International payment

INTERNATIONAL PAYMENT I INTRODUCTION TO INTERNATIONAL PAYMENT International trade credit and the documents associated with it are more complicated than their domestic equivalents This is because inter.

INTERNATIONAL PAYMENT I INTRODUCTION TO INTERNATIONAL PAYMENT International trade credit and the documents associated with it are more complicated than their domestic equivalents This is because international trade cuts across two bodies of laws and regulations and because the buyers and sellers ure less familiar with and less accessible to one another than buyers and sellers in the same country These complications often require the help of banks to: intermediate import-export transactions through methods of international payment In the simplest form of international trade, the open-account basis, banks have only a simple transaction role In open-account trade, the importer and exporter are wellknown to each other and probably have established a successful working relationship The importer orders goods and promptly pays for them when the goods and tittles thereto are received Almost as simple is the foreign collection basis, in which a bank is used to transmit collected funds Before the goods it has bought can be shipped, the importer must place funds with its bank so that the exporter is assured that payment will be made with collected funds In this instance, the bank is merely an agent and not a lender II PAYMENT INSTRUMENTS Bill of exchange A written, unconditional order by one party, the drawer, to another, the drawee, to pay a certain sum, either immediately (a sight bill) or on a fixed date, a term bill, for payment of goods and/or services received The drawee accepts the bill by signing it, thus converting it into a post-dated check and a binding contract A bill of exchange is also called a draft but, while all drafts are negotiable instruments, only to order bills of exchange can be negotiated According to the 1930 Convention Providing A Uniform Law for Bills of Exchange and Promissory Notes held in Geneva, a bill of exchange contains: (i) The term bill of exchange inserted in the body of the instrument and expressed in the language employed in drawing up the instrument (ii) An unconditional order to pay a determinate sum of money, (iii) The name of the person who is to pay, drawee, (iv) A statement of the time of payment (v) A statement of the place where payment is to be made (vi) The name of the person to whom or to whose order payment is to be made (vii) A statement of the date and of the place where the bill is issued (vili) The signature of the person who issues the bill, drawer A bill of exchange is the most often used form of payment in local and international trade and has a long history-as long as that of writing Promissory notes A promissory note is a written, signed, unconditional and unsecured promise by one party to another that commits the maker to pay a specified sum on demand, or on a fixed or a determinable date Promissory notes such as bank or currency notes are negotiable instruments Cheque A cheque is an order by the account holder to withdraw funds from his account, either in cash or through or through payment to another party Cheques provide both safety and convenience A cheque is a non-cash payment instrument, ie, customers not need to carry large amounts of cash with them, which is easy to be lost or stolen In addition, a cheque is only valid when it is signed by the account holder and is secured by a cheque card so your money can not be withdrawn from your account if someone finds your cheque book Using cheques is convenient because they are easy to use The account holder can draw a cheque anywhere without going to the bank such as in shops, supermarkets, restaurants, hotels and so on When drawing a cheque, it is obligatory to complete all The drawer must writes cheques in ink and avoid as much blank as possible for fraudulence and use the ruler to cross out any blanks In the case of the blank cheque book being used, all the cheques need to be crossed, with 'not negotiable If the cheque is corrected of charged, the drawer must initial the correction in addition to his usual signature In effect, a cheque presented will be honoured if there is enough money in the drawer's account Different types of cheque book are supplied to account holders free of charge according to their requirements either with or without stubs, bearer or order crossed or uncrossed Cheque books can be sent to an account holder by registered post, or may be given to him at the counter against his signes receipt Cheque books are considered security documents in view of danger of their misuse by people trying to commit fraud Transfer Transfer is an order by the account holder to withdraw funds from his account to pay for another party, or transfer the funds to his other account This can be conducted via Mail, Telegraphic or Electronic transfer Bank cards Bank cards are bank-issued card with a magnetic stripe that holds machine readable identification code Bank cards are used for electronic commerce with magnetic stripe or via the internet and or banking transactions automatic teller machines Two main types of bank cards are credit and debit cards Credit cards are a means of exchange, not of payment Ultimate payment by the card user occurs at the end of the month when a cheque is written or a bank account is debited to settle the outstanding balance In that respect, credit cards are akin to trade credit for the users, and a substitute credit long extended by retailers to customers However, to the seller of goods, sales made to the credit card users have similarities to those made to cheque writers Costs and fee may differ, but credit card sales vouchers can be effectively credited to the merchant's bank account in a similar manner to cheque received Because the voucher is a claim on the credit card company or issuing bank, the risk of nonpayment is lower In the ways that most are currently structured, credit card systems can be thought of as similar to the cheque payments system Paper (i.e vouchers) flows in a similar direction, the major difference being the timing of transactions and liabilities incurred along the way The card holder voucher writer is given short-term credit (a short-term loan or long-term float) by the card issuing body between the linediate unconditional credit to the merchant involved and delay collection of value from the card holder The combination of flost to card holders and more or less immediate reimbursement to stores is thought to be one factor inhibiting the greater use of the EFTPOS system, in which fleat is absent Letters of credits Letters of credit (LCs) are one of the most versatile and secure instruments available to international traders An LC is a commitment by a bank on behalf of the importer, foreign buyer, that payment will be made to the beneficiary, exporter, provided that the terms and conditions stated in the LC have been met, as evidenced by the presentation of specified documents Since LCs are credit instruments, the importer's credit with his bank is used to obtain an LC The importer pays his bank a fee to render this service An LC is useful when reliable credit information about a foreign buyer is difficult to obtain or if the foreign buyer's credit is unacceptable, but the exporter is satisfied with the creditworthiness of the importer's bank This method also protects the importer since the documents required to trigger payment provide evidence that goods have been shipped as agreed However, because LCs have opportunities for discrepancies, which may negate payment to the exporter, documents should be prepared by trained professionals or outsourced Discrepant documents, literally not having an 'I dotted and t crossed, may negate the bank's payment obligation a) Characteristics of a letter of credit The method is recommended for use in higher-risk situations or new or less established trade relationships when the exporter is satisfied with the creditworthiness of the buyer's bank The risk is spread between exporter and importer, provided that all terms and conditions as specified in the LC are adhered to The payment is made after shipment Also, a variety of payment, financing and risk mitigation options are available However, it is a labor intensive process and a relatively expensive method in terms of transaction costs b) Key Points (1) An LC, also referred to as a documentary credit, is a contractual agreement whereby the issuing bank, importer's bank, acting on behalf of its customer, the importer or buyer, promises to make payment to the beneficiary or exporter against the receipt of 'complying stipulated documents The issuing bank will typically use intermediary banks to facilitate the transaction and make payment to the exporter (ii) Besides, the LC is a separate contract from the sales contract on which it is based; therefore, the banks are not concerned with the quality of the underlying goods or whether each party fulfills the terms of the sales contract (iii)Next, the bank's obligation to pay is solely conditioned upon the seller's compliance with the terms and conditions of the LC In LC transactions, banks deal in documents only not goods (iv) Also, LCs can be arranged easily for one-time transactions between the exporter and importer or used for an ongoing series of transactions (v) Finally unless the conditions of the LC state otherwise, it is always irrevocable, which means the document may not be changed or cancelled unless the importer, banks, and exporter agree e) Confirmed letter of credit A greater degree of protection is afforded to the exporter when an LC issued by a foreign bank, the importer's issuing bank, is confirmed by a U.S bank The exporter asks its customer to have the issuing bank authorize a bank in the exporter's country to confirm this bank is typically the advising bank, which then becomes the confirming bank Confirmation means that the U.S bank adds its engagement to pay the exporter to that of the foreign bank If an LC is not confirmed, the exporter is subject to the payment risk of the foreign bank and the political risk of the importing country Exporters should consider getting confirmed LCs if they are concerned about the credit standing of the foreign bank or when they are operating in a high-risk market, where political upheaval, economic collapse, devaluation or exchange controls could put the payment at risk Exporters should also consider getting confirmed 1.Cs when importers are asking for extended payment terms d) Illustrative letter of credit transaction (1) The importer arranges for the issuing bank to open an LC in favor of the exporter (ii) The issuing bank transmits the LC to the nominated bank, which forwards it to the exporter, (iii) The exporter forwards the goods and documents tor a freight forwarder (iv) The freight forwarder dispatches the goods and either the dispatcher or the exporter submits documents to the nominated bank (v) The nominated bank checks documents for compliance with the LC and collects payment from the issuing bank for the exporter (vi) The importer's account at the issuing bank is debited (vii) The issuing bank releases documents to the importes to claim the goods from the carrier and to clear them at customs e) Special letters of credit LCS can take many forms When an LC is made transferable, the payment obligation under the original LC can be transferred to one or more second beneficiaries' With a revolving LC, the issuing bank restores the credit to its original amount each time it is drawn down A standby LC is not intended to serve as the means of payment for goods but can be drawn in the event of a contractual default, including the failure of an importer to pay invoices when due Similarly, standby LCs are often posted by exporters in favor of an importer to pay invoices when due Standby LCs are often posted by exporters in favor of importers because they can serve as bid bonds, performance bonds, and advance payment guarantees In addition, stand-by LCs are often used as counter guarantees against the provision of down payments and progress payments on the part of foreign buyers  ... drawee, (iv) A statement of the time of payment (v) A statement of the place where payment is to be made (vi) The name of the person to whom or to whose order payment is to be made (vii) A statement... performance bonds, and advance payment guarantees In addition, stand-by LCs are often used as counter guarantees against the provision of down payments and progress payments on the part of foreign... his account, either in cash or through or through payment to another party Cheques provide both safety and convenience A cheque is a non-cash payment instrument, ie, customers not need to carry