The bank payment obligation and traditional payment methods ininternational trade

1.Traditionalpaymentmethodsininternational trade:There are five traditional payment methods in international trade:1.1 Cash in advance:● An exporter can avoid credit risk using cash-in-a

VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY

UNIVERSITY OF ECONOMICS AND LAW

FACULTY OF FINANCE AND BANKING

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PRESENTATION ASSIGNMENT:

“The bank payment obligation and traditional payment methods in

international trade”.

Course name: COMMERCIAL BANK Lecturer: NGUYEN THI HAI HANG Group AGRIBANK

Full Name Student ID

Trịnh Thụy Ái Trâm K204041282

Nguyễn Hồng Ngân K204041272

Lý Như Bình K204041262

Ho Chi Minh City, September 02 2022 th

TABLE OF CONTENT

1 Traditional payment methods in international trade: 2

2.1 What is Bank Payment Obligation (BPO) 6 2.2 Example of how a BPO transaction could work 7

3 The Objectives of Bank Payment Obligation (BPO) 7

4 Benefits and Drawbacks of Bank Payment Obligation (BPO) 8

5 BPO in the world and in Vietnam: 9

1.Traditional payment methods in international trade:

There are five traditional payment methods in international trade:

1.1 Cash in advance:

● An exporter can avoid credit risk using cash-in-advance payment arrangements because money is received before ownership of the products is changed

● The most popular methods for exporters to receive cash in advance are wire transfers and credit cards

● The least appealing alternative for the buyer is to demand payment in advance because it results in poor cash flow

● Foreign purchasers worry that the items might not be delivered if payment is made in advance

⇒ Exporters that insist on using this type of payment as their exclusive means of

conducting business risk losing out to rivals who o昀昀er more enticing terms of

payment

Buyer none - Affects cash flow

- Risk of missing a delivery or having no recourse for items that are damaged

Seller Payment is made before

goods are received

Not a benefit for competition

1.2 Letter of credit:

● An LC is a commitment by a bank on behalf of the buyer that payment will be made

to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents

● LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank

● An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised

⇒ Letters of credit (LCs) are one of the most secure instruments available to

international traders

Buyer - After the products

are received, payment is made

- Terms may be altered

- Expensive

- Taking a lot of time to manage

- Date of expiration

- Depends on the vendor to ship the requested items

- Changes in exchange rates may increase the price

Seller - Low chance of

default because the buyer's bank is securing the sale

- Terms can be customized

- Strict documentation requirements to show the fulfillment

of the contract

- Profits may decrease due to market changes

1.3 Documentary Collection:

● In a documentary collection (D/C), the exporter gives control of the payment collection for a sale to its bank (the remitting bank), which then gives the buyer's bank (the collecting bank) instructions to transfer the necessary documents to the buyer for payment

● In return for those documents, money is collected from the importer and sent through the banks participating in the collection to the exporter

● When utilizing a D/C, the importer must pay the face value of the draft either immediately (document against payment) or on a specific date (document

● The collection letter contains instructions that list the paperwork needed to transfer ownership of the goods Although banks do serve as intermediaries for their clients, D/Cs provide no means of verification and just a few options

in the event of non-payment

Buyer - Cheaper than letters

of credit method

- Payment is only made after the delivery of the items

Before the products may be inspected, payment is made;

it is up to the seller to ship the goods as promised

Seller Owns the items until the

payment is received

- No guarantee of payment

- No protection against cancellations

- Risk of having to cover return shipping costs in the event that the customer defaults

1.4 Open account:

● When products are sent and delivered before payment is due, which in international sales is often in 30, 60, or 90 days, the transaction is referred to as a "open account transaction."

● This is undoubtedly one of the most cost- and cash-efficient solutions for the importer, but it also carries one of the highest levels of risk for the exporter

● Since the extension of credit by the seller to the buyer is more frequent abroad, foreign buyers frequently demand exporters for open account conditions due to the fierce competition in export markets

● As a result, exporters who are hesitant to issue loans risk losing a sale to rivals By utilizing one or more of the suitable trade finance approaches discussed later in this Guide, exporters can provide open account terms that are competitive while significantly reducing the risk of non-payment

● The exporter can use export credit insurance to seek additional protection when providing open account terms

Buyer Cash flow is improved since

payment is deferred until after goods are received

None

Seller Can improve sales because

this payment method benefits the customer

- No assurance of payment

- No protection against orders that are canceled

1.5 Consignment

● Consignment is a type of open account used in international trade, however payment to the exporter is not made until the products have been sold by the foreign distributor to the final consumer

● An international consignment transaction is based on a legal agreement in which the exporter keeps ownership of the products until they are sold and the foreign distributor receives, handles, and sells them on behalf of the exporter

● Exporting products on consignment is obviously very dangerous because the exporter is not guaranteed to receive payment and because the commodities are in the hands of an independent distributor or agency in a foreign country

● Consignment increases exporters' competitiveness since items are more readily available and delivered more quickly Exporters can cut their direct inventory management and storage costs by selling on consignment

Buyer Only when the products

have been received and sold is payment made

Relies on the seller shipping the products in good faith

Seller Can lower the price of

maintaining and storing merchandise abroad

Delays payment and increases the potential of not receiving payment

2.Introduction of BPO:

International trade presents a range of risk, which relates to the timing of payments between the seller and buyer For exporters, any sale is a gift until payment is received For importers, any payment is a donation until the goods are received

In response to the disadvantages of the existing payment methods, SWIFT and the International Chamber of Commerce (ICC) have established a new form of payment, called the Bank Payment Obligations (BPO) On April 17th, the ICC Banking Commission approved the URBPO contractual rules, which was brought into effect from July 1st 2013

2.1 What is Bank Payment Obligation (BPO)

Bank Payment Obligation is a completely new payment system that was created to compensate for the shortcomings of today's payment methods It is a solution to the problems encountered by companies that use goods payment and mutual payment methods in international trade This is an irrevocable payment undertaking (IPU), which is a promise by the buyer to pay the financier the amount owed to the seller, given by one bank to another bank that payment will be made on

a specified date following successful electronic matching of data generated by SWIFT's Trade Services Utility or any equivalent Transaction Matching Application, based on ICC's Uniform Rules for BPO The payment will be made on a specified date following the completion of a specified event

BPO is essentially an alternative payment instrument for international trade settlement with automated processing and reduced risk (paying to the seller) As a result, it benefits the receiver by lowering the risk of not paying both the buyer and the seller to the bank, lowering costs, and speeding up the operation The widespread use of Bank Payment Obligations will lower costs and reduce operational errors

BPO is fundamentally different from traditional trade finance instruments The Irrevocable Payment Undertaking (IPU) is between the banks and their corporate clients in the case of traditional trade finance instruments such as Letters of Credit (LC), whereas a BPO is an IPU between the buyer's bank and the seller's bank A BPO occurs between two banks: the obligor and the recipient

2.2 Example of how a BPO transaction could work

● When a buyer and seller sign a contract, they will agree on the BPO as the payment term The buyer would send the seller a Purchase Order (PO)

● The buyer would provide their bank with information from the purchase order and payment terms (buyers bank)

● The seller would confirm that the information from the PO is correct and forward it to their recipient bank (sellers bank) If the documents match (and the banks agree), the seller can ship the goods or services as agreed in the initial sales contract

● The seller submits the data to its bank, which is then verified by the buyer Wherever possible, data mismatches are resolved

● If both parties agree, the seller's bank is notified, and the seller sends the trade documents to the buyer directly These documents will be used by the buyer to clear goods through customs

● The buyer's bank debits the proceeds from the buyer's account on the contract's due date

3.The Objectives of Bank Payment Obligation (BPO)

This new payment mechanism offers more advantages than ever before It does this by first offering a solution for electronic payment

other words, BPO has combined the two approaches It also streamlines trading operations by saving time and paper Therefore, it is feasible to lower stationery costs Third, BPO is intended to target small and medium-sized firms (SME), which make up around 80% of all corporate formations in both developed and undeveloped nations Fourthly, BPO provides uniform product definitions for supply chain financing Additionally, BPO connects banks chosen and represented by the manufacturer, supplier, intermediary, and final purchaser to lower Know Your Customers (KYC) expenses

Know Your Customer (KYC) is a component of the legally mandated due diligence that financial institutions must perform to confirm the identification of clients and keep track of their activities It mandates that financial institutions verify each customer's or business's beneficial owner's personal information, including their names, dates of birth, and residences In addition, it offers end-to-end automation, which cuts down on processing times and costs by doing away with proprietary formats.)

4.Benefits and Drawbacks of Bank Payment Obligation (BPO)

4.1 Benefits:

For Buyer (Importers) For Seller (Exporters) For Bank

As a payment method the

bank payment obligation is

more secure than the

advance payment, because

the BPO is a conditional

payment method Under the

BPO transactions, banks

send payment amounts to

the exporters only after the

shipment of the goods, not

before

Payment is provided by a bank guarantee

a secure payment method in international trade BPO can

be more secure than the letter of credit, because the documents will not be checked by human beings,

by which process eliminating alleged discrepancy risks, dispute and delay

Automated data matching reduces complexity and increases reliability

Low risk business

Issuing a bank payment

obligation may prove that

the importer is a financially

secure and strong company

Exporters could get their money very fast from the banks under the BPO transactions as documents

The data is recorded automatically, there is no confusion and productivity increases

automatic system instantly Facilitates financing for the

buyer, eg: extended

payables

Access to flexible pre-shipment or

post-shipment finance

Prudent use of capital

The buyer can negotiate

better terms and conditions

By issuing a BPO, the

buyer demonstrates the

ability to pay and can

negotiate improved terms in

the future

Exporters have more control over the goods until they have been paid by the banks under the BPO transactions as shipment documents will be held by the exporters during the BPO process Exporters do not send paper documents

to the banks Once exporters receive their money from the banks, they dispatch the documents to the importers separately

The BPO protects the buyer

since the bank only pays

when the seller complies

with the specific terms and

conditions and produces the

data required, moreover,

against non-shipments, late

shipments and inferior

quality of goods shipments

The buyer can confirm that

the goods are shipped on or

before the due date to the

required specification

Protect the seller:

● Once the bank payment obligation is opened, it is almost impossible for the importer to cancel the order without the consent of the exporter

● The buyer cannot refuse to pay due to

a complaint about the goods

Strengthens core relationships

4.2 Drawbacks:

● BPO is a new payment mechanism that is challenging to outperform existing ways

● BPO is quite independent in terms of documents and goods Documents are transferred directly from the exporter to the importer without a bank check, so there may be errors Besides, the bank does not guarantee the quality of the delivered goods Due to delivery before documents, there may be a risk of late arrival of documents, preventing importers from receiving goods

● Cybersecurity and individual’s privacy is also concerned