massimiliano di pace1 international payments handling international payment can be complicated and...

Massimiliano Di Pace 1

INTERNATIONAL PAYMENTS

Handling international payment can be complicated and risky

The problems can be:- currency- transfer of money - assessment of counterpart’s reliability- validity of warrant relating to the transfer of money

There are a number of different payment methods for foreign commerce, of which some are riskier than

others



The solutions for international payment are:

- money transfer

- open account

- cheque

- bill of exchange

- promissory note

- commercial Letter of Credit (LC)



Rules on international payments are issued by International Chamber of Commerce, and in

particular in ICC Uniform Customs and Practice for Documentary Credits UCP 600



Money transfer

The buyer sends the money by wire transfer through the Swift (Society for Worldwide Interbank Financial Telecommunication)

system

All banks linked to Swift have a control code which guarantees the authenticity of the

message, and makes the credit operational



You have to provide the bank with the following data:

- buyer (ordinant) and seller (payee)

- amount and currency

- reason (i.e. purchase of goods)

- creditor’s bank


INTERNATIONAL PAYMENTSThe money transfer can be used:1) for payment in advance2) for payment partly in advance and partly at the delivery of merchandise3) for payment at the delivery of merchandise

In the first case the buyer sends the money by wire transfer along with the order

The buyer need to be sure about the supplier's reliability



Usually, the advance payment includes only a percentage of the value of delivery, being the remaining part paid at arrival of merchandise

The third solution requires a relevant trust from seller’s side


INTERNATIONAL PAYMENTSCheque (or Check)

A cheque is issued by the buyer (the drawer) to pay the seller and it consists in an order to the buyer’s bank (where he has

the account) to pay the amount of money reported in the cheque to the payee (the seller)

The drawer writes the various details including the money amount, date, and a payee on the cheque, and signs it,

ordering their bank, known as the drawee, to pay this person or company the amount of money stated

It differs from money transfer for the fact that in order to get the payment the payee has to present the cheque to his own

bank


INTERNATIONAL PAYMENTSA type of cheque which makes sure that in drawer’s account

there is money is certified cheque

In this case the issuing bank verifies there are currently sufficient funds in the drawer's account to honour the cheque

Those funds are then set aside in the bank's internal account until the cheque is cashed or returned by the payee

Thus, a certified cheque cannot "bounce", and, in this manner, its liquidity is similar to cash,

The bank indicates that it is a certified cheque by making a notation on the face of the cheque (technically called an

acceptance)



Open account

The importer pays for the goods with a bank check or international money order on arrival

of goods accompanied by the invoice

Exporters should be careful in granting open-account status, especially for new accounts

abroad



Bill of exchange

They are written orders drafted by the seller addressed to the buyer, which oblige the buyer

to pay the amount due by a specified date

The exporter assumes much more risk with a bill of exchange because the importer already

has possession of the goods



Promissory note

The buyer writing the promissory note commits himself to pay a sum of money at a

precise date to a specific beneficiary (the seller)



Commercial Letter of Credit

LC is a letter written by the importer's bank to the exporter to guarantee their ability to pay

It’s the most used payment procedure at international level

Documentary letters of credit are contractual agreements between two banks and two parties

conducting commerce



The buyer of goods is called the applicant in the letter of credit

The seller is called the beneficiary

A bank that acts on behalf of the buyer is called an issuing bank, while the bank acting on behalf of the seller is called an advising or confirming bank (the latter engaging itself to

pay the sum agreed)



The letters of credit can be of 2 type:

- revocable

- irrevocable

In the latter case the commitment of the buyers’ bank to pay the seller on presentation of agreed documents by the fixed date cannot be called off, while in the former case it can

be modified or cancelled without prior notice



LCs are usually irrevocable once they've been sent by an importer

In this way the buyer is sure that the payment has been made only when the availability of

merchandise is guaranteed by documents

The seller asks to his own bank to cash the credit, against the delivery of documents

required by the letter of credit



The letters of credit can be also:

- confirmed

- not confirmed

In the first case the seller’s bank (or another bank, different from the one chosen by the

buyer, and located at seller’s premises) engages itself to pay the seller, always under

presentation of required documents



The documents to be presented usually are:

- bill of lading or other freight document

- insurance contract, if foreseen

- invoice for the goods delivered

- third-party verification of quality and quantity of goods sold

- other documents required by the agreed Incoterm



The control of documents can be carried out by:- issuing bank - advising/confirming bank

In the first case the buyer’s bank check that documents are compliant with provisions of letter of credit, while in the second case it’s the seller’s bank

to do so

The advantage of the latter solution for the seller is evident: he has to interact with a national bank, and

not a foreign and far bank



The payment foreseen by the letter of credit can be:

- without delay, once the documents have been presented

- postponed to the moment of presentation

- represented by a bill of exchange or a promissory note



The seller’s bank sends the documents to the buyer’s bank, which controls the compliance with the content of the letter of credit, and if

everything is compliant, carries out the money transfer, or, alternatively the issue of a cheque

or of a bill of exchange

In the first case we have “documents against payment” or “cash against documents”



In the second case we have “documents against acceptance”, that is signing the cheque

or the bill of exchange

If the seller’s bank has confirmed the letter, or acts as advising bank, it’s up to it the control

of documents and consequent payment



The buyer’s bank delivers the documents representing the goods only once it has

charged the sum paid on the buyer’s account

In this way the buyer can get goods from the carrier at the agree place



The letters of credit contain:

- name of the issuing bank

- buyer’s and seller’s addresses

- deadline for shipment and payment

- list of documents requested

- confirmation (optional)

The letter of credit is sent to the seller’s bank which can confirm (or not) the letter



The commercial letter of credit document provides in detail the evidence the beneficiary

must present to the issuing bank for getting money to be transferred from the issuing bank

to the advising or confirming bank to complete the transaction



The steps of a letter of credit are:

1) signature of the sale contract

2) buyer’s request to his bank to issue a letter of credit

3) notification to the seller of the issue

4) shipment of goods

5) control of documents by the issuing bank, or by the confirming bank

6) payment by the issuing bank, or by the confirming bank, and transfer of documents to the buyer



Once the letter of credit has been issued, the seller ships goods to the buyer in accordance

with all instructions in the document

Once the goods arrive at destination, the seller presents all the documents required in the

letter of credit to the confirming bank



The issuing/advising/confirming bank reviews all the documentation for completeness and compliance with the letter of credit contract

Once the confirming bank certifies that all conditions have been met, funds are

transferred to the bank on behalf of the beneficiary



In this framework banks act under specific and detailed orders, relating to the control on the respect

of conditions stated in the letter of credit

In fact the payment is made when the buyer’s bank is sure, under the provision of documents (i.e. bill of

lading, or freight documents) transferred by the seller’s bank, that the merchandise sold has been

received by the importer



The advantage of letter of credit is due to the fact that the buyer’s order to pay the seller

cannot be changed once the letter of credit is issued

Evidently an irrevocable and confirmed letter of credit guaranties the seller about the

payment nearly 100%

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