Bank:​ These are set up to meet some unique needs
of an ​industry​ or a sector. They provide financial services to
such industries. Some such specialized banks are import-export
banks, development banks (IDBI), agricultural banks
(NABARD) etc
● Central Bank:​ This is the apex bank in the country, the Reserve
Bank of India (RBI). Its primary function is to control and
supervise all the other banks in the country. It also makes and
implements monetary policy of a country. The RBI is also the
government’s banker.

(Source: livemint)

Functions of Banking
1] Accepting Deposits
A bank is both the borrower and the lender in our economy. So from
time to time it will borrow money from its customers and pay them an
interest in return. This acceptance of ​deposit​ can be through any time
of account, like

● Current Account: This type of account is used for the daily

banking​ operations of a business. There is no limit to the
amount or number of withdrawals.
● Savings Account: This is to inculcate the habit of savings in the
public. Such an account will earn a nominal rate of interest.
There are some limitations as to the number and the amount of
the withdrawals
● Time Deposits: Also known as Fixed Deposits. Here the rate of
interest is much higher but withdrawals may invite a penalty.

2] Lending Activities

The second most important function of the bank is to lend money. The
money banks borrow from customers, it lends to other entities. This
can be done in one of the various ways – term loans, overdraft, cash
credits, discounting of bills etc.
By doing so, the bank will help generate capital in the economy and
further financial activities. For the overall economic situation of a
country, capital formation is an essential requirement, that banking
industry helps to achieve.

3] Cheque Facilities

A cheque is the most used and developed ​credit​ instrument in our

economy. The banks provide the very important services of collecting
our cheques and drawing them on other banks. This is how funds get
transferred to the payee account.

4] Allied Services

The bank also provides a plethora of other services, both banking and
general utility services. Some examples are bill payments,
underwriting bills, locker facilities, selling and buying of shares,
insurance premium payments, and even taxation services in some
cases.

e-Banking

Over the last few decades technology has changed everything around
us including banking. It has made possible internet banking. Here the
customer can do all his banking activities on the internet without
physically going to a bank or any human interaction.

All of the bank’s data and the information is stored on servers. So

there are services that the bank provides to the customer online and in
real time. Customers can see their account statements, transfer funds,
apply for ​loans​, pay their bills all online. Hence the phenomenon of
e-banking has caught on in the last few years. Almost all banks
provide it now.

Solved Question for You

Q: What are the advantages of e-Banking?

Ans: Some of the advantages of e-Banking are as follows

● 24×7 banking is possible.

● The convenience of the customers, who can do most of their
daily banking activities from the comfort of their homes
● Provides competitive advantage to the banks
 ● Banking is not limited to the branches of the bank, so banks
need not invest too much capital in multiple locations

Insurance

There are no certainties or guarantees in life. There is no ​guarantee

that the business will not suffer an unexpected loss or damages. So
while we cannot protect our interests against all risks, we can opt for
some insurance. Let us take a look at concepts of insurance and
functions of an insurance company.

Insurance

Insurance is defined as a contract, which is called a policy, in which

an individual or organisation receives financial protection and
reimbursement of damages from the insurer or the insurance company.
At a very basic level, it is some form of protection from any possible
financial losses.

The basic principle of insurance is that an entity will choose to spend

small periodic amounts of ​money​ against a possibility of a huge
unexpected loss. Basically, all the policyholder pool their risks
together. Any loss that they suffer will be paid out of their premiums
which they pay.

Browse more Topics under Business Services

● Nature and Types of Services
● Banking and E-Banking
● Life Insurance, Fire Insurance and Marine Insurance
● Communication Services, Transportation and Warehousing

Functions of an Insurance Company

1] Provides Reliability

The main function of insurance is that eliminates the uncertainty of an

unexpected and sudden financial loss. This is one of the biggest
worries of a business. Instead of this uncertainty, it provides the
certainty of regular ​payment​ i.e. the premium to be paid.

2] Protection

Insurance does not reduce the risk of loss or damage that a company
may suffer. But it provides a protection against such loss that a
company may suffer. So at least the ​organisation​ does not suffer
financial losses that debilitate their daily functioning.

3] Pooling of Risk

In insurance, all the policyholders pool their risks together. They all
pay their premiums and if one of them suffers financial losses, then
the payout comes from this fund. So the risk is shared between all of
them.

4] Legal Requirements

In a lot of cases getting some form of insurance is actually required by

the law of the land. Like for example when goods are in freight, or
when you open a public space getting fire insurance may be a
mandatory requirement. So an insurance company will help us fulfil
these requirements.

5] Capital Formation
The pooled premiums of the policyholders help create a capital for the
insurance company. This capital can then be invested in productive
purposes that generate income for the ​company​.

Principles of Insurance

As we discussed before, insurance is actually a form of contract.

Hence there are certain principles that are important to ensure the
validity of the contract. Both parties must abide by these principles.

1] Utmost Good Faith

A contract of insurance must be made based on utmost good faith ( a

contract of uberrimate fidei). It is important that the insured disclose
all relevant facts to the insurance company. Any facts that would
increase his premium amount, or would cause any prudent insurer to
reconsider the policy must be disclosed.

If it is later discovered that some such fact was hidden by the insured,
the insurer will be within his rights to void the insurance policy.

2] Insurable Interest

This means that the insurer must have some pecuniary interest in the
subject matter of the insurance. This means that the insurer need not
necessarily be the owner of the insured property but he must have
some vested interest in it. If the property is damaged the insurer must
suffer from some financial losses.

3] Indemnity

Insurances like fire and marine insurance are contracts of indemnity.

Here the insurer undertakes the responsibility of compensating the
insured against any possible ​damage​ or loss that he may or may not
suffer. Life insurance is not a ​contract​ of indemnity.

4] Subrogation

This principle says that once the compensation has been paid, the right
of ownership of the property will shift from the insured to the insurer.
So the insured will not be able to make a profit from the damaged
property or sell it.

5] Contribution

This principle applies if there are more than one insurers. In such a
case, the insurer can ask the other insurers to contribute their share of
the compensation. If the insured claims full insurance from one insurer
he losses his right to claim any amount from the other insurers.

6] Proximate Cause
This principle states that the property is insured only against the
incidents that are mentioned in the policy. In case the loss is due to
more than one such peril, the one that is most effective in causing the
damage is the cause to be considered.

Solved Question for You

Q: Write a few lines on the Indian Insurance Sector.

Ans: India’s economy has been in a boom for the last two decades.
There has been increased manufacturing and financial activities. This,
in turn, has triggered a rapid growth in the insurance sector as well.

In the year 2000, the authorities allowed private companies to be a

part of the insurance ​business​. Today there are 13 companies in ​life
insurance​ and 13 in general insurance. The most prominent one is of
course LIC. And then there are other major players like New India,
Tata AIG, Bajaj Allianz, ICICI Lombard etc.

Life Insurance, Fire Insurance, and

Marine Insurance
Did you know that you can insure your phone? Yes, in fact, you can
get ​insurance​ for your house, car, office, phone, and even your travel.
Let us learn about three of the main types of insurances we see in
business​, namely life insurance, fire insurance, and marine insurance.

Life Insurance

The purpose of life insurance is to provide the relatives and

beneficiaries of a deceased person with some financial aid and help.
Life insurance is a contract between the policyholder and the
insurance company​. It can be said that the insurance company or the
insurer are providing a ​service​ to the policy-holder.

Let us take a look at how the system of a life policy works.

● The policyholder pays the insurer a premium, which is

generally paid on an annual basis. The amount of this ​premium
depends on a variety of factors such as the ​health​ of the
policyholder, occupation, medical history, and many such
factors.
● The insurance company pays the “sum assured” to the
beneficiaries of the policy at the death of the insured, or at the
end of the term
 ● The insured can also borrow money against his own life policy

There are broadly two types of life policies- Term Policy and Whole
Life Policy​. Whole life policy will pay out whenever the policyholder
will die. Term Policy is set for a term i.e. a certain number of years.
Here the insurance covers the term and if the insured dies during the
term, the policy will pay out. If the insured survives the term then
there is no payout.

Browse more Topics under Business Services

● Nature and Types of Services
● Banking and E-Banking
● Insurance
● Communication Services, Transportation and Warehousing

Fire Insurance

A fire insurance is a ​contract​ between the policyholder and the insurer.

Here the insurance company will pay to the policyholder any loss
caused to him or his particular property when destroyed by a fire
accident. So the protection is against any damage that the fire causes.

Here the policyholder pays an annual premium. And if a fire breaks

out and causes damage to the property the insurance company will pay
to the extent of the ​damages​ up to the insured amount. If the damages
exceed such amount the ​company​ will not be liable for the excess
amount. And if during the term such an incident does not occur, the
premium amount will obviously lapse.

Two important characteristics of fire insurance are:

● Insurable Interest: The policyholder must have an insurable

interest in the property being insured. The loss of such property
must affect the policyholder and their survival will benefit him.
● Good Faith: The policyholder must disclose all facts to the
insurer in good faith. All details about the property, its
construction, the environment etc must be provided to the
insurance company. If the company finds out at a later date that
 the policyholder withheld information they can terminate the
policy.

Marine Insurance

(dieselship)

Marine insurance is generally meant for sea transport and shipping

corporations. It provides insurance to ships and the cargo they carry.
Marine insurance covers any damage a ship or the cargo of the ship
may suffer during the voyage or at any point between the start and end
of the journey.

According to the terms of the insurance many kinds of ​financial​ losses

are covered. Losses that occur due to natural disasters, such as storms
or hurricanes, or loss that might occur due to theft or piracy and even
losses due to accidents on deck.

Solved Question for You

Q: What is cargo insurance?

Ans: Marine cargo insurance, also known as freight insurance, is a

branch of marine insurance. This type of insurance protects the goods
on the ship from loss due to natural disasters, spoilage, theft, damage
in transit and many other such factors. It also will generally cover the
goods during storage as well.

Communication Services,
Transportation and Warehousing

A business organisation does not operate in isolation. It is a part of the

society and the economy and needs support to function smoothly.
There are a lot of intermediate services that an entity requires to
perform its functions. Some such services are communication,
transportation, warehousing etc. Let us take a look at these.
Communication Services

A ​business organization​ must have constant contact with the outside

world. There needs to be an exchange of information and ideas. This
is why effective communication is the cornerstone of any successful
company. A company must communicate with its employees,
customers, buyers, suppliers, the government etc.

For any communication service to be effective it must be fast and

inexpensive. In the last few decades with the rapid technological
advancements, communication has become highly effective now. In
fact, the advancement of the internet (with its ​communication
capabilities) is the reason we have a ​global economy​.

There are two main communication services in India that businesses

generally rely on,

● Postal Services: The Indian Post Office is an important part of

our society. They provide various types of mail and telegraph
services pan-India. But did you know that post office also
provide financial services similar to ​banks​?
● Telecom Services: Telecommunication infrastructure is a very
important part of a country’s infrastructure and essential to its
 progress. These services include cellular services, internet
services, DTH services etc.

Transportation

Transportation is concerned with the transport of goods and raw

materials. However, transportation is not only the freight but all the
auxiliary services associated with them.

The main function of transportation is to overcome the barrier of

place. The goods will be made available to the end consumer no
matter where they are located in the world. They will be transported
from their place of production to their place of consumption.

To keep up with an expanding ​business​, transportation services must

also keep up. One main factor is the infrastructure of the country.
Roads, railways, ports etc must be taken care of. It is both the
responsibility of the industries and the government.

Warehousing
Once the goods are produced they also must be stored. There is
generally a lag time between production and consumption. This
systematic and scientific storage and maintenance of goods and raw
materials is called warehousing.

Warehousing isn’t merely storing goods in a shed. It is a logistics

centre, which provides a variety of ​services​. They are responsible for
inventory management, which includes providing the production
departments with the right quantity of goods at the correct time
intervals.

There are types of warehouses based on the ownership of them. Some

of them are
 ● Private Warehouse: Owned and operated by the ​company​ itself.
Private warehousing requires huge capital investment but it
provides the company with full and complete control. It is ideal
for organisations that have a huge ​inventory​ and a high
turnover like for example a chain retail stores.
● Public Warehouses: Here you use a warehousing facility in
exchange for a fee. While the ownership will not be the
company’s it is a cost-effective method. The ​government​ will
regulate such warehousing facilities. The owner of a public
warehouse is expected to take reasonably good care of the
goods.
● Bonded Warehouse: These are warehouses for imported goods.
The goods will be in storage at the facility till the importer pays
his custom duty and other such taxes. So the goods are said to
be in a bond.

Solved Question for You

Q: What is a Cooperative Warehouse?

Ans: At times certain industries and cooperative societies (like
agricultural societies) will set up their own warehouse. The warehouse
will be available to the member organisations for various warehousing
activities. Here the ownership will be the society.