massimiliano di pace1 international payments handling international payment can be complicated and...
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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
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INTERNATIONAL PAYMENTS
The solutions for international payment are:
- money transfer
- open account
- cheque
- bill of exchange
- promissory note
- commercial Letter of Credit (LC)
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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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
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INTERNATIONAL PAYMENTS
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
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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
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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)
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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)
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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)
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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”
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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
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INTERNATIONAL PAYMENTS
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%