Chapter 4

International payments
transactions

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Payment methods in international trade
 Similar to those in domestic trade
 Added risks involved in cross-border transactions
 Means of payment = terms of payment in international
trade
 Four commonly used terms of payment – each of them
defers in level of risk and stability for buyer and seller.
 Absolute v. relative security of parties (compromise of
the parties interests)
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method
 Relationship between the seller and the buyer
 The length of business relationship between the parties
(most important factor)
 Nature of merchandise
 Industry norms
 Distance between seller and buyer
 Currency fluctuations
 Political and economic stability
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There is a mismatch between

Buyer and Seller Goals
When do YOU want to get paid?
When do Buyers want to pay?

Now!

Later!
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 Choice of Methods LOGO

(What Determines?)
 Buyer-Seller Relationship
 Buyer’s credit standing
 Competition
 Uniqueness of the product (custom made?)
 Country conditions (political, economic)
 Cash flow considerations
 Transaction costs
 Other

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Payment risk diagram

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How to transfer money between banks
 Vostro Account
When a foreign bank maintains a current account with a local
bank ,from the point of a domestic bank, the account is a vostro
account

 Nostro Account
When a domestic bank maintains a current account with a
foreign bank ,from the point of a domestic bank, the account is a
nostro account

Vostro a/c (1)in cover,we have credited

you’re a/c with us
Remitting bank (2)in cover,please debit our a/c Paying bank
with you
Nostro a/c
1. Remittance
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 Remittance refers to a bank (remitting bank), at

the request of its customer (remitter), transfers
a certain sum of money to its overseas branch
or correspondent bank (paying bank) instructing
it to pay a named person domiciled in that country

 Parties of a remittance
-- Remitter
-- The Remitting Bank
-- The Paying bank
-- Beneficiary or Payee
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Methods and procedures of remittance
 Remittance can be classified as M/T、T/T、 D/D

 Remittance by mail (M/T)

the remitting bank transfers the funds by mailing a
P.O.
cheap but slow

 Telegraphic Transfer
the remitting bank sends the P.O. to the paying bank
by cable, telex, or SWIFT, authorizing the paying bank
to make payment to the payee.
fast ; safe ; limited time for banks to keep the funds
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Methods and procedures of remittance
 Procedures of M/T、T/T

(8)
Remitter Beneficiary
(1) (2) (4) (5) (6)
(3)
Remitting Paying
bank bank
(7)
(1)Remittance application with funds and commission;
(2)receipt
(3)sends P.O. /telex/SWIFT instructing paying bank to make payment
(4)after authenticating, notifies the payee
(5)upon receipt, the payee provides the paying bank a receipt
(6)the paying bank debited the remitting bank’s a/c and make payment
(7)sends the debit advice and payment receipt from payee to the remitting bank
(8)the debt is discharged
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Methods and procedures of remittance

 Remittance can be classified as M/T、T/T、 D/D

 Remittance by Bank Demand Draft

the remitting bank draws a bill of exchange on
the paying bank ordering the latter to pay on
demand a certain sum of money to the beneficiary
who will also be the payee of the draft.
convenient and transferable
Application of remittance
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 Payment in advance
--The time of payment comes before the delivery of
goods or the provision of services
--This method is favorable to the exporter while putting
the importer at a great risk of non-delivery
Application of remittance
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 Characteristic of payment in advance:

- Full or significant partial payment is required, usually
through a credit card or a bank or wire transfer before
the ownership of the good transferred
- Cash in advance, especially a wire transfers: most
secure and favourable method of payment for exporters
and least secure for importers
• Pros: payment before shipment and eliminates risk of
nonpayment
• Cons: May loss customers to competitors over
payment terms
- No additiona learning through financing operations
Application of remittance
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• When use Cash in advance term?

• Importers is a new customer and/or has a less-
established operating history
• Importer’s credit worthiness is doubtful,
unsatisfactory or unverifiable
• The political and commercial risks of the importer’s
home country are very high
• Exporter’s product is unique, not available
elsewhere or in heavy demand
• Exporters operate an Internet-base business where
the acceptance of credit card payment is a must to
remain competitive
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 Open Account
-- Exporter will make the delivery of goods or the
provision of services before importer makes payment
-- This method is favorable to the importer while putting
the exporter at a great risk
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Application of remittance - Open account

 Under this method, this is absolute trust bw exporter

and importer built up over many years of trading
relationship
 Exporter provides credit for importer by honour at future
date
 Open account trade is a generous credit facility
extended by exporter to the importer to enable him to
find buyers for the products
 Role of banks:
- Providing the services for transfer payment at the due
date
- Financing for exporter by factoring...
Application of remittance
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 Open account
-Characteristics
– Risk: Exporter faces significant risk as the buyer could
default on payment obligation after shipment of the goods
– Pros:
+Boots competitiveness in the global market
+Establish and maintain a successful trade relationship
– Cons:
+Importer insolvency
+Additional costs associated with risk mitigation measures
Application of remittance
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 Consignment
-- Exporter ships the goods to the importer and
retains the title to the goods until the importer make
payments
-- This method is favorable to the importer while
putting the exporter at a great risk
Questions:
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2. Collection
2.1. Definition of collection

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2. Collection
2.2. Parties to a collection
1. The "principal" who is the party entrusting the
handling of a collection to a bank;
2. The "remitting bank" which is the bank to which
the principal has entrusted the handling of a
collection;
3. The "collecting bank" which is any bank, other
than the remitting bank, involved in processing the
collection;
4. The "presenting bank" which is the collecting
bank making presentation to the drawee.

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2.3. Classification2. Collection

2.3.1.Clean Collection
Collection of financial documents not
accompanied by commercial documents.
- Financial documents:bills of exchange/draft, promissory
notes, cheques, or other similar instruments used for
obtaining the payment of money
- Commercial documents:invoices, transport documents,
documents of title or other similar documents, or any other
documents whatsoever, not being financial documents

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2. Collection
Clean Collection Procedure

Principal (Sales Contract) Drawee

(Seller/Exporter) (Buyer/Importer)
(1)Goods + Document
(5)
(2) Draft (7)Payment/ (4)Draft Payment/

Acceptance Acceptance

(3) Draft

Remitting Bank Collecting Bank

(Seller’s Bank) (6)Payment/ (Buyer’s Bank)
Acceptance

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2. Collection

2.3. Classification
2.3.2. Documentary Collection
A documentary collection (D/C) is a transaction
where the exporter (principal) entrusts the collection
of payment to the exporter's bank (remitting bank),
which sends documents to the importer's bank
(collecting bank) along with instructions for payments.
Funds are received from the importer and remitted to
the exporter through the banks in exchange for those
documents.

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2. Collection
2.3. Classification
2.3.2. Documentary Collection
 Documents against Payment – D/P
Requires the importer to pay the face
amount of the draft at sight.
The payment must be made to the bank
before the buyer's bank or collecting bank
releases the documents.
A D/P is also called a Sight Draft or Cash
Against Documents.

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2. Collection
2.3. Classification
2.3.2. Documentary Collection
Documents against Acceptance – D/A The
importer must agree to pay according to the
terms, which is usually done via a time draft.
The draft must be accepted to the bank before
the buyer's bank or collecting bank releases
the documents.
DOT: Documents against Other terms and
Conditions

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3. Documentary Credit

3.1. Definition
A documentary credit is an undertaking made by a
bank, either at the request of the applicant for the
credit or on its own behalf, to pay a specified
amount in an agreed currency to a beneficiary, on
condition that the beneficiary presents stipulated
documents within a prescribed time limit.

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3. Documentary Credit

3.1. Definition

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3. Documentary Credit
3.2. Parties to a documentary credit
Applicant
Beneficiary
Opening bank/ Issuing bank
Advising bank
Nominated bank
 Confirming bank
 Paying bank
 Transfering bank
 Reimbursing bank
 Negotiating bank

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Independence Principle

Buyer has an Importer (Buyer) Exporter and Importer

obligation to the have a sales contract
Issuing Bank to pay between them which
upon claim for supports the
payment underlying transaction
Separate
Contracts

Advising/
Issuing Bank Exporter (Seller)
Confirming bank

Issuing Bank has the obligation to the Exporter

to pay if he has complied with all the terms and
conditions in the L/C

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Sight LC Transaction Flow

Buyer (Applicant) Seller (Beneficiary)

Sales Contract
Importer
(Buyer)

2 4
Advising/ Exporter
Issuing Bank
Confirming bank (Seller)
Application LC Advised

3
Vietnam BANK Foreign Bank
LC Issued
(Issuing Bank) (Advising Bank)
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Sight LC Transaction Flow

Buyer Seller
(Applicant)
5

Shipment

Buyer pays
BEFORE receipt
of goods 8 $ 6 Documents
$ 8

$
Vietnam BANK Foreign Bank
Payment Claim
7
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Time LC Transaction Flow

Buyer Seller

5
(Applicant)
Shipment

Payment
At
Maturity 8 $ 6 Documents
$ 8 6 Documents

$
Payment Documents
Vietnam BANK 6 Foreign Bank
7 Acceptance

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3. Documentary Credit

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3. Documentary Credit
3.4. Letter of Credit
Letter of credit is a letter issued by a bank at the instance
of its customer favouring the supplier of goods, whereby
the issuing bank undertakes to make payment on
submission of certain documents, as specified in the
letter.
Letters of credit issued by banks facilitate trade between
two parties, both at domestic and international levels. .

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3. Documentary Credit
3.4. Letter of Credit

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3. Documentary Credit
3.4. Letter of Credit

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3. Documentary Credit
3.4. Letter of Credit
46a Documents Required
47a Additional Conditions
71B Charges
78 Reimbursement Instructions

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3.4 Letters of credit
Functions of Letters of Credit
 Payment Instrument
• In absence of letter of credit, sight or time drafts used. No
Guarantee of Payment.
– Letters of Credit Involves Bank in Transaction.
 Performance Guarantee
• In Documentary Transaction no guarantee of performance.
– Payment by bank would not be released until goods and
document conforms to specifications on letter of credit.
 Finance Instrument
• Seller can use letter of credit as collateral to finance
production and exportation of good.
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3.4 Letters of credit
Types of Letters of Credit
 Irrevocable Letter of Credit: bank cannot revoke letter
of credit. To change letter of credit, must get written
agreement.
• Most Popular in International Commercial Transaction
• Article of 3 of UCP-600 says that a credit is irrevocable even
if there is not indication to that effect.
 Revocable Letter of Credit-bank can revoke the letter
of credit.
• Very Seldom Used.
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Types of Letters of Credit

1. Confirmed Documentary Credit
2. Revolving Credit
3. Transferable Credit and Transferred Credit
4. Back to back credit
5. Red Clause Credit
6. Standby credit

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3.4 Letters of credit
Types of Letters of Credit
 Confirmed Documentary Credit: A confirmation of a
documentary credit by a bank (confirming bank) upon
the authorization or request of the issuing bank
constitutes a definite undertaking of the confirming
bank, in addition to that of the issuing bank, provided
that the stipulated documents are presented to the
confirming bank or to any other nominated bank on or
before the expiry date and the terms and conditions of
the documentary credit are compiled with either to
honor or to negotiate.
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3.4 Letters of credit
Types of Letters of Credit
 Revolving Credit: A Revolving Documentary Credit
is one by which, under the terms and conditions
thereof, the amount is renewed or reinstated without
specific amendments to the documentary credit being
required. The Revolving Documentary Credit may
revolve in relation to time or value. A documentary
credit of this nature may be cumulative or non-
cumulative.
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3.4 Letters of credit
Types of Letters of Credit
 Transferable Credit and Transferred Credit:
Transferable credit means a credit that specifically
states it is “transferable”. A transferable credit may be
made available in whole or in part to another
beneficiary (“second beneficiary”) at the request of
the beneficiary (“first beneficiary”). Transferred credit
means a credit that has been made available by the
transferring bank to a second beneficiary
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3.4 Letters of credit
Types of Letters of Credit
 Back to Back Credit: The back to back credit is a
new credit opened on the basis of an original credit in
favor of another beneficiary. Under the back to back
concept, the seller as the beneficiary of the first credit
offers it as ‘security’ to his bank for the issuance of
the second credit.
The beneficiary of the back to back credit may be located inside
or outside the original beneficiary’s country.
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3.4 Letters of credit
Types of Letters of Credit
 Red Clause Credit: A Red Clause Credit is a credit
with a special condition incorporated into it that
authorizes the confirming Bank or any other
Nominated Bank to make advances to the beneficiary
before presentation of the documents. Under the
above credit, the issuing bank is liable for the pre-
shipment advances made by the nominated bank, in
case the beneficiary fails to repay or present the
documents for settlement.
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3.4 Letters of credit
Types of Letters of Credit
 Standby Credits : The Standby Credit is a
documentary credit or similar arrangement, however
named or described, which represents an obligation
to the beneficiary on the part of the Issuing Bank to :
a) repay money borrowed by the applicant, or
advanced to or for the account of the applicant;
(b)Make payment on account of any indebtedness
undertaken by the applicant; or (c)Make payment on
account of any default by the applicant in the
performance of an obligation.
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3.4 Letters of credit
Other types of Letters of Credit
1. IRR L/C without recourse (miễn truy đòi)
2. Reciprocal L/C (đối ứng)
3. Deferred payment L/C (Thanh toán dần)
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documentary credits
Uniform Customs and Practices for
Documentary Credits are rules and procedure
published by International Chamber of
Commerce
 Provisions
• Care should be taken in specifying expiration dates
• The applicant must specify if the letter of credit is
transferable.
• The applicant must specify that the letter be confirmed
• The currency of the letter of credit should be designated
using ISO currency code.
• The applicant should designate the nominating bank
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documentary credits
Uniform Customs and Practices for
Documentary Credits-provisions continued.
 Applicant must specify clearly whether the letter of
credit will be available for partial shipment.
 The letter of credit should provide transport details
 Under “rule of strict compliance”, banks are
authorized to reject documents if there are any
discrepancies.
• Facial Compliance Rule-bank only required to review
documents.
• Banks are not required to investigate trade customs or usage
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documentary credits
Uniform Customs and Practices for
Documentary Credits-provisions continued
 Description of the Goods should be clear and brief as
possible.
 In the listing of documents, should list the contents of
each document.
 Transportation Documents must be clear.
 Insurance Documents must be clear.
 Time periods for presentation of documents must be
specified.
 Title of Letter of Credit should specify irrevocable.