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Chapter 3:
METHODS OF PAYMENT

Objectives

1. Define what is meant by international payment;

2. Pragmatically approach international payment;
3. Analyze the procedure, benefits and risks of each
method
4. Take application of payment methods into consideration

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Contents

I. Remittance
II. Open account
III. Collection
IV. Letter of Credit

Methods of international payment

Definition:
Methods of international payment are all conditions and
manner recommended for Commercial bank to transfer
proceeds between residents and non –residents of one
country.
 Residents
 Non- residents

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Classification

In terms of attached In terms of bank’s role

docs

Non-documentary methods: Intermediary of payment:

- Open account • Remittance
• Open account
- Remittance
• Collection
- Clean collection
- Demand guarantee
Commitment to pay:
Documentary methods:
• Demand guarantee
• Documentary collection • Standby L/C
• Documentary L/C • Letter of credit
• Authority to Purchase • Authority to Purchase

Methods of international payment

Definition: are all conditions and manner recommended for

Commercial bank to transfer proceeds between residents
and non –residents of one country.

Figure 1: Payment Risk Ladder

Exporter: Least Secure → Less Secure → More Secure Most Secure
→

Importer: Most Secure ← More Secure ← Less ← Least Secure

Secure

Open Account Collection Documentary Advance

Clean Collection -> Credits Payment
DA -> DP

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Factors affecting the selection of payment methods
Trust degree, capital ability of each party
The competition of each party
Political situation

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I. REMITTANCE/TRANSFER

Main contents:
Definition
Procedure of remittance
Types of remittance (Mail/Telex/Wire/Swift)
Some notices of remittance

1.1. Definition

A remittance is:

- a method of payment by which applicant requires his/her

bank to transfer an amount of money to the beneficiary
at a certain place.
- a method of payment thereby buyer requires his or her bank
to remit/transfer an amount of money to seller at seller’s
bank.
SWIFT - PAYMENT ORDER
VCB Citibank

Importer NOSTRO ACCOUNT Exporter

VN X country

VCB at Citibank in USD Citibank at VCB in VND

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1.1. Definition

Parties of remittance:
- Applicant
- Beneficiary
- Remitting bank
- Intermediary bank
- Paying bank

1.2. Types of Remittance:

Two types of remittance:

 Mail transfer remittance: M/T
 Rarely used nowadays
 Low cost, Low speed
 Risky
 Telegraphic transfer Remittance: T/T (wire/Telex/Swift)
 Popular
 Costly, Speedy
 Safe

Buyer Payment order by Seller

Bank mail/Wire/Telex/Swift Bank
Nostro Account
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1.3. Procedure of Transfer remittance:

a – Remittance before shipping goods

Seller’s Bank 2. Transfer Buyer’s Bank

remittance

3. To 1.
Credit Application
seller’s for
account remittance

4. Shipment and sending docs

Seller/Exporter Buyer/Importer
Contract
Bear the risk:
No delivery
Late shipment
... 11

1.3. Procedure of Transfer remittance:

b – Remittance after shipping goods

Seller’s Bank Buyer’s Bank

3. Transfer
remittance
2.
Application
4. To Credit
for
seller’s
remittance
account

1. Shipping goods, sending docs

Seller/Exporter Buyer/Importer
(0) Contract
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Message Type Description

MT0xx System Messages
MT1xx Customer Payments and Cheques

MT2xx Financial Institution Transfers

MT3xx Treasury Markets
MT4xx Collection and Cash Letters
MT5xx Securities Markets

MT6xx Treasury Markets - Metals and Syndications

MT7xx Documentary Credits and Guarantees

MT8xx Travelers Cheques
MT9xx Cash Management and Customer Status
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Within 01 week after receiving the seller’s notice of

shipment, buyer should remit 100% contract value by
TT to seller’s account at Bank X.

Payment by T/T within 7 days after receiving shipping

documents (original) to Kolon company, account No… at
Vietcombank, branch HCM.
Payment should be made upon buyer’s receiving following
shipping docs:
- 3/3 clean Bill of Lading, shipped on board, marked
Freight prepaid.
- Commercial invoice: 3 copies
- Packing list: 3 copies
- Certificate of origin issued by Korean Commercial
Chamber
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1.3. Procedure of Transfer remittance

c – Mixed Remittance: before and after shipping
goods
Term of payment:
• Make payment by T/T
• Within 01 week after signing contract, buyer should remit
in advance 20% contract value.
• 80% remaining value will be transferred to seller upon
receiving docs.
• Pay to account:
• A/C name:
• A/C No. (USD):
• Swift code:
• Bank name:
• Bank address:
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1.3. Procedure of Transfer remittance

c – Mixed Remittance: before and after shipping
goods
Article 3: Payment:
• T/T 60% invoice value will be paid prior to the shipment;
and
• T/T 40% invoice value will be paid when the goods arrive in
Vietnam
• A/C name: Duni Song Seng Pte. Ltd, Singapore
• SWIFT code: DNBASGSGA
• Bank name: DNB Bank ASA
• Bank address: 8 Shenton way, AXA Tower, #48-02
Singapore 068811
• Bank account: 42053002
• All bank charges shall be born by Party B (Buyer)
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1.4. Applicable situations

- Recommended for trade in service

- Simple but rather risky because of extremeness
- Should combine with other method to prevent risks
- Have no international convention or customs on
remittance
- Used separately or as a part of the other methods of
payment

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II. OPEN ACCOUNT

Main contents:
- Definition
- Procedures
- Classification
- Cases for application
- Some notices of open account method

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2.1 Definition

- Is method of payment, by which the seller ships

the goods and sends invoice together with the
other documents to the buyer, who is invited to
pay the agreed amount on the appointed date
into the account indicated by the exporter.
- Open account: book account opened by seller,
not bank account

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2.2 Features

- the least secure method of trading for the

seller/exporter, but the most attractive to buyers.
- the Exporter sends the goods and commercial docs
to Buyer without any instant payment.
- no payment protection for the exporter at all.
- Without bank’s participation as one party to this
method.
- Simple procedure
- Higher price than instant payment
- Most popular in trading in Europe (60%)
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2.3. Procedure 2.
of Open
OpenAccount
account

Mechanics: How does an Open Account transaction work?

OPEN ACCOUNT: The Exporter

Exporter ships goods
and documents directly
to the Importer and
GOODS PAYMENT
waits for the Importer to 1 2
send payment.

Importer
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2.3. Procedure of Open account

Seller’s Bank 4. Transfer Buyer’s Bank

remittance
5. To Credit seller’s

3. Application
for collection

3.
Application
for
remittance
account

2.
Ship goods, send docs, open
Seller/Exporter book to record shipment Buyer/Importer
1. Contract
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2.4. Classification

a. In terms of security of payment

- open account to be secured: can be subjected to
bank guarantee requested by buyer (L/G, standby L/C,
performance bond)
- open account to be naked: without any protection

b. In terms of receiving payment

- Open account by Collection
- Open account by Remittance

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2.5. Applications

- Risky for exporters, safe for importer

- Limited to transactions involving small amounts
- or to situations where the exporter has no doubts about
the credit worthiness and/or the willingness of his buyer
to pay.
- It assumes that the parties are well known to
each other and this mode of payment is then very
efficient.
=> Trust each other
- Used for consignment, the parent company-subsidiary
company

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III. COLLECTION

Main contents:
• Definition
• Applicable rules
• Parties to Collection procedure
• Contents of Collection instruction
• Classification and procedure of Collection
• Case study

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3.1 Definition

The URC 522 are the Uniform Rules for Collections:

Sub- Article 2(a): Collection means the handling by banks
of documents as defined in Sub-Article 2(b) in accordance
with instructions received, in order to:
• Obtain payment and/or acceptance
• (or) Deliver documents against payment and/or against
acceptance
• (or) Deliver documents on other terms and conditions.

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3.1 Definition

Sub- Article 2(b):

"Documents" means financial documents and/or
commercial documents:
1 "Financial documents" means bills of exchange,
promissory notes, cheques, or other similar instruments
used for obtaining the payment of money;
2 "Commercial documents" means invoices, transport
documents, documents of title or other similar documents,
or any other documents whatsoever, not being financial
documents

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3.1 Definition

• Under a collection, the exporter (principal) normally

requests his own bank (the remitting bank) to turn over
the documents relating to the goods (normally a B/L
issued by the carrier) to a bank in the country of the
importer (the collecting bank).
• The collecting bank will be acting as the agent of the
remitting bank and collect from the importer through the
importer’s bank (the presenting bank) the money agreed
in the contract of sale.
• Obviously this type of collection will have been
discussed between the importer and exporter
beforehand and be agreed amongst them

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3.2 Applicable Rules

• The URC 522 are the Uniform Rules for Collections.

URC 522 came into effect on 01 January 1996.
• The ICC URC were first published by the ICC in 1956.
Revised versions were issued in 1967 and 1978.
• This present revision was adopted by the Council of the
ICC in June 1995, for issue as ICC Publication N°522.
• Please note that the title or classification on the heading
of each Article is for reference as to intent and purpose.
It is not to be construed as being other than solely for
benefit or guidance and there should be no legal
imputation.

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3.3 Parties to a collection

1. Principal: party entrusting the handling of a collection

to a bank;
2. Remitting bank: the bank to which the principal has
entrusted the handling of a collection;
3. Collecting bank: which is any bank, other than the
remitting bank, involved in processing the collection.
4. Presenting bank: which is the collecting bank making
presentation to the drawee.
5. Drawee: is the one to whom presentation is to be made
in accordance with the collection instruction

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3.3 Parties to a collection

Bank’s obligations:
1. Banks are only permitted to act upon
the instructions given in such collection instruction, and
in accordance with these Rules.
2. Banks will not examine documents in order to obtain
instructions.
3. Unless otherwise authorised in the collection
instruction, banks will disregard any instructions from
any party/bank other than the party/bank from whom
they received the collection.

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3.3 Parties to a collection

Bank’s obligations:
• The remitting bank will utilise the bank nominated by the
principal as the collecting bank.
• In the absence of such nomination, the remitting bank will
utilise any bank of its own, or another bank's choice in the
country of payment or acceptance or in the country where
other terms and conditions have to be complied with.
• Documents and collection instruction may be sent directly
by the remitting bank to the collecting bank or through
another bank as intermediary.
• If the remitting bank does not nominate a specific
presenting bank, the collecting bank may utilise a
presenting bank of its choice.
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3.4 Collection instructions

1. Details of the bank from which the collection was
received
2. Details of the principal
3. Details of the drawee
4. Details of the presenting bank
5. Amount(s) and currency(ies) to be collected.
6. List of documents enclosed (and the numerical count)
7. Terms and conditions upon which payment and/or
acceptance is to be obtained.
8. Charges to be collected, indicating waived or not.
9. Interest to be collected, if applicable, indicating whether
it may be waived or not.
10. Method of payment and form of payment advice.
11. Instructions in case of non-payment, non-acceptance
and/or noncompliance with other instructions
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3.5 Types of collection

Sub- Article 2(c):

"Clean collection" means collection of financial
documents not accompanied by commercial documents.
Sub- Article 2(d):
"Documentary collection" means collection of:
(1) Financial documents accompanied by commercial
documents;
(2) Commercial documents not accompanied by financial
documents.

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Collection
Procedures of Clean Collection
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(6) Remit money or
accepted draft
Remitting bank Collecting bank

(3) Issue and send

Collection order +
(7) Money (2) financial docs (5) Payment
(4) Present
or accepted Application or
docs
draft for Collection, acceptance
financial docs
(1) Send goods
accompanying
Exporter commercial docs Importer
(Seller) (Buyer)

(0) Underlying
transaction
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Collection

Procedures of Documentary Collection

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(6) Money or accepted
draft
Remitting bank Collecting bank

(3) Collection order

+ docs (5)
(2) Application Exercise
(7) Money for Collection, (4) with the
or commercial Present collection
accepted and/or docs instruction
draft financial docs

Exporter (1) Send goods Importer

(Seller) (Importer)

(0) Underlying
transaction
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Types of Documentary Collection

 D/P at sight - Documents against at sight payment

 D/P at X days after sight: Release documents against x
days after sight
 D/A - Documents against Acceptance
 D/OTC (or D/OT, D/TC) - Documents against/upon other
Terms and Conditions

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D/P vs D/P x days

D/P: In collection instruction is stated clause

“Release Documents against payment
D/P x days after sight of documents. To be
applicable in following cases:
 Commercial docs arrived before goods
 Importer need to arrange financial aids/ payment
 Goods specifications are so complicated and
numerous

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Documents on other terms and conditions

The other Terms and Conditions could be:

 Partial payment
 Documents against Promissory Notes
 Documents against Letters of undertaking to pay
 Documents against a signed trust receipt
 Documents against a Bank undertaking

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IV. DOCUMENTARY CREDIT

Main contents:
1. Definition of Documentary Credit (DC)
2. Applicable rules
3. Parties to Documentary Credit
4. Procedure of Documentary Credit
5. Applicable situation of Documentary Credit method

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1. Definition of Letter of Credit

Letter of credit – L/C or Documentary Credit – D/C

is a commitment of bank for exporter if he provides the
documentary fully according to terms and conditions of L/C

UCP 600 – ICC 2007:

Credit means any arrangement, however named or
described, that is irrevocable and thereby constitutes a
definite undertaking of the issuing bank to honour a
complying presentation.

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4.1. Definition

Article 2, UCP 600, 2007, ICC

Credit means any arrangement, however named or
described, that is irrevocable and thereby constitutes a
definite undertaking of the issuing bank to honour a
complying presentation.
Honour means:
to pay at sight if the credit is available by sight payment
to incur a deferred payment undertaking and pay at
maturity if the credit is available by deferred payment.
To accept a bill of exchange (draft) drawn by the
beneficiary and pay at maturity if the credit is available by
acceptance.

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Letter of Credit

 Conditional, legal obligation of bank to pay

to beneficiary
 Bank places its internationally accepted
credit rating to customer’s credit (payment)
 Eliminates commercial risk

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4.2.Applicable rules

THEUNIFORM CUSTOMS
WHAT?
AND PRACTICE FOR
DOCUMENTARY CERDITS

INTERNATIONAL
UCP WHO? CHAMBER OF
COMMERCE (ICC)

WHEN? 1933

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GUIDELINES

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UCP 600, 2007, ICC

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4.2. Applicable rules

1933 First UCP 82

1951 UCP No 131

1962 UCP 222
1974 UCP 290
1983 UCP 400
1993 UCP 500, 49 articles

2007 UCP 600 (39 articles)

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4.2.Applicable rules

- UCP 600 are the latest revision of the Uniform

Customs and Practice that govern the operation of
letters of credit.
- UCP 600 comes into effect on 01 July 2007
- UCP for DC, 2007 Revision, ICC Publication no.
600 are rules that apply to any documentary credit
("credit") (including, to the extent to which they may
be applicable, any standby letter of credit) when the
text of the credit expressly indicates that it is subject
to these rules.
- They are binding on all parties thereto unless
expressly modified or excluded by the credit.
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4.2.Applicable rules

- UCP 600 are customs and practice, so they do not

obviously bind on the parties to DC
- Be applicable rules and binding on the parties to DC
only when the text of the credit expressly indicates
that it is subject to the rules
- Binding on all parties thereto unless otherwise
expressly agreed or contrary to the provisions of a
national, state or local law and/or regulation which
cannot be departed from.
- Legal level of customs are lowest

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Scope of the publication isbp745, 2013

This publication is to be read in conjunction

with UCP600 and not in isolation.
The practices described in this publication
highlight how the articles of UCP600 are to be
interpreted and applied, to the extent that the
terms and conditions of the credit, or any
amendment thereto, do not expressly modify
or exclude an applicable article in UCP600.
Aims: to avoid discrepancies in examining
documents between banks

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4.3. Parties to documentary credit

1. Applicant means the party on whose request the credit is
issued
2. Advising bank: that advises the credit at the request of the
issuing bank.
3. Beneficiary means the party in whose favour a credit is issued.
4. Issuing bank means the bank that issues a credit at the
request of an applicant or on its own behalf.
5. Confirming bank means the bank that adds its confirmation to
a credit upon the issuing bank' s authorization or request.
6. Nominated bank means the bank with which the credit is
available
7. Presenter means a beneficiary, bank or other party that makes
a presentation

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4.4 Procedure of Documentary Credit

Issuing / Opening Bank Advising Bank
Letter of credit (sight/time)
Documents
Application

Goods
Beneficiary
Applicant / Buyer Seller
Importer
Contract Exporter

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Availability

UCP 600 - Article 6

1. A credit must state the bank with which it is available or
whether it is available with any bank.
2. A credit available with a nominated bank is also
available with the issuing bank.
3. A credit must state whether it is available by sight
payment, deferred payment, acceptance or negotiation.
4. A credit must not be issued available by a draft drawn
on the applicant.

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L/c is available with? By what?

1. Available with advising bank by payment

 Advising acts as examining bank and paying bank under nomination
of issuing
2. Available with A nominated bank by payment
 Advising bank = examining bank; Bank A = Paying bank =
nominated by issuing bank
3. Available with advising bank by negotiation
Or : Available with any bank by negotiation
 advising bank or any bank act as negotiating bank
4. Available with the issuing bank by T.T.R (Telegraphic Transfer
Reimbursement Claim).
5. Available with issuing bank by payment/acceptance/deferred
payment

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Available with any bank by negotiation

Option 3:
 Available with any bank by negotiation
 Available with advising bank by negotiation
 Negotiation means the purchase by the nominated bank
of drafts (drawn on a bank other than the nominated
bank) and/or documents under a complying presentation,
by advancing or agreeing to advance funds to the
beneficiary on or before the banking day on which
reimbursement is due to the nominated bank.

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4.5. An introduction to letter of credit

Features of Letter of Credit

1. L/C is to be independent of underlying transaction or
contract;
2. Banks deal with documents and not with goods,
services or performance to which the documents may
relate;
3. L/C is to be required strict compliance of documents
with terms and conditions of L/C;
4. L/C is tool of payment and thereby to avoid the risks
in international trading; however it could be used for
suspension, postponement or refusal of payment and
even for fraud
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4.6. Applicable situation

of Documentary Credit method

- In trading with new partner

- Big amount of contract value
- Required by legal regulations or customs in trade or
payment
- Required by credit insurer
- Required by foreign exchange regulation

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Benefit of letter of credit

- Removes the buyer’s credit risk

- Removes the buyer’s country risk and issuing bank’s credit
risk (if confirmed)
- Irrevocable: once issued, it can not be cancelled or
changed without consent
- Allows payment despite contract dispute with the buyer
- Provides the possibility of finance
- Mitigate documentary risk (if confirmed)

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Risks of letter of credit

- Inability or Failure to comply with the L/C terms

- Delay and Non-payment by the issuing bank
- Country risks
- Letter of Credit from Non-banker
- Counterfeit L/C

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THE VOLUME OF L/C USE BY GEOGRAPHIC REGION

-EU: 9%
-Rest of Europe: 20%
-North America: 11%
-Latin America: 27%
-Middle East: 52%
-Asia Pacific: 43%
-Africa: 49%
-Asia: 46%
-Aust.& New Zealand:17%

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4.7. Forms of L/C in Trade Finance

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