Solutions to mitigate and manage risks in international payments at fado iexport corporation

viii LIST OF FIGURES Figure 2.1: The risk level of international payment methods 6 Figure 4.1: Business statistics at FADO iExport 2021-2023 29 Figure 4.2: The process of T/T payment met

INTRODUCTION

Background of the study

Nowadays, in the era of globalization and economic integration, the field of foreign economic relations is considered an extremely important and core field in promoting economic development International trade activities, including import and export activities, have been growing leaps and bounds Integration is “a trend” that no country can resist or stand outside of in the 21st century In order to survive and develop, each country cannot withdraw into itself but needs to open trade as well as expand international ties with many countries around the world Import-export activities known as the lifeblood of the economy, have been playing a significant role for socio-economic development

Many economists reckon that export-import area provides the increase of productivity growth and the promotion capabilities Also, the correlation between import-export activities and economic growth have been clarified According to Nguyen Van Tien (2021), without international payment operations, it will be difficult for foreign economic activities to exist and grow Seyoum (2014) also pointed out that if there are no timely payment arrangements, the rapid growth and expansion in global trade cannot be maintained

International payment is an indispensable step in the business cycle The more foreign trade activities develop, the more diverse forms of payment become International payment activities directly affect the capital cycle, thus affecting the entire reproduction process and the profits of each company In particular, there are many opportunities open up for Vietnamese import-export businesses to seek and enter new markets all over the world since accessing the WTO and signing FTAs However, in the current context of integration and globalization, the more foreign trade activities flourish, the more complex and risky international payment activities

To be able to make export enterprises grow strongly, problems about international payment can be shrugged off Managers must analyze risks that an exporting company may face in international payment such as: credit risk, foreign exchange risk, shipping risk, moral risk, documetation risk and cybersecurity risk in

2 order to provide solutions to prevent and limit Preventing financial risks is “an urgent task” for all export businesses nowadays Therefore, it is necessary to research, analyze deeply about international payments; from there, provide optimal solutions and recommendations for export companies By doing this, businesses can implement international payments, promote business cycles, improve capital efficiency and gain more profitability.

Rationale of the study

International payment is considered as an extremely important activity because it is related to the money flowing into the business When payment activities happen favourable, the import-export segment of the enterprise will grow prosperity This is clearly shown because when businesses collect money quickly, it will motivate them to continue promoting remanufacturing and import-export activities Being aware of the importance and significance of international payment activities in international trade transactions during the internship period at “FADO iExport Corporation'', I settle on a topic called “Solutions to manage risks in international payments at FADO iExport Corporation.” for my graduation thesis.

Objectives of the study

In theory, the research analyzes the theoretical basis of international payment in import-export activities and potential risks in international payment operations to exporters

In practical terms, the overall goal of the study is to delve further into risks in international payment by identifying, researching and analyzing the current situation of international payment activities at FADO iExport Following that, the research will propose solutions and recommendations to strengthen risk management frameworks in exporting enterprises in general and FADO iExport in particular.

Significance of the study

This study gathers and shows the current situation, difficulties as well as limitations of FADO iExport in international payment activities Thus, it is expected that this research can help FADO iExport review problems and apply the proposed solutions to have more efficient international payment operations in the future If

3 issues about international payments are solved, FADO iExport can gain a good reputation and bring in more profitability for itself Moreover, this study is also additional material for companies that have the same models with FADO iExport , references for economic researchers and other university students during the process of doing thesis.

Scope and limitation of the study

Subject of the study: the study will focus on analyzing in international payment of FADO iExport Corporation and its risks

Scope of the study: Instead of analyzing and researching all international payment methods, the study will mostly shed light on methods that FADO iExport applied in the period of 2020-2023

Limitation of the study: FADO iExport Corporation is a medium export trading company that was founded in 2016 The company has 2 branches with one in Ha Noi and the main branch is located in Ho Chi Minh Some of the senior and experienced staff work in Ho Chi Minh city As a result, there is no chance to have face-to-face interviews with those employees to discuss and get deeper understanding about the issue Furthermore, international payment is a link in import-export activities but it is also known as a complicated and complex process with many unforeseeable cases that takes much time to analyze and research.

Definition of terms

International payment is the process of carrying out payment obligations and entitlements to financial benefits resulting from economic and non-economic activities between organizations, individuals of different nationalities, or a nation and an international organization via banks of related partners.(Nguyen Van Tien, 2021) Risk is the possibility that something bad might happen Risk implies the future uncertainty about deviation from unexpected outcome

Risks in international payment are risks that arise during the implementation of international payment operations, stemming from the relationship between the parties involved international payment including importers, exporters, banks,…or external factors such as war, natural disasters, politics,…(Le Anh, 2021)

Risks in international payment to exporters may include credit risk, foreign exchange risk, shipping risk, moral risk, cybersecurity risk and documentation risk Risk management isn't about removing risks It is said that there is no existence of such a thing as risk-free business, particularly when collaborating with overseas customers and business partners from other countries Rather, risk management entails the process of ensuring that a company understands what and how much risk it confronts, as well as how much of that risk can be mitigated (Dr Rajinder Minhas,

Summary

Chapter 1 produces readers background information about the research topic along with rationale, objectives, significance of the study International payment is considered as an extremely important activity because it is related to the money flowing into the business When payment activities happen favourable, the import- export segment of the enterprise will grow prosperity Being aware of the importance and significance of international payments in foreign trade transactions during the internship period at “FADO iExport Corporation'', the author settles on a research topic called “Solutions to manage risks in international payment at FADO iExport Corporation”

LITERATURE REVIEW AND THEORITICAL

Overview of international payments

Firstly, in terms of subjects, international payment activities involve multiple parties in two or more countries including exporters, importers, banks, possibly intermediaries such as freight forwarders or customs agents Moreover, the majority of international payments are made via the banking system In reality, payments between exporters and importers are typically made through the banking system rather than directly to one another As a result, there will always be at least two participating banks—one bank serving the importer and the other bank serving the exporter—because banks can guarantee payments are made securely, swiftly, and effectively

Secondly, in terms of language in international payments, when it comes to language English is the most widely used language in international payments Thirdly, in terms of currency in international payments, most cash is not used directly but through means of payment such as promissory notes, bills of exchange or cheques In international trade transactions, the currency utilized can be that of the seller’s or buyer’s country or the common one As a result, international payment operations are influenced by the national exchange and foreign exchange reserves Fourthly, in terms of the legal system, entities engaged in international payment activities must conform not only with national laws, but also with international legal documents and practices (URC, UCP, etc.) which are issued by ICC (the International Chamber of Commerce) This ensures fairness and equality for entities when participating in international trade and payment activities However, in some cases, the legal systems of different countries lead to mutual opposition When settling a dispute, it is customary to choose international or national law of a third country, or the law of the exporting or importing country, as agreed upon by the parties through the court or arbitration

2.1.2 Terms of international payment methods:

When negotiating international payment methods in international trade transactions, both parties (sellers and buyers) always want to select the most advantageous payment method for themselves There are lots of transactions that don't come to the end because importers and exporters are at loggerheads with each other about international payment methods Obviously, choosing international payment methods is a momentous decision in international trade that will directly affect the interests of both importers and exporters As a result, for international trade and payments, businesses need to conduct due diligence thoroughly on their partners before entering into transactions, as well as consider carefully before choosing the payment method that is appropriate and fit, because the ideal payment method can protect the contending interests of both buyers and sellers

In international trade, exporters prefer to get payments as soon as possible Conversely, importers would rather make payments as late as feasible Thus, the choice of reasonable international payment methods must be diversified to harmonize both importers and exporters

According to Jeménez (2012), the cost of the payment method and the trustworthiness of the trading partners have a close relation It means the more trustworthiness that two parties have for each other, the less complicated and pricey the payment method is

Figure 2.1: The risk level of international payment methods

As shown in figure 2.1, there are five international payment methods that are utilized commonly in international trade transactions, including: Cash-in-Advance, Open Account, Letters of Credit, Documentary Collections and Consignment Two methods include Open Account and Cash-in-Advance can be solved by T/T service (International Wire service) There is no payment option that is fit for all situations in international trade Each payment method has different levels of risk for import- export companies which depend on importing or exporting

International arbitrators recommend four factors to consider when choosing a payment method, including: characteristics of the industry/type of exported goods; deal value; distance in geographical space and most importantly, understanding of partners and markets a Cash-in-Advance

This is a payment method that is known as the lowest risk for exporters When both the importer and the exporter agree to choose “Cash-in-Advance” as their payment method in trade transactions, the importer accepts the seller’s goods price by a irrevocable order has the obligation to pay in advance full or partial amount before the goods are transferred to the importer according to the signed contract or shipment is effected Cash in Advance is usually addressed via wire transfer, credit card, or escrow service

Seyoum (2014) pointed out that Cash-in-Advance is often required by sellers in cases if the importers are not credible or reputable or the political and economic conditions of the buyer’s country are insecure.

Paying cash in advance for goods can harm importers’ cash flow; moreover,importers may be worried that they may not receive the goods from exporters even when they make Cash-in-Advance Payment method is a balancing act in any international transactions As a result, with exporters that require cash in advance, they may receive fewer orders from buyers and even may lose customers to sellers with flexible and less stringent payment terms This method should be applied when buyers and sellers trust each other on the basis of long-term business

Open account is defined as a international payment method in which after completing the shipment the exporter will debit the importer's account to a monitoring book and the payment of these amounts is normally made periodically as agreed (Nguyen Van Tien, 2021) Essentially, Open Account is the one that is opposite to the payment method: “Cash-in-Advance” As shown in figure 2.1, Open Account is also known as one of the most risky payment methods among all of the payment methods to exporters

Currently, approximately 60% of trade turnover between the UK and EU countries is conducted via the payment method - Open Account- because of similarities among these countries in culture, business practices, and laws Also, customers in these countries have traditional, regular, long-term business relationships and mutual trust

When using Open Account as the payment method, it is considered as absolutely beneficial for the importer because the importer only have to make payment when the goods have been received or even after they have been consumed The exporting company can bear the risk of incomplete payment or delayed payment by the importer Moreover, importers can sell the goods even when they have not received shipping voice from exporters and use the amount of money from selling to pay for importer

Open Account provides flexibility for both buyers and sellers, as buyers can receive goods or services without having to pay upfront, while sellers can attract customers by offering favorable payment terms However, open account arrangements also carry risks, such as the potential for late payment or non-payment by the buyer Sellers may mitigate these risks by conducting credit checks, requiring guarantees or collateral, or offering discounts for early payment

It is advisable for exporters to purchase credit insurance to protect against default by the importing company such as political or commercial risks Exporters can use another safeguard: secure collateral to cover a transaction The process of this payment method (Open Account) is explained clearly in the below Figure

Figure 2.2: The process of Open Account

(Source: Nguyen Van Tien, 2021) c Collection

Types of risk in international payment to exporters

Risks exist in all aspects of life, including practically all human activities As stated by the Oxford Dictionary, the term risk is defined as ‘a chance or likelihood of danger, injury, loss or other adverse outcomes.’

Risk refers to the likelihood or possibility of an event or situation occurring, along with losses or the negative consequences associated with that event In variety of contexts, risk may encompass a wide range of scenarios, including operational, financial, strategic, environmental, or personal risks

Risks in international payment are risks that arise during the implementation of international payment operations, stemming from the relationship between the parties involved international payment including importers, exporters, banks, ,intermediaries…or external factors such as war, natural disasters, politics,…(Le Anh, 2021)

Risks in international payment related to international trade transactions is considered similar to those in domestic transactions, but more complex due to cultural, geographical and legal differences…

Foreign exchange risk is the loss that an international financial transaction may experience due to currency changes Foreign exchange risk (also known as FX risk, currency risk or exchange-rate risk, refers to the likelihood that the value of an investment would decline as a result of changes in the relative value of the involved currencies (Akhilesh Ganti, 2020)

Businesses that import and export goods to numerous countries, as well as investors who trade in global markets, may be affected by foreign exchange risk Exchange rate fluctuations may have a negative impact on this conversion, causing the amount to be less than expected

An exporting enterprise is exposed to foreign exchange risk when currency exchange rates affect and receivables and account payables This type of risk arises when two parties sign a sales contract that specifies exact prices for goods as well as delivery dates If there is a fluctuation in a currency’s value between the delivery date and the time the sales contract is signed, one of the parties may suffer a loss.(Alkhilesh Ganti, 2020)

As a result, forecasting the fluctuation of the exchange rate is an essential task to limit the level of risk and protect against unwanted foreign exchange movements 2.2.2 Credit risk

According to the Basel III framework, credit risk refers to the likelihood that a counterparty won’t fulfill its obligations in line with the terms have been agreed

17 upon Additionally, according to Harvey (2011), credit risk is associated with not collecting an account receivable

Credit risk in international payments refers to the possibility that the importer (payer) may default on their payment obligations This can result in non-payment or delayed payment, leading to financial losses for the exporter (recipient) This risk arises due to various factors inherent in international transactions: the importer’s financial stability, business risk, payment history, country risk, currency risk, documentation and contractual risk, banking system risk

- Financial Stability of the importer: The financial health and stability of the importer are known crucial determinants of credit risk If the importer is experiencing financial difficulties, such as liquidity problems or insolvency, they may be unable to fulfill their payment obligations, resulting in default

- Business Risks: Economic conditions, market dynamics, and industry-specific factors can impact the creditworthiness of the payer Changes in market conditions, regulatory environment, or competitive landscape can affect the payer's ability to generate revenue and meet their financial commitments

- Payment History: The payer's track record of making timely payments and honoring financial obligations is an important indicator of credit risk Past instances of late payments, defaults, or financial distress may signal potential credit problems and increase the risk of default in future transactions

- Country Risk: Political instability, economic conditions, and regulatory environment in the payer's country can influence credit risk Factors such as currency devaluation, government intervention, or geopolitical tensions may impact the payer's ability to access foreign exchange or make international payments

- Currency Risk: International payments often involve currency conversion, exposing both parties to currency fluctuations If the payer's currency depreciates significantly relative to the currency of payment, they may face difficulties in meeting their payment obligations, increasing credit risk for the recipient

- Documentation and Contractual Risk: Incomplete or ambiguous contractual terms, inadequate documentation, or failure to comply with contractual obligations

18 can increase credit risk Disputes over payment terms, delivery of goods/services, or quality issues may lead to payment delays or defaults

- Banking System Risk: The stability and reliability of the banking system in the importer's country can impact credit risk If the payer's bank encounters financial difficulties or operational issues, it may affect their ability to process payments and fulfill financial obligations

In the context of international payment, "Moral risk" typically refers to the possibility that one party may behave in a risky or unethical manner because they believe they will be protected from the consequences of their actions

Moral risk arises when one counterparty (import or export) intentionally does not fulfill its obligations, influencing others' rights and advantages In business, ethics are about reputation and trust This is an important issue in international trade and payment, because the counterparties are often far apart, and they may not even have a chance to face each other during negotiations

Literature review of risks in internatioal payments to exporters

While import-export activities known as the lifeblood of the economy, have been playing a significant role for socio-economic development, international payment is an indispensable step in the business cycle of an exporting company As Nguyen Van Tien (2021) said, without international payment operations, it will be difficult for foreign trade activities to exist and grow And the more foreign trade

21 activities flourish, the more complex and risky international payment activities International payment activities directly affect the capital cycle, thus affecting the entire reproduction process and the profits of each export enterprise Therefore, it is necessary to research, analyze deeply about risks in international payments; thereby providing optimal solutions and recommendations for export companies

Although the topic about risks in international payments is not new, it is always a hot, topical and necessary issue in supporting import-export businesses, especially when Vietnam's economy depends heavily on imports and exports Acknowledging the importance, applicability as well as practicality of risk management in international payment operations, there are numerous topics and projects that clarify and analyze this issue in the form of theses, magazines, books, dissertations and so on An overview of some notable studies is provided below:

Pham Thu Hang (2021) conducted to clarify and analyze risks through the current status of international payment activities at Vicofood (an import-export company) and then propose recommendations to be able to prevent and limit risks in international payments However, the shortcoming of this research is that the author merely analyzed the actual situations of Vicofood’s risks in international payments without pointing out the reasons for each risk clearly Furthermore, the author only suggested general solutions which cannot address potential risks in international payments that the company has been dealing with

The research work of the author Tran Thi Huyen Trang (2023) introduced readers an overview of international payment methods, specific analysis about international payment methods, advantages and disadvantages of each payment method, the factors affecting the choice of international payment methods, thereby, suggest recommendations and solutions to facilitate importing-exporting companies applying international payment methods appropriately and efficiently to able to prevent potential risks in foreign trade

The professor Nguyen Van Tien (2021) is successful in providing readers an overview of international payments, specific analysis of payment methods, the advantages and disadvantages of each payment method for both importers and exporters, the system of legal documents regulating international payments,

Incoterms, payment instruments, documentation in international payment and other related knowledge The book is really significant and helpful for researchers who are interested in international payment and trade finance topics from the perspective of commercial banks However, the book does not specifically mention potential risks that exporters may encounter in international payment operations as well as propose solutions and recommendations to help them manage these risks in international trade transactions

Vo Thi Thuy Duong (2022) focused on analyzing some real situation about risks in international payment operations, the current status of import-export and using international payments in Vietnam, international payment risks, strengths and weaknesses of each international payment method, thereby giving recommendations to import-export businesses, banks, government, in order to partly contribute to solve problems and prevent risks in import-export as well as international payments

Regarding the book of Dr Rajinder Minhas (2015), the author introduces an overview of import-export area from generalities to particulars, issues and necessary concepts related to foreign trade, export-import documentation and steps, international payment methods, Incoterms and so on However, in this book, the author only indicates the types of export risks in general, not specifically in international payments Furthermore, this book’s shortcoming is not to suggest recommendations and solutions for importers and exporters to prevent those potential risks

In general, the literature mentioned above, has provided an overview of the import-export field and useful knowledge related to international payments to assist researchers to be able to identify, analyze these risks as well as propose appropriate solutions to manage risks involved in international payment activities mainly from the perspective of commercial banks As a result, this thesis continues to delve into the assessment of risks in international payments to exporters through the FADO iExport Corporation's actual situations, supplementing as well as resolving the gaps that previous topics did not address

Firstly, after studying and researching the mentioned above topics, the author found out that there are numerous research articles, theses, magazines, dissertations related to the topic of risks in international payments as well as risk management from the perspective of commercial banks or these articles only generally mention risks of international payment methods to exporters and importers; however, there are very few scientific and research works stating the current situation and risks in international payment activities from the perspective of an exporting enterprise while exporters themselves must be directly affected if risks arise

Additionally, up to now, there has not yet been a research topic on risk management in international payments at FADO iExport, despite the fact that this is a pressing concern for executives at FADO iExport in particular and other exporters in general

From the above analysis, the author finds that choosing a topic “Solutions to manage risks in international payments at FADO iExport” as thesis topic is absolutely necessary and consistent with the current trend of international integration The author wishes to delve deeper into and analyze more carefully potential risks and causes of risks in international payments based on FADO iExport’s data and information collected, thereby proposing solutions and recommendations to limit risks for export businesses.

Summary

Chapter 2 provides theoretical foundations on international payments such as the definitions, characteristics and terms of international payments Also, types of risks in international payment activities to exporters are identified and analyzed thoroughly by the author Although there are numerous academic and scientific works that clarify and analyze this issue in the form of theses, magazines, books, dissertations, the author still demonstrates the topic “Solutions to manage risks in international payments at FADO iExport” is absolutely necessary and consistent with the current trend of international integration

RESEARCH METHODOLOGY

Data collection

With the purpose of proposing appropriate solutions to limit and prevent risks that arise in international payment activities at FADO iExport, this research will make a choice to use a quantitative research method for some reasons below

Firstly, by using only the qualitative research method, the research would be not objective and have limitations in the general ability

Secondly, using the quantitative research method can help understand clearly the current export activities of FADO iExport Therefore, it can be easier to find out achievable and accurate solutions for each type of risk that occurs in the process of international payment

The study will use the data and information gathered in two ways: primary data collection and secondary data collection

The distinction between primary and secondary data is merely one degree Data that was primary in one person's hands becomes secondary in another's

Primary data collection: face-to-face interview combined with online interview Primary data refers to data obtained for the first time by the researcher from the investigated field An investigator can gather data using a variety of approaches depending on the purpose of his research As a result, the primary data is unique or original in nature (Shah, 2021)

As mentioned before, FADO iExport corporation was founded in 2016 Currently, the company has 2 branches with one in HaNoi and the main branch is located in Ho Chi Minh I did an internship in the Hanoi branch, so it is accessible for me to have face-to-face interviews with employees to discuss and get deeper understanding about the issue Due to some of the senior and experienced staff working in Ho Chi Minh city, I plan to conduct interviews through the internet with those who are directly working in FADO iExport’s export department The respondents directly take responsibility for international payment at FADO iExport, thus, they have more knowledge and information about it as well as comprehend the issues and the reasons that need to be taken into consideration The main purpose of

25 conducting interviews is to approach specific risks international payment activities that FADO had to encounter in reality as well as the reasons for each risk

Secondary data refers to data that are initially collected but retrieved from published or unpublished sources Differ from Primary data, this data is not unique or original in nature.(Shah, 2021)

The data will be assembled from FADO iExport’s financialstatements, annual reports in 3 years: 2021, 2022 and 2023 Furthermore, data and information will also be collected from textbooks, documents, reference books and reliable online resources All the used information and data is assured to be authentic and clear.

Research question

There are three questions given for the interview:

Question 1: What kind of risks in international payment that FADO iExport has been facing?

Question 2: What are the primary causes of each risk?

Question 3: What solutions has FADO iExport had to prevent and limit those risks?

The author makes a decision on conducting the interview in order to collect primary data in this research Because international payment is considered a complicated step in export activities, the interview will help the author have a deeper understanding and an objective view about risks in international payment activities From that, appropriate and practical recommendations are proposed to strengthen risk management frameworks in exporting enterprises in general and FADO iExport in particular

The interview process for collecting primary data:

The primary data is collected from 3 people with 5 years or more of working experience at FADO iExport Corporation

With face-to-face interview: The author conducted a face-to-face interview with a sales manager and a senior sales staff of FADO iExport at its branch in Hanoi With online interview: the online interview was conducted with a sales executive who works at main branch in Ho Chi Minh city and directly makes

26 important decisions on choosing payment methods and terms for FADO iExport’s sales contracts with forein partners The questionnaires are administered through the online interview via Google-meet.

Data analysis

The research will apply three analysis methods to make clear the status of the company as well as the issues in international payment the business has been facing 3.3.1 Data comparison analysis method

The study will draw comparisons of the contract value, number of signed contracts as well as fraction of payment methods used among the years 2021, 2022, and 2023 On the basis of comparing these statistics, it can be easier to evaluate and find out effective and ineffective methods for different customers This will assist the business in determining a strategy for improving its international payment options 3.3.2 Economic situation analysis method

Economic situation analysis method will gather information, statistics as well as regulations which are provided by the government such as: exchange rate, credit risk, etc The primary risks in international payment that FADO iExport faces will be identified in this study, along with potential sources of risk, losses, or damage to the company's operations

3.3.3 The real case study analysis method

Reliability and Validity

According to Saunders and Lewis (2009), reliability indicates the constancy of the result It implies that the results will be the same under the same conditions, even if alternative methods of analysis are applied This study is guaranteed for high reliability by utilizing audited numeric statistics, charts, graphs, and information The company's accounting department audits this information and statistics on a yearly basis, ensuring that it is accurate and reliable for research

As regards validity, by conducting both face-to-face and online interviews to employees at FADO iExport, the research can assure high validity All interviewees have many years of experience as well as comprehend the studied issues Furthermore, all information, data and international payment methods employed from FADO iExport activities have been completely exploited to fulfill the study’s objective of managing and preventing risks that arise during the international payment process.

Research ethics

Nowadays, morality or ethics is regarded as one of the most important concerns in education According to Cambridge Dictionary, plagiarism is defined as “copying someone else's ideas or words and passing them off as your own ” As plagiarism entails dishonesty and ethical violations, it is not acceptable during the study process.

Summary

The author use quantitative research method can help understand clearly the current exporting situation and international payment activities of FADO iExport The data and information are collected in two ways: primary data collection and secondary data collection Also, chapter 3 clarified the accuracy and reliability of information as well as statistics used in the thesis

FINDINGS AND ANALYSIS

Overview of FADO iExport Corporation

For many countries in general and Vietnam in particular, exports have become the spearhead of the economy, a lever for socio-economic growth Vietnam has grown its exports of agricultural products with competitive advantages by implementing Free Trade Agreements (FTAs) International economic integration has enabled Vietnam's agricultural sector to effectively engage in the global value chain Vietnam has emerged as an essential link in the global agricultural value chain, ranking among the top 15 agricultural exporting countries in the world and second in Southeast Asia Vietnam's agricultural exports continue to increase, helping to improve the trade balance Nowadays, exporting agricultural products plays a key role for Vietnam’s economy

FADO iExport is an export business which was founded in 2016 FADO iExport Corporation, is oriented to become a multinational company, specializing in the production and trade of Vietnamese fresh fruits all over the world The company’s mission is to provide high-quality Vietnamese fresh fruits to the world, enhancing the position of Vietnamese products in the international area FADO focuses on developing some main agricultural products including: young coconut, dragon fruit, seedless lime, fresh guava, seedless watermelon, fresh longan, fresh banana and fresh chili And the agricultural products are mainly shipped by three ways: seaway, railway and airway to the main markets of FADO iExport: UAEs, America, Japan, Korea, China, India, Dubai, Saudi Arabia, Oman

Figure 4.1: Business statistics at FADO iExport (2021-2023)

Unit: million VND (Source: Financial statement of FADO iExport 2021-2023)

Total revenue Total cost Total profit

The table and chart above highlight FADO iExport’s business performance from the year 2021 to 2023 in terms of total revenue, total cost and total profit The chart shows that FADO iExport’s revenue, cost, and profit fluctuated dramatically during the period from 2021-2023

Concretely, in 2022, FADO iExport obtained total revenue of 18,489.5 million VND which was approximately 3.3% higher than the one in 2021 Moreover, the profit increased from 450.2 to 665.8 million VND, equivalent to 48% compared to

2021 The year of 2023 is considered as a challenging year for FADO iExport in promoting and selling products for overseas customers especially in 2nd and 3rd quarter of 2023 The sales revenue for 2nd and 3rd quarter of 2023 only reached 788 million VND and 1736 million VND, respectively The total revenue for 2nd of 2023 is evaluated the lowest in the last three years from 2021-2023 Compared to 2022, the sales revenue in 2023 experienced the strongest fall up to 34.19%, from 18,489.5 to 12,168 million VND However, throughout the period from 2021 to 2023, it is guaranteed positive growth in the profit

The reason for decline in total sales revenue of 2023 is because of the strong competition among export enterprises More and more exporting companies are willing to accept payment methods that place Vietnamese exporters in a disadvantageous position with the purpose of finding and attracting new foreign partners to cooperate The payment methods can be consignment, T/T after shipment, open account, etc The profit in 2023 witnessed a slight increase, achieving roughly 750.4 million VND, 12.7% higher compared to the one in 2022 Although FADO iExport's total revenue in 2023 declined about 34.19% compared to 2022, profits tended to increase slightly Accounting for this upward trend in 2023, FADO iExport invested more time and effort in finding a variety of domestic fresh suppliers who can offer the company competitive prices but still ensure the quality of products In

2023, FADO iExport was successful in approaching, contacting and offering overseas customers with prices that generated high profit for the company Obviously, when the cost of goods declines, profit will increase Moreover, as we can see from the table and the chart above, the cost in 2022 is higher roughly 6,408.1 million VND, equivalent to 36% in comparison with the one in 2023 It also highlights the effort of

FADO iExport in taking measures to optimize operating expenses and other costs such as reducing staff size, selecting the right people for the right job, minimizing administrative costs,

In general, during the period of three years from 2021-2023, FADO iExport witnessed an upward trend in the profit accompanied a decline in the cost of the company However, FADO iExport must always be aware to make correct decisions to increase sales revenue and profit which can have a direct impact on the business’s sustainability.

Overview of FADO iExport’s the process of applying international

During the period from 2021 to 2023, FADO iExport gave trust to two banks to conduct international payment activities: Asia Commercial Joint Stock Bank (ACB) and Joint Stock Commercial Bank for Foreign Trade of Vietnam (VCB) According to news from Vietnam Assessment Report Joint Stock Company (Vietnam Report), ACB and VCB are 2 of 10 prestigious Vietnamese commercial banks in 2023 Choosing the two prestigious Vietnamese banks for international payment activities offers reliability, convenience, expertise, and peace of mind, making them the preferred choice for FADO iExport engaged in global trade

4.2.1 Cash-in-Advance (T/T payment method):

T/T ( Telegraphic Transfer) is a payment method in which the bank transfers a specified amount of money to the recipient via money transfer (Swift/Telex) depending on the payer’s instructions Telegraphic Transfer (T/T) is considered one of the most common payment methods utilized in international payment activities It's a way of electronically transferring funds from one bank account to another, typically across borders

T/T payment method is applied in almost all FADO iExport’s international transactions, with familiar customers and even first-time customers The reason that FADO chose T/T as the main payment method in international transactions is because of its convenience, inexpensive cost and the level of security and traceability compared to other payment methods

* The payment term applied by FADO iExport is 30%-50% T/T Deposit and 50%-70% T/T against scanned B/L

Figure 4.2: The process of T/T payment method at FADO iExport ( against scanned B/L) (Source: FADO iExport Planning and Business Department)

(1) FADO iExport and the importer sign a commodity trading contract after exchanging significant information, discussing clearly and agreeing about the payment term

(2) The importer provides instructions to their bank regarding the amount to be transferred, the recipient's bank details (including account number, name, and address, payment bank’s name, reason for remittance), and any additional information required by the sending bank or the recipient bank

(3) The sending bank will settle 30%-50% of the value of goods to ACB- the recipient’s bank (the bank that serves FADO iExport) Once the funds reach the recipient bank, they are credited to the recipient's account based on the information provided by the sender

(4) ACB makes payment to FADO iExport

(5) After receiving 30%-50% the amount of money, FADO iExport will start to prepare goods and make some related procedures to deliver goods to the importer such as booking vessel for delivery, making PHYTO (phytosanitary) and C/O

(Certificate of Origin), customs clearance for goods, etc Immediately after receiving the B/L from the vessel, FADO iExport will send it to the importer and require for the balance of the contract

(6) Similarly, the importer provides instructions to their bank regarding the amount to be transferred, the recipient's bank details again

(7) The sending bank will settle 50%-70% of the value of goods to ACB- the recipient’s bank (the bank that serves FADO iExport) The remittance bank records transactions as wire transfers

(8) ACB sends FADO iExport 50%-70% balance of the value of goods

* The payment term applied by FADO iExport is 100% T/T within 1-2 days after sending booking confirmation:

Figure 4.3: The process of T/T payment method at FADO iExport (after sending booking confirmation) (Source: FADO iExport Planning and Business Department)

(1) FADO iExport and the importer sign a commodity trading contract after exchanging significant information, discussing clearly and agreeing about the payment term

(2) FADO iExport carry out booking with the vessel After receiving booking confirmation from the vessel or logistics agent, FADO iExport sends it to the importer

(3) The importer provides instructions to their bank regarding the amount to be transferred, the recipient's bank details (including account number, name, and address, payment bank’s name, reason for remittance), and any additional information required by the sending bank or the recipient bank

(4) The sending bank will settle 100% of the value of goods to ACB- the recipient’s bank (the bank that serves FADO iExport) Once the funds reach the recipient bank, they are credited to the recipient's account based on the information provided by the sender

(5) ACB makes payment to FADO iExport

Today, Vietnam is experiencing strong development in foreign trade, the market is expanding globally, and foreign partners are extremely diverse With the current context, in order to ensure payment, the Documentary Credit method proves to be effective and suitable The L/C method is used commonly since it can reconcile the benefits and risks between the importer and the exporter Therefore, the proportion of import-export payment turnover by LC has dominated in recent years

There are several reasons that FADO iExport determine to use L/C as the international payment method in trading transactions:

Firstly, L/C method is applied by FADO iExport to new foreign trading partners or first-time customers, especially in unfamiliar markets or regions because using an L/C can provide a level of security The L/C serves as a guarantee that the seller will receive payment once they fulfill the specified terms and conditions, minimizing the risk of non-payment or default

Secondly, FADO iExport applies L/C for high-value transactions For high- value transactions where the risk of non-payment is significant, such as large equipment purchases or bulk commodity shipments, an L/C can provide assurance to both parties It ensures that the buyer has the necessary funds reserved and that the seller will receive payment upon shipment or delivery of goods

Thirdly, L/C will be used when exporting to high-risk countries: When exporting goods to countries with high political or economic risks, where there's a

35 heightened risk of non-payment due to factors such as currency instability, import restrictions, or political turmoil, using an L/C can provide added protection for FADO iExport

FADO iExport uses L/C irrevocable at sight in international trade transactions because it provides a secure and immediate payment mechanism for FADO iExport Once FADO iExport fulfills the specified conditions and presents the required documents, the issuing bank (importer’s bank) is obligated to make payment without delay The irrevocable nature of the L/C ensures that the payment commitment cannot be altered or revoked unilaterally, providing assurance and security to both the buyer and the seller

The process of L/C method at FADO iExport is conducted through VCB, as indicated in the following figure:

Figure 4.4: The process of L/C payment method at FADO iExport

(Source: FADO iExport Planning and Business Department)

(1) FADO iExport and the importer signs a commodity trading contract choosing L/C as the payment method

(2) The importer will send the application form for L/C to the issuing bank (the bank serving her/him) based on the terms and conditions of the sale contract, requesting the issuing bank to issue an L/C to FADO iExport

(3) The issuing bank issues its undertaking to the beneficiary in the form of a Letter of Credit, then, notifying and sending the L/C to the correspondent bank or branch of the issuing bank -VCB-

(4) After receiving L/C, VCB inspect and check the apparent authenticity of that L/C If the L/C is genuine, VCB will immediately advise and send the original L/C to FADO iExport

(5) FADO iExport conducts feasibility analysis of L/C, makes adjustments and supplements if any If the L/C is consistent with the signed contract, FADO iExport proceeds with delivery to the importer

(6) After that, FADO iExport will prepare a full set of documents and present them to the issuing bank for payment

(7) The issuing bank conducts checks on all documents If complying with the presentation, the issuing bank proceeds to make payment to FADO iExport’s account at VCB

(8) The importer reimburses the issuing bank for the money

(9) The Issuing Bank hands over the full set of documents to the importer 4.2.3 Consignment method:

Current status of international payment activities at FADO iExport

4.3.1 According to FADO iExport’s export situation

The table and charts below displays FADO iExport’s exporting situation using payment methods according to contract value and the number of signed contracts throughout a three-year period from 2021-2023

Unit: million VNDNc: Number of contracts(Source:Annual report of FADO iExport from 2021 to 2023)Table 4.2: The situation of using payment methods of FADO iExport over 3 years (2021-2023)

Figure 4.6: Structure of using payment methods according to the number of signed contracts (2021-2023) (Source: Annual reports of FADO iExport from 2021 to 2023)

Figure 4.7: Structure of using payment methods according to the contract value (2021-2023) (Source: Annual reports of FADO iExport from 2021 to 2023)

As we can see from the charts above, the main payment method that FADO iExport applied was Cash-in-Advance, which always accounts for more than 60% of the value and the number of the signed contracts

Overall, the percentage of applying Cash-in-Advance as the payment method tends to increase gradually each year On the other hand, FADO iExport witnessed a downfall in the percentage in using L/C and Consignment method by the year The reason for this increase is considered clear Exports will have the tendency to use the payment methods that are convenient, inexpensive and safe for them With nearly 9-year experience, FADO iExport is successful in building its brand in the global marketplace Thanks to the high reputation in business, it is easier for FADO iExport to attract many importers that are ready to accept Cash-in-Advance as the payment method Overseas customers of FADO iExport agree on choosing this method which is not beneficial for them because they believe in the company’s prestige and reputation

In the year of 2023, FADO iExport’s total value and number of signed sales contracts declined in comparison with 2022 There are several reasons for this decline The first is due to the common market economy The Vietnamese economy in particular, as well as the global economy in general, faced numerous obstacles and difficulties in 2023 As a highly open economy, Vietnam's economy is greatly influenced by global economic context Exporting companies such as FADO iExport had to face many disadvantages in accessing export markets

The second reason is because of the strong competition among export enterprises More and more exporting companies are willing to accept payment methods that place Vietnamese exporters in a disadvantageous position with the purpose of finding and attracting new foreign partners to cooperate The payment methods can be consignment, T/T after shipment, open account, etc

Despite these obstacles above, FADO iExport doesn’t apply the methods of payment that are too risky and can expose FADO iExport to risks such as credit risk, non-payment or late payment from importers, The company will take advantage of its reputation and reliability to convince foreign partners to apply Cash-in-Advance (T/T) for almost international transactions FADO iExport’s payment terms can be:

- 100% T/T within 1-2 days after sending booking confirmation

- 30%-50% T/T Deposit and 50%-70% T/T Balance against within 3 days after scanned B/L

- 50% T/T Deposit after signed sales contract, 45% by T/T Balance against within 2 days working after scanned Documents, 5% by T/T within 5 days from ETA ( Estimated Time of Arrival)

To persuade first-time and fastidious customers, FADO iExport can show these customers a set of documents of previous orders such as B/L, Certificate of Origin, to build trust and credibility for customers The reason why FADO iExport wants to apply this payment method is because of convenience, quickness, safety and cost- saving In the L/C payment method, the firm will only apply it in sales contracts when overseas customers are careful that they want to mitigate specific risks in international transactions because applying the L/C method is a really complex

42 process with many steps and terms that both importers and exporters have to comply with Moreover, L/C can cost much for issuing and amending if there are any discrepancies in documentation Similar to the L/C method, the proportion of using the Consignment method of FADO iExport tends to decline during the period from 2021-2023 because of its risks that can put the company at a disadvantage such as loss of control, delayed or uncertain payment,

4.3.2 According to FADO iExport’s exporting markets

FADO iExport has been targeting easy-to-please markets which don’t have too high requirements of product qualifications such as Global Gap, Halal, Health Certificate, Certificate of Analysis… as well as strict policies to be able to import into these markets Therefore, the Middle East and Asian are markets that FADO iExport have been focusing on to exploit a The Middle East market

The Middle East is considered as the dominant market of FADO iExport Some countries that FADO iExport now is focusing on exploiting include: Dubai, UAE, Saudi Arabia, Oman,

Unit: million VND Nc: Number of contracts (Source:Annual report of FADO iExport from

Table 4.3: The situation of using international payment methods of FADO iExport in the Middle East market

As can be seen clearly from the above table, FADO iExport flexibly uses all of

3 payment methods including Cash-in-Advance, L/C and Consignment method for Middle East market throughout three years from 2021 to 2023 While the trend of FADO iExport’s usingCash-in-Advance method increased year by year, the number of sales contracts paid by L/C and Consignment method went down

The number of contracts signed with foreign partners in the Middle East market accounts for the majority compared to those in the Asian market Specifically, FADO iExport accepted to sell goods for importers on the Consignment basis in this market, but the proportion which is very small has the tendency to decline from 2021 to 2023

In terms of the value of sales contracts in the Middle East market, Cash-in- Advance gained the highest exporting value compared to the two payment methods left, accounting for more than 60% of the total contract value The following of Cash- in-Advance is L/C method and Consignment method, constituting a very small percentage, approximately 10% during the period from 2021 to 2023

In a way, the table below illustrates the tight ties that exist between FADO iExport and foreign clients in the Middle East market b Asian market

FADO iExport mainly focuses on the Asian market, working with foreign commercial partners in India, China, Korea, Taiwan, and Malaysia

Most Asian consumers originate from nations with relatively stable economic and political situations, so FADO iExport always values their ability to pay in this market Furthermore, due to its geographical proximity to Vietnam, the Asian market is ideal for FADO iExport to penetrate and export fresh fruits

Unit: million VND Nc: Number of contracts (Source:Annual report of FADO iExport from

Table 4.4: The situation of using international payment methods of FADO iExport in the Asian market

The table indicates the situation of using international payment methods of FADO iExport in the Asian market during the period from 2021 to 2023 The company only uses 2 payment methods including Cash-in-Advance along with L/C methods for Middle East market throughout three years from 2021 to 2023 As can be seen clearly that Consignment payment was not applied in international trade transactions in the Asian market This is because this consignment is too risky, so it is not popular with Asian import-export enterprises Similar to the Middle East market, the Cash-in-Advance method was applied the most, accounting for more than 70% of the total value contracts from 2021 to 2023

While the trend of FADO iExport’s usingCash-in-Advance method increased year by year, FADO witnessed the downturn in the proportion of using L/C payment

In terms of the signed contracts value, to Cash-in-Advance method, FADO iExport achieved 3905 million VND, 4546 million VND and 2967.8 million, respectively from 2021 to 2023 And to the L/C payment, the amounts in the period from 2021 to 2023, are 1301.5 million VND, 909.3 million VND and 593.6 million VND respectively by year

4.3.3 Based on the payment period and payment costs

When selecting a payment method, exporters should assess the risk tolerance of both parties, the nature of the transaction, the creditworthiness of the buyer, and any legal or regulatory requirements Additionally, exporters should consider using payment methods that balance the interests of both parties and facilitate smooth and efficient trade transactions In international trade transactions, FADO iExport primarily uses 3 payment methods including: Advanced payment method (T/T method), L/C method and consignment

Current status of risks in international payment at FADO iExport

An exporting enterprise is exposed to foreign exchange risk when currency exchange rates affect account receivables and account payables This type of risk arises when two parties sign a sales contract that specifies exact prices for goods as well as delivery dates

There are a variety of factors that influence exchange rates between currencies, including economic indicators, central bank policies, geopolitical events and market sentiment Fluctuations in exchange rates can occur on a daily basis and be significant, resulting in volatility in the value of foreign currency payments received by exporters Therefore, businesses need to pay special attention to the risk of exchange rate risk Transaction risk is a kind of exchange rate risk which is the probability of being impacted by changes in exchange rates between the date of contract signing and the date of payment

Exporting companies run the risk of receiving less money translated into domestic currency than they initially anticipated when they sign an export contract and agree to receive payment from the sale of goods in foreign currency In general, foreign exchange risk increases with the length of time between the quote date and the payment date Currently, USD is used as the currency for 80 of FADO iExport’s transactions, making foreign exchange risk inevitable in international payments Actual case happened in 2022:

On November 30th, 2022, a foreign partner in Oman signed a sales contract with FADO iExport to import 2 container 40ft RF of young coconut into his country

According to the signed sales contract, US.dollar (USD) is utilized as the currency of international payment; the entire value of the shipment is roughly $50,000 USD with the delivery term – CIF, Incoterms 2010, Sohar Port and the payment method applied is irrevocable L/C at sight On December 30th 2022, after presenting a set of documents in comliance with the provisions and terms of the issued LC to the issuing bank, FADO iExport got paid However, at that time, the USD/VND exchange rate decreased from 23,420 to 23,410 With this fluctuation, FADO iExport suffered a loss of (23,420-23,410) x 50000 = 500,000 VND due to the variation of the exchange rate

In the above real-world example, the loss is not too big in comparison to the contract's value However if FADO iExport has hundreds of such contracts with higher values, the loss can be significantly larger

FADO iExport is an export trading company that typically purchases goods from suppliers in the domestic currency (VND), but when working and dealing with overseas customers, payments are usually made in the foreign currency (USD) The value of foreign currency payments can change over time due to fluctuations in exchange rates, impacting the amount of revenue received by FADO iExport in the domestic currency Foreign exchange risk occurs mainly due to external factors such as economic conditions (inflation rates, interest rates, economic growth, and political stability), central bank policies, geopolitical events and market sentiment As a result, it is considered difficult for the exporting company to control this type of risk, aparting from taking into consideration a variety of currency hedging products such as forward contracts, swaps, options and futures contracts in order to help the company hedge against unfavorable fluctuations in exchange rates

International trade can indeed be complex and challenging, and things don't always go as planned International trade may contain many potential risks, especially in international payment activities Credit risk in international payments refers to the possibility that the importer (payer) may default on their payment obligations This can result in non-payment or delayed payment, leading to financial losses for the

54 exporter (recipient) This risk arises due to various factors inherent in international transactions: the importer’s financial stability, business risk, payment history, country risk, currency risk, documentation and contractual risk, banking system risk

Most of FADO iExport’s overseas customers make full payment; however, there are a few cases of late payment when the company applies Consignment as the payment method in international trade transactions

In April 2023, FADO iExport signed a contract with a Dubai company with the payment method: Consignment Accordingly, FADO iExport shipped a container 40 ft RF that mixed some fruits including white dragon fruit, fresh longan and fresh guava worth $20,000USD to this company without receiving any deposit FADO iExport only collected money when the company in Dubai sold out all goods to the end consumers in their country’s market According to the signed contract, the Dubai company will take 5% commission on gross sale and send the balance to FADO iExport However, at that time, the market fluctuated It means that these types of fruits flooded the market, but the demand for these goods was low Therefore, the foreign partner had difficulty in selling and refused to settle for FADO iExport In case of this, the payment method applied is Consignment; thus, if the Dubai company can’t sell goods, FADO iExport has to suffer losses After discussing and negotiating a lot with the partner, FADO iExport only collected half the amount of shipment, approximately $10,000USD from that company

That’s a reason why “Consignment is considered as one of the riskiest payment methods for exporters In a consignment arrangement, the exporter sends goods to the buyer without upfront payment The exporter relies on the buyer to sell the goods and remit payment afterward However, there's no guarantee that the buyer will sell the goods or pay for them promptly, leaving the exporter with the risk of non- payment In the case of FADO iExport above, the Consignment method exposes the company to market risks due to some reasons: economic downturns, fluctuations in demand and changes in consumer preferences Because the goods did not sell well and the market condition declined, FADO iExport incurred losses

Consignment can be a strategic option for exporters in some circumstances such as attracting more importers to sign contracts because of beneficial payment method, thereby increasing the total sales revenues, but exporters should proceed with caution and implementing risk mitigation measures, such as conducting thorough due diligence on buyers, creating explicit contracts, and expanding their clientele to reduce dependency on consignment agreements

4.4.3 Cybersecurity risk (Risk from high-tech scam)

Exporters are considered susceptible to fraud and cybersecurity threats in international trade transactions, such as invoice fraud, phishing attacks or payment diversion schemes Cybercriminals can impersonate legitimate parties, manipulate payment instructions, or intercept payment transactions, causing financial losses and reputational damage to exporters

FADO iExport has cooperated with a company in Dubai for 3 years, becoming each other's long-term strategic partners All exchanged information is usually sent via email from the two companies

In June 2022, a company in Dubai ordered FADO iExport 1 container 40ft RF of white dragon fruit worth nearly 20,000 USD, with payment term 30% T/T (Telegraphic transfer) deposit and 70% T/T after scanning the documents After the goods were delivered, FADO iExport sent documents to the customer and requested payment by T/T via email as always However, emails sent to customers in Dubai by FADO iExport were hacked and controlled by hackers Emails sent to customers were blocked in the middle, then the cybercriminal changed the transfer information and sent this altered email to FADO iExport’s foreign customer in Dubai Fortunately, after receiving this email, the Dubai company's accountant noticed an anomaly because the transfer information and beneficiary name were different from before As a result, they stopped remitting money and got in touch with FADO iExport to clarify the information, only to discover that the email had been hacked and altered by cybercriminals

Because of familiar and long-term working habits, FADO iExport and the company in Dubai can receive information and read each other's emails cursorily Hackers will attack the subjectivity and long-term work of exporters and importers Cybercriminals can impersonate legitimate parties, manipulate payment instructions, or intercept payment transactions, causing financial losses and reputational damage to exporters If importers and exporters do not closely monitor these issues, they can easily become victims of cybercriminals and suffer great losses

Evaluation of risks in international payment at FADO iExport

4.5.1 Achievements in international payment activities at FADO iExport

In the past 3 years, the exporting business in general and international payment activities in particular at FADO iExport has happened favorably and smoothly with increasing profitability by the year

At the first periods of doing business, because of not having reputation, experience as well as a foothold in the export field compared to senior exporting enterprises, it was difficult for foreign customers to put their trust in FADO iExport Therefore, the company accepted risky payment methods to find potential customers, build close relationships and trust with foreign partners in the future However, after nearly nine-year experience in the field of agricultural export, the company gradually built its own foothold, position and reputation The company was sought by many foreign partners all over the world to cooperate, so the company switched to using international payment methods that are safe and beneficial for exporters such as Cash- in-Advance (T/T payment method), L/C at sight

FADO iExport applied mainly three payment methods in trade transactions with foreign partners, including Cash-in-Advance, L/C and Consignment methods It is highlighted that, from 2021 to 2023, the company tended to use appropriate payment methods that can ensure exporters security, convenience, cost-saving and quickness

61 such as Cash-in-Advance (T/T in advance) (accounting for more than 60% the proportion of payment methods applied in international trade transactions) In terms of the Consignment method, which is considered riskiest for exporters, and L/C method which is the most safe for exporters but having expensive cost and complicated process, the trend of using these methods at FADO iExport is downward each year during the period of 2021-2023 As can be seen clearly that FADO iExport is aiming to build a secure payment method system ( using Cash-in-Advance method

- T/T in advance for all transactions) to be able to prevent as well as limit risks in international payments by taking advantage of its own good reputation

By applying these payment methods in international trade transactions reasonably has helped the company to promote payment procedures, improve payment efficiency, quickly recover capital and gain the maximum profitability Specifically, in 2021, FADO iExport signed 55 commodity trading contracts with many overseas customers, bringing the company approximately 17,896 million VND

By 2022, the number of signed contracts increased slightly by 6 compared to 2021, bringing 18,490 million VND in revenue The year of 2023 is considered a challenging year in finding overseas customers to FADO iExport, especially in 2nd and 3rd quarter of 2023 As a result, the number of exporting arrangements declined, reaching around 41 contracts with the worth of 12,168 million VND in sales revenue Accounting for this downward trend in total sales revenue of 2023 is because of the strong competition among export enterprises More and more exporting companies are willing to accept payment methods that place Vietnamese exporters in a disadvantageous position with the purpose of finding and attracting new foreign partners to cooperate Although in 2023, FADO witnessed a decline in total sales revenue, the profitability of the company still is in the upward trend throughout the past 3 years from 2021-2023, achieving roughly 2,733.4 million VND, 3.66% higher compared to the one in 2022

Additionally, FADO iExport is considered successful in building solid relationships with banks, especially ACB and VCB which two of the ten most prestigious Vietnamese commercial banks FADO iExport is a loyal customer of ACB and always chooses this bank as its regular representative bank in international

62 trade transactions After a long-time collaboration, FADO iExport and ACB are so well coordinated, supported together especially in the L/C method The process of applying the L/C method is conducted quickly, accurately to help FADO iExport minimize potential risks in international payment operations such as documentation risk or even credit risk and moral risk

4.5.2 Limitations in international payment activities at FADO iExport

Besides these achievements, there remain limitations in FADO iExport’s international payment activities that need to be addressed Risk management is not focused and receives much attention at FADO iExport, but is primarily dependent on the director’s and manager’s experiences and decisions

At the present, there are 3 main payment methods usually applied by FADO iExport including Cash-in-Advance, L/C at sight and Consignment methods which are both secure and insecure payment methods in international trade transactions FADO iExport should focus on using 2 payment methods: Cash-in-Advance along with L/C at sight and consider limiting signing sales contracts with overseas customers on the Consignment basis because according to figure 2.1, it is the riskiest method for exporters to apply Specifically, in a consignment sale, the exporter will send the goods to an importer on a deferred-payment basis; it means the importer does not pay for the merchandise until it is sold to a third party The problems that are usually associated with this payment method include the following: delays in payment, risk of nonpayment, cost of returning merchandise, limited sales effort by importers

In the period of 2021-2023, FADO iExport faced some risks in international payments including foreign exchange risk, credit risk, moral risk, documentation risk, shipping risk and cybersecurity risk It means that the level of concern for risk management at FADO iExport is not high In reality, there is no specialized group or department dedicated to risk management at FADO iExport The company is only concerned with looking for new overseas customers as much as possible with the aim of gaining the highest profitability without considering potential risks in international payment operations that can cause the company to fail to meet its profit as planned Additionally, having the tendency to “take life as it comes”, FADO iExport lacks

63 specific solutions to manage risks in international payment Only when these risks occur does FADO draw experiences from them by identifying, analyzing and then offering temporary solutions

4.5.3 Objective and subjective reasons a Objective reasons

Credit risk in international payments refers to the possibility that the importer (payer) may default on their payment obligations Credit risk arises from the possibility for non-payment or default by foreign trading partners, leading to financial losses for the exporter (recipient) FADO iExport utilizes mainly three payment methods, including: Cash-in-Advance, L/C at sight and Consignment in sales contracts However, credit risk only occurs in the Consignment arrangements Despite conducting thorough due diligence on importers prior to entering into international trade transactions, FADO iExport may still be exposed to credit risk in international payment activities due to factors such as economic downturns, fluctuations in demand and changes in consumer preferences, political instability, insolvency of buyer, or political instability which directly affect FADO iExport’s ability to receive payment for goods

FADO iExport is an export trading company that typically purchases goods from suppliers in the domestic currency (VND), but when working and dealing with overseas customers, payments are usually made in the foreign currency (USD) The value of foreign currency payments can change over time due to fluctuations in exchange rates, impacting the amount of revenue received by FADO iExport in the domestic currency Exchange rate movements may lead to losses for FADO iExport depending on the timing of currency conversions, affecting the profitability of export transactions Foreign exchange risk occurs beyond FADO iExport’s control.Specifically, it is considered difficult for the exporting company to control this risk

Shipping risk occurs mainly due to external factors Specifically, during the process of transportation, the goods can be affected by some factors such as natural disaster (storms, big waves, and rough seas often cause ships to capsize or tilt, the goods can be damaged or even lost); traffic congestion, accident, theft, breakage, etc Similar to foreign exchange risk, it is difficult for FADO iExport to be able control this type of risk b Subjective reasons

FADO iExport may lack awareness or understanding of the various risks associated with international payments This lack of awareness can lead to ineffective risk management strategies and making the exporting company vulnerable to unforeseen challenges Additionally, FADO iExport fails in conducting risk mitigation strategies to manage potential risks in international payments This can be lack of diversification in customer base, reliance on outdated payment methods, or failure to hedge against foreign exchange fluctuations, leaving exporters exposed to unnecessary risks

- Credit risk and moral risk:

First is due to a lack of due diligence on buyers: Because of the psychology of wanting to sell a lot of goods as much as possible in order to maximize sales revenue, FADO iExport may not spend time and efforts to conduct due diligence processes thoroughly on foreign customers before entering into transactions Inadequate due diligence increases the risk of exposure to buyers with poor creditworthiness or unstable financial conditions, then increases the risk level in international payments

Summary

Chapter 4 hightlights FADO iExport’s business performance and international payment activities in the period from 2021 to 2023 After that, the author proceeds to indicate, identify and analyze risks in international payment through the actual cases that FADO had to encountered, thereby evaluating achievements and limitations in the payment activities of FADO iExport Besides, this chapter also pointed out objective and subjective reasons for each risks Doing this will lay a solid foundation for the author to suggest recommendations and solutions on risk management in international payment at FADO iExport in chapter 5

RECOMMENDATION

Summary of findings

The research utilized the quantitative research method to approach and evaluate the stated objectives, which uses both primary data collected from interviews and the secondary data gathered from the internal documents of FADO iExport such as financial statements, annual reports in the period of three years from 2021-2023 and other reliable information sources

The purpose of this research is to identify and analyze potential risks in international payment activities in general and FADO iExport between 2021 and

2023 in particular Also, analyzing risks in international payment clearly and thoroughly is extremely significant for import-export companies and FADO iExport

It is an indispensable step for FADO iExport when venturing into the import-export market and conducting international trade transactions There is no existence of such a thing as risk-free business, particularly when collaborating with overseas customers and business partners from other countries Rather, risk management entails the process of ensuring that a company understands what and how much risk it confronts, as well as how much of that risk can be mitigated It is said that risks in international payment stem from objective and subjective reasons, so they cannot be eliminated entirely beyond limitation and mitigation in some ways The analysis in chapter 2 and chapter 4 also indicates that in order to limit risks in international payment activities more efficiently and capable, aparting from the effort of import-export enterprises, the participation and intervention of commercial banks and government is necessary for import-export companies commonly and FADO iExport particularly.

Recommendation

5.2.1 Recommendation for FADO iExport a Conducting thorough due diligence on buyers

FADO iExport should focus more on conducting due diligence on importers (buyers) to prevent potential risks “Due diligence” is a term considered familiar with business enterprises, especially in import-export firms It refers to the act of

68 examining a company and its financial records thoroughly before entering into a business arrangement with this company

FADO iExport should carry out thorough due diligence to assess the creditworthiness, reputation, and financial stability of foreign customers before becoming involved in trade agreements or granting credit to buyers To do this examination, FADO iExport may entail getting business registration, references, financial statements, credit reports, and checking the backgrounds of potential buyers This examination is particularly important and necessary when FADO iExport applies the payment method: “Consignment” in international trade transactions with foreign partners which is known as the riskiest one for exporters according to Figure 2.1

By conducting thorough due diligence, FADO iExport can prevent some risks in international payment such as: moral risk and credit risk Specifically, it means that FADO iExport can avoid the possibility that importers would partially or entirely default on their payment obligations, causing financial losses for FADO iExport b Taking into account choosing appropriate and secure payment methods The company also should take into consideration choosing suitable and secure payment methods in international trade transactions because these payment methods offer protection against non-payment As mentioned previously, at the present, FADO iExport mainly utilizes three payment methods including L/C method, Cash-in-Advance method and Consignment Among them, L/C and Cash-in-Advance methods (T/T) are considered safer than Consignment FADO iExport should limit the usage of Consignment method because of its high risk When FADO iExport sells the goods for overseas customers on the consignment basis, buyers are allowed to purchase goods on credit terms, meaning according to agreed-upon payment terms, they receive the goods upfront but settle at a later date after selling out the goods to the end customers When applying Consignment as the payment method, FADO iExport can face the risk that importers can delay and even refuse to make payment after receiving and selling goods Therefore, it is advised that the company should only utilize this payment method to importers that FADO iExport has conducted thorough due diligence about their creditworthiness, reputation, reliability, assess

69 their market knowledge and experience as well as verify their permits, business licenses, and certifications to legally conduct business in their marketplaces

As analyzed in chapter 4, the usage of L/C method in international payment activities has tendency to decline over and over year in the period from 2021-2023 The reason for this decline is because of its complexity and high costs

With nearly 9-year exporting experience to many marketplaces all over the world, FADO iExport should take advantage of its reputation and reliability to convince foreign partners to apply Cash-in-Advance (T/T) for almost international transactions FADO iExport’s payment terms can be:

- 100% T/T within 1-2 days after sending booking confirmation

- 30%-50% T/T Deposit and 50%-70% T/T Balance against within 3 days after scanned B/L

- 50% T/T Deposit after signed sales contract, 45% by T/T Balance against within 2 days working after scanned Documents, 5% by T/T within 5 days from ETA ( Estimated Time of Arrival)

When applying these payment terms above, FADO iExport can avoid risks such as delayed payment or non-payment from buyers because goods cannot be delivered to them if they don’t finish paying off the company

To persuade first-time and fastidious customers, they cannot put faith in the company As a result, FADO iExport can show these customers a set of documents of others’ previous orders such as B/L, Certificate of Origin, to build trust and credibility for customers The reason why FADO iExport should apply this payment method is because of its convenience, quickness, safety and cost-saving c Building solid and strong relationship with partners

FADO iExort should also cultivate good ties with overseas customers, banks, logistics providers, and other related partners involved in international trade It’s not an overstatement that fostering strong relationships with overseas customers, banks, and logistics providers helps the company streamline international trade transactions Effective communication, trust, and collaboration between FADO iExport and all related parties assist to increase transparency and reliability in international

70 transactions as well as reduce the likelihood of disputes and payment delays, facilitate the smooth flow of goods, documents, and payments, reducing delays and ensuring timely delivery of goods to customers Specifically:

- To buyers: Sales Department’s FADO iExport should put time and efforts to take care and support both new and senior customers to guarantee assessing and conducting due diligence more accurately about their creditworthiness, reliability and reputation By understanding customers' financial stability, payment history, and business practices, FADO iExport can mitigate credit risk as well as moral risk and avoid entering into international trade transactions with customers who have a higher likelihood of defaulting on payments Additionally, when FADO iExport keeps positive relationships with foreign customers, importers’ payments on time and according to agreed-upon terms are more guaranteed This reduces the likelihood of payment delays or disputes between two parties, mitigating risks and losses for FADO iExport

- To banks: FADO iExport can obtain trade finance options, risk management techniques and credit insurance to protect against payment risks and currency changes by collaborating closely with banks, especially when FADO iExport utilizes L/C as the payment method in international trade transactions

For example, if FADO iExport has a close relationship with banks, it can be easier for FADO iExport to obtain recommendations from them when signing sales contracts utilizing the L/C method In particular, banks will notify the company to request amendment of the L/C from the issuing bank, rectify documentation quickly, save more both time and cost if there are any errors in L/C or discrepancies in documentation Thanks to this close tie with banks , the firm should take full advantage of banks to limit risks that can arise in international payments such as credit risk, documentation risk or even foreign exchange risk and maximize profit

- To logistics providers: Similarly, FADO iExport can mitigate the risk of logistical delays or interruptions by working with reliable logistics providers to navigate complicated shipping routes, customs procedures, and regulatory requirements From this, FADO iExport can manage the shipping risk which can directly affect the process of international payments

- To Embassies and Trade Departments: Additionally, FADO iExport should build strong relations and regularly contact Embassies and Trade Departments in import and export markets to get and update authentic information about business partners By doing this, the exporting company can avoid collaborating with poor- reputable importers or scammers in trade transactions

Developing good ties with foreign partners, banks, logistics providers, Embassies and Trade Departments can assist FADO iEXport in preventing potential risks in international payments, expanding its market reach as well as growing its business internationally By leveraging the networks, FADO iExport can also have the chance to approach new and potential clients, penetrate new markets, as well as grasp growth opportunities d Buying and implementing credit insurance

Summary

After identifying and analyzing risks in international payments that FADO iExport encountered between 2021 and 2023, chapter 5 proceeds to propose solutions for FADO iExport as well as recommendations to banks and the Vietnamese government with the aim of with the aim of risk management in international payment for exporting enterprises in general and FADO iExport in particular

It is said that there is no such thing as risk-free business, particularly when working and collaborating with business customers and partners from a variety of countries all over the world In the context of international trade in general and international payments in particular, it is necessary to identify and understand risks which can impact the objectives of the business Eliminating risks is such a thing that is impossible Instead of finding ways to get rid of risks, exporters should focus on risk management It involves taking steps to guarantee that a business is aware of potential risks that it may confront, their extent, and the extent to which those risks may be mitigated

Risk identification in conjunction with the management of risks in international payments will allow exporting enterprises to have a deep understanding of the risks involved in international trade and provide exporters with timely risk control

By identifying and analyzing potential risks in international payment activities through the current situation of FADO iExport between 2021 and 2023, related causes of these risks are clarified, so recommendations are proposed to help prevent those risks In general, FADO iExport has been utilizing both secure and insecure payment methods in international trade transactions, that’s why risks are inevitable.FADO iExport applied three main payment methods in trade transactions with foreign partners, including Cash-in-Advance, L/C and Consignment methods However, it is highlighted that, from 2021-2023, the company tended to use appropriate payment methods that can ensure exporters security, convenience, cost-saving and quickness such as Cash-in-Advance (accounting for more than 60% of the total number of payment contracts) In terms of the Consignment method, which is considered riskiest for exporters, and L/C method which is the most safe for exporters but having expensive cost and complicated process, the trend of using these methods at FADO iExport is downward each year during the period of 2021-2023 FADO iExport only applies the payment method - Consignment - to close and strategic overseas customers after conducting thorough due diligence about their creditworthiness, reputation, reliability, assess their market knowledge and experience as well as verify

76 their permits, business licenses, and certifications to legally conduct business in their marketplaces

Generally, risks in international payments are considered inevitable for exporters in international trade As a result, FADO iExport should identify causes of risks clearly and then apply proposed practical solutions and recommendations in order to mitigate and limit such potential risks By doing this, FADO iExport can enhance the efficiency, security, and reliability of cross-border payment operation, thereby maximizing profitability for itself as well as facilitating global trade and economic growth in an increasingly interconnected world

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