International Payment Methods

IT 211 : INTERNATIONAL PAYMENT Dr. Arunee Tanvisuth BBA, Thammasat Business School Semester 2 / 2022 , Feb 9 ’ 23 (# 4 ) Objective in International Trade 2  Buyers want to receive the goods they order  For Importers, any payment is a “donation” until the goods are received  Sellers...

IT 211 : INTERNATIONAL PAYMENT Dr. Arunee Tanvisuth BBA, Thammasat Business School Semester 2 / 2022 , Feb 9 ’ 23 (# 4 ) Objective in International Trade 2  Buyers want to receive the goods they order  For Importers, any payment is a “donation” until the goods are received  Sellers want to be paid the agreed upon price in a timely manner  For exporters, any sale is a “gift” until payment is received  Balance between protecting the interests of the exporter and offering good marketing practices that encourage good customer relations Int’l Payment Characteristics  Credit Information  Less information on the creditworthiness of a creditor in a foreign market than there is for a domestic customer  Collecting credit info can be expensive and complicated  Lack of personal contact  Int ’l transactions tend to be conducted in a more impersonal fashion (email , fax)  Difficult and expensive collections  The collection of a past -due account can be difficult  Int ’l collection services can charge 5 -30 % of the receivable 3 Int ’l Payment Characteristics ( 2 )  No easy legal recourse  No international court of justice … how about the International Court in The Hague?  United Nations Convention on Contracts for the International Sale of Goods (CISG)  ratified by 84 countries ( 80 % of the world ’s trade) but not U.K. and U.S. (only part of the treaty)  Higher litigation costs  The cost of int ’l litigation, arbitration, or mediation is generally much greater than that of domestic litigation  In India, a judgement takes 5 years on average and may not be rendered for 10 years 4 Risks in International Trade 5  Credit Risk  The risk associated with not collecting an account receivable  Country Risk  Political stability and overall health of the economy  Foreign Exchange Risk  Force Majeure (Greater Force in French) Risk  A risk in trade incapacity caused by a change in a country’s policy, and a risk caused by a natural disaster such as hurricanes, tornadoes, and earthquakes  A clause that is included in contracts to remove liability for unforeseeable and unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling obligations  Other risks are mainly risks caused by differences in law, language, or culture Time Required to Perform Certain Tasks (World Bank) Country Import Export Settle a Lawsuit Brazil 183 hrs 67 hrs 731 days France 1 1 395 Germany 1 37 499 India 344 144 1,420 Japan 43 25 360 Singapore 38 14 164 USA 10 4 420 Zimbabwe 309 171 410 6 Primary Methods of Int ’l Payment 7  Cash in Advance  Open Account  Letters of Credit  Documentary Collections  TradeCard Cash in Advance 8  An importer has to pay the exporter before the exporter ships the goods, usually with an electronic fund transfer, SWIFT)  For new relationships  For smaller transactions where importer is unable to obtain an L/C  No advantage to importer as importer pays prior to receipt of goods and documents  Good for exporter as it eliminates risk of non - payment  Mostly used when it ’s “ seller ’s market ”  Any example? Open Account 9  Exporter sends an invoice to the importer along with the goods and expects the importer to pay within a reasonable amount of time  Used within high trust relationships, or with inter - company transactions  Common in EU as European exporters have benefited from their government ’s support (free or discounted commercial insurance on their foreign receivables)  Advantages to Importer  Allow importer to delay payment until goods have been examined, and/ or goods have been sold  Advantages to Exporter  No advantage but there is risk of non -payment Letter of Credit (LC or L/C) 10  L/C is also called documentary credit (DC or D/C) or simply credit  L/C is a financial document provided by a third party (with no direct interest in the transaction), mostly bank or a financial institution (mutual funds or insurance companies)  For new relationship between exporter and importer  For transaction of high value  Mostly used when it’s “ seller’s market” Letter of Credit (2)  The issuing bank promises to pay the beneficiary (the exporter) on behalf of the applicant (the importer), as long as the exporter has provided the documents requested in the L/C  The bank substitutes its creditworthiness for that of the applicant ( importer)  The promise of payment is made upon the documents of the transaction  The bank is under no obligation to pay if the document do not conform to the L/C ’s requirement 11 Letter of Credit … Process 12  The importer and exporter agree on all the terms and conditions in a purchase agreement  Importer instructs its bank to issue an L/C in accordance with the sales contract or pro forma invoice  L/C contains only those details that are to be reflected in the documents to be submitted by the exporter for payment  L/C may be payable either at sight or at extended payment terms (30, 60, or 90 days after presentation and acceptance of documents) Advantages for the Importer/ Buyer 13  Reduce your commercial risk by ensuring that your supplier will not be paid until evidence has been provided that the goods have been shipped  Assure that your bank will refuse payment to the seller if the documents presented do not comply with the terms and conditions of the L/C  Conserve your company’s cash flow by eliminating the need to make advance payment  Demonstrate your creditworthiness to your supplier  May obtain lower price due to reduced credit risk for seller Disadvantages for the Importer 14  In L/C transactions, banks deal only in documents, not in goods and services … merchandise may not be as represented in the documents … bank checks the accuracy of documents, not the quality of the products  Might be expensive (L/C fee)  Opening commission  Stamp  Postage/ SWIFT L/C Fee (KTB) 15  ค่ าธรรมเนียมในการเปิดเลตเตอร์ออฟเครดิตไปต่ างประเทศ  0.25 % ของจ านวนเงินที ่เปิดต่ อหนึ ่งระยะเวลา (Period) 90 วัน เศษ ของ 90 วัน ให้ ถือเป็นอีกหนึ ่งระยะเวลา โดยมีค่ าธรรมเนียมขั ้นต ่า 1,000 บาท  ค่ าธรรมเนียมในการแจ้ งการเปิด / แก้ ไขเลตเตอร์ออฟเครดิต  800 บาท / ฉบับ  ค่ าธรรมเนียมใน การขอยกเลิกเลต เตอร์ออฟ เครดิต  USD 75.00 / ฉบับ  ค่ าธรรมเนียมใน การโอนเลต เตอร์ออฟ เครดิต  0.25 % ของจ านวนเงินที ่โอนต่ อครั ้ง (ขั ้นต ่า 1,000 บาท สูงสุด 60,00 0 บาท ) Advantages for the Exporter/ Seller 16  Increase your export sales, but not your financial risk  Substitute bank ’s credit for buyer ’s credit  Assure that you get paid (the bank that issues the L/C is obligated to pay) upon presentation of complying documents  Protect against cancellation of underlying sales contract Risk to the Exporter 17  The seller ’s documents must comply “ strictly ” with the terms and conditions of the L/C to ensure payment  GLOBALTRADE SOURCE, LTD., 6807 N. Lakewood, Suite LL, CHICAGO, IL 60626 , USA  Global TradeSource, Ltd., 6807 North Lakewood, #LL, Chicago, IL 60626 , USA L/C… Parties Involved 18  Applicant (Buyer or Importer)  The party who applies to the opening (issuing) bank for the issuance of an L/C  Opening Bank (Issuing Bank)  The bank which issues the L/C and assumes responsibility for the payment on behalf of the applicant (buyer)  Beneficiary (Seller or Exporter)  The party in whose favor the L/C has been established, it’s the party who demands payment under the letter of credit L/C… Parties Involved (2) 19  Advising Bank  The bank giving notification of the terms and conditions of an L/C to the beneficiary (seller), it takes reasonable care to check the apparent authenticity of the L/C which it advises  Confirming Bank  The bank, that at the request of the issuing bank, assures that drawings under the credit will be honored (provided the terms and conditions of the credit have been met) ICC and UCP 20  Uniform Customs and Practice for Documentary Credits (UCP)  A set of rules on the issuance and use of letters of credit  It is utilized by bankers and commercial parties in more than 175 countries  ICC rules of practices are designed by bankers and merchants so they demonstrate the needs, customs and practices of business  First published by ICC in 1933  UCP 500, effective Jan 1, 1994 -June 30, 2007  The latest version is UCP 600, effective July 1, 2007 21 L/C… How it Operates 22  Importer (buyer) and exporter (seller) agree on the price, merchandise and method of payment.  Importer applies to their bank for an L/C in favor of the exporter (beneficiary).  Importer ’s bank prepares the L/C and forwards it to an advising bank in the exporter ’s country, which in turn forwards the credit on to the beneficiary.  Exporter prepares their shipment and documentation. Goods are then delivered to the shipping company. L/C … How it Operates ( 2 ) 23  The original L/C, drafts, and documents are sent to the advising/ presenting/ negotiating bank for initial compliance examination.  The original L/C, drafts, and documents are presented to the negotiating or paying bank. The documents are then presented to the issuing bank.  The issuing bank examine the documents for compliance with the L/C terms. If documents are compliant with the requirements of the L/C, the drawing is paid or accepted.  Documents are then delivered to the importer.  Importer clears the goods through customs and receives them from the shipping company. 24 Documents for L/C Payment  B/L  Commercial Invoice  Packing List  Consular Invoice  Certificate of Origin (C/O)  GSP  Phytosanitary and Fumigation Certificate  Insurance Policy  Other Government Certificate or License 25 Types of L/C 26  Revocable L/C  A letter of credit that can be altered (amended or canceled) by the issuing bank or the buyer without any notification to the seller/ beneficiary  T his type of L/C is not used frequently as the beneficiary is not provided any protection  Irrevocable L/C  A letter of credit that does not allow the issuing bank to make any changes without the approval of the beneficiary  L/C issued under UCP 600 are irrevocable  Confirmed L/C  The strength of an L/C is related to the financial standing of the bank that issues it. In case where the financial strength of the issuing country and/ or bank is in doubt, the exporter may require another bank to honor the credit Types of L/C ( 2 ) 27  Transferable L/C  L/C that can be transferred in whole or in part by the original beneficiary (exporter) to one or more second beneficiaries in either the same country or different countries  The first beneficiary (an intermediary) can assign part or whole of the L/C amount to a second beneficiary (the supplier or manufacturer)  To be transferable, the L/C must be so marked by the issuing bank on the instructions of the buyer.  On the instructions of the first beneficiary the advising bank can transfer it to the second beneficiary but not any further.  Used extensively in the Far East (China, Japan, Korea, Singapore, Taiwan, among others) Types of L/C (3)  Unconfirmed L/C  Only the Bank issuing the L/C will be liable for payment of this L/C  Un - Transferable L/C  A letter of credit that does not allow transfer of money to any third parties. The beneficiary is the only recipient of the money and cannot further use the letter of credit to pay anyone 28 Types of L/C ( 4 ) 29  Back - to - back L/C  A type of L/C issued in case of intermediary trade  Intermediate companies such as trading houses are sometimes required to open L/Cs by supplier while they receive Export L/Cs from buyer  In this case, the advising bank of the first L/C becomes the issuing bank of the second L/C  The Export L/C (Master L/C) serves as the collateral of the second L/C)  It is used mainly by middlemen (intermediaries) to hide the identity of the actual supplier or manufacturer Types of L/C (5)  Revolving L/C  It is designed for multiple uses, can be used for a series of payments  It is common among businesses that expect to do business together on an ongoing basis  There is usually an expiration date attached to this type of L/C, often 1 year  Standby L/C  Serves as an assurance that buyer will fulfill his/ her obligations under a contract  Seller draws funds under the standby L/C only when buyer fails to meet the obligations  This type of L/C is closer to the bank guarantee 30 Types of L/C (6)  Red Clause L/C  The seller can request an advance for an agreed amount of the L/C before shipment of goods and submittal of required documents  This red clause is so termed because it is usually printed in red on the document to draw attention to "advance payment" term of the credit 31 Documentary Collections 32  The method of payment in which an exporter enlisted the help of a bank in the importer’s country to collect the payment from the importer  The exporter asks the bank not to release the documents (especially B/L) until the importer satisfies certain requirements (paying or signing a financial document, draft or bill of exchange)  Banks act as “facilitators” for their clients, D/Cs offer no verification process and limited recourse in the event of non - payment 33 Documentary Collections (2)  Bill of Exchange or Draft  A promissory note, signed by the importer in the presence of a representative of the presenting/ collecting bank, in which the importer commits to pay the exporter on a given date  D/P Sight (Sight Draft)  D/A Term (max 180 days)  D/A 60 days after shipment date  D/A 90 days after B/L date  D/A 45 days after sight, etc . 34 35 TradeCard  Created by the World Trade Centers Association in 1994  TradeCard is a proprietary electronic system that is gaining more acceptance in the trade community  No payment is made until all the documents are in order and there is no discrepancies  The buyer is obligated to pay if the documents are in order  The system is expedient (payment is received quickly) 36 TradeCard ( 2 )  TradeCard charges only $150 for a transaction up to $100,000, compared to 1 - 3% for L/C  Unfortunately, TradeCard had not achieved a critical mass of customers to make it a standard form of payment  Nevertheless, TradeCard presents such advantages over the other forms of international payment that it is expected to become a dominant method of payment in the 2020s 37 Method of Payment and Perceived Risks Term of Payment Prob of Losing Biz Prob of Non - Payment Cash in Advance High Nil L/C Fairly High Almost Nil D/C Low Low Open Account Nil Relatively High TradeCard Low Almost Nil 38