Banking services fall under trade in services within the current account. The passage distinguishes between two types of service income:
| Type | What It Covers |
|---|---|
| Factor Income | Returns to factors of production—wages, rent, interest, profits earned abroad |
| Non-factor Income | Services like banking, insurance, shipping, tourism, consultancy |
Banking is a service export/import, not a return on a factor of production (like labor or capital investment).
When a country provides banking services to foreign clients, it earns foreign exchange through a commercial service transaction—placing it in the non-factor income category.
Transfer Payments —> These involve no goods or services in return (e.g., remittances, foreign aid)
Capital Account —> This records asset transactions, not service flows
Factor Income —> This would apply if we were discussing interest earned on foreign investments, not the banking service itself