Methods in International Payments: Bank Transfer Bank Remittance

CONTENTS
Nguyen Thi Dieu Chi. PhD – Course of International Payments
Bank transfer
(Remittance)
Chapter 7
Open account Methods in
METHODS IN international
INTERNATIONAL PAYMENTS Collection of payment payments
Documentary credit
School of Banking and Finance – International Finance Department

Nguyen Thi Dieu Chi (PhD)
2
Contents
Nguyen Thi Dieu Chi. PhD – Course of International Payments Nguyen Thi Dieu Chi. PhD – Course of International Payments
Definition
Parities in bank transfer

BANK TRANSFER
Bank
BANK REMITTANCE Remittance Transfer forms
Requirements of Bank Transfer
Procedure of Bank Remittance
Definition Parities in bank transfer

Bank transfer is a method of transferring money by

1 2 3 4
instructing a bank to directly transfer funds from one bank
Remitter Remitting Paying bank Beneficiary
account another without the use of checks bank
1
Types of Bank transfer Elements of TTR payment order
Telegraphic Value date/ transferring date

Mail transfer
Transfer Currency value
Mail Transfer (MTR - M/T) Telegraphic Transfer Name and address of import bank, order person and
Requirements of payment is (T/T - TTR)
Intermediary bank (export bank/beneficiary bank) and Account
implemented through a Requirements of payment is
letter Number of them.
implemented through Fax, Telex
Low expense and using SWIFT system. Expense for transferring
Slow time High expense Obligations of charge
Fast time
Procedure of Bank Remittance Advantages & Disadvantages of TTR/TT

Remitting 4 Paying
Fast transaction, few documents
Advangeges
bank bank
Have enough foreign currency to pay
4
Pay at any branch of the bank
3 5 5
3
Disadvantages
Exporter and Importer trust each other

1
Remitter Beneficiary Exporter and Importer are trust partner
2
2
Applying cases
* In commercial activities
Importer pay for the transaction when goods were loaded on board;
board;
Exporter finish to deliver the goods;
goods;
Importer receive the goods;
goods; OPEN ACCOUNT
Importer pay partially of the international sale contract
* In other activities
Bank transfer is implemented in advance of supplying contract
2
Contents Definition
Defintion
Procedure of open account payment Open Account method means that the seller delivers goods or
Open account Advantages and risks of open account
services to the buyer without receiving cash, a bill of exchange or
payment any other legally binding and enforceable undertaking at the time of
delivery, and the buyer is expected to pay according to the terms of
Applying cases
the sales contract and the seller’s latter invoice
Notes
Features of open account method Procedure of open account payment

This method is the most advanteageous option to the importer in

Importing bank 4 Exporting bank
cash flow and cost terms
Open account method is the highest risk option for an exporter
4
because his goods, along with all the necessary documents are
shipped directly to the importer who agrees to pay the exporter‘s 4 4
4 4
invoice at a future date, usually in 30 to 90 days.
Exporter should be absolutely confident that the importer will
accept shipment and payat agreed time and that the importing 3
Importer Exporter
1
country is commercially and polically secure.
The exporter and importer trust one another implicitly,and they 2
have traded together for a number of years. 2
Advantages of method Risks in method of open account payment

of open account payment
* Exporter
Easiest payment method, low expense, friendly payment method; * Exporter
Reduce document expenses The exporter has no control over the goods
Reduce goods prices
The exporter cannot be guaranteed payment
Increase exporter’s completion in international market
* Importer The open account is perhaps the riskiest method of trade available
Pay the goods after receiving all of the cargo * Importer
To be credited by the exporter in specific duration time
* Both parities The seller cannot deliver goods on category, time, quantity and
Reduce bank expense. Bank does not participate in open account quality;
method.
There are only two parties to be exporter and importer
3
Applying cases
* Applying cases
Exporter and Importer trust each other
Use in regular transactions, for example for 6 months to 1 year.
Use in pay transport expenses, commission expenses, guarantee
expenses, interest rate expenses… COLLECTION OF PAYMENT
* Notes
Must regular specific kinds of currency
Define specific currency value to be paid in shipping date
Which kinds of currency transfer will be used in payment date –
Mail transfer or TTR transfer
20
Definition Features of collection payment

Collection of Payment is process, in which after deliver the goods, Collection order between exporter and exporting bank is not a
the seller instructs his bank to forward documents related to the contract;
export of goods to the buyer’s bank with a request to present these In collection of payment, banks are only intermediary in payment
documents to the buyer for payment, indicating when and on what method;
conditions these documents can be released to the buyer. Collection of payment is only implemented after the seller
delivers goods basing on issuing documents;
Documents in collection of payment Parities in collection of payment

* Financial documents Principal

Drawee
Seller, Exporter, Drawer
- Banker’s Bill of Exchange, Draft 1 4 Buyer, Importer
- Commercial Promissory Note
- Check
Parities
* Commercial documents
- Transport documents): Seaway bill, air waybill, post receipt
Remitting Bank Collecting Bank
- Owning documents: Trust document, packing list, commercial invoice, C/O… 3 and/or Presenting
- Other cargo documents
Principal’s Bank, Seller’s 2 Bank
bank, exporter’s bank
Buyer’s bank, importer’s
bank
4
Legal documents Uniform Rule for Collection 522
The ICC Uniform Rules for

Collections are a practical set of Rules to aid
bankers, buyers and sellers in the collections
International Law process.
The Rules have been prepared to
resolve problems that practitioners have
National Law experienced in their everyday operations
since 1979.
Rules of collection URC 522 underlines the need for
the principal and/ỏ the remitting bank to
attach a separate document, the collection
Uniform rule for collection URC 522 instruction, to every collection subject to the
rules – makes it very clear that banks will
not exams documents.
The collection order The collection order

* Key provisions of the collection order as follows:

The collection order is the key document prepared by the seller
The payment period as agreed with the buyer
specifying the terms and conditions of the documentary collection. The name and address of the buyer
The collection order must be prepared with great care and The buyer’s bank
Instructions, if any, about what to do with the accepted bill of
precision as the banks are only permitted to act upon the
exchange
instructions given in the order and not on instructions from past Notation concerning payment of charges for the documentary
transactions or verbal understandings. collection
Notation/instructions for the lodging of a protest in the event of
no acceptance or nonpayment
Instructions for notification of agent or representative in the
buyer’s conntry
Types of collection of payment Clean collection

Collection of payment
Clean collection Documentary collection

Clean collection are collections of financial documents
D/OT hay D/TC
D/P (Delivery documents D/A (Delivery documents
(Delivery documents against
(promissory notes, Checks, payment slips, ect…)without attacted
against payment) against acceptance)
other terms and conditions) commercial documents (invoices, shipping documents, and
insurance documents)
D/OT hay D/TC
D/P (Delivery documents D/A (Delivery documents
(Delivery document against
Against payments) Against acceptance)
Other terms and conditions)
5
Clean collection Clean Collection
* Advantages
Procedure
7 7 Simple
Remitting Collecting Beneficial to the importer
Bank Bank
Receiving cargo and paying the cargo are separate
4
* Disadvantages
8
3 Export may not be paid for shipping the cargo
6
8 5 Payment time is slow because of two reasons as follows:
6 + Up to goodwill of the importers/buyers
1
+ Up to transferring document process
Exporter Importer
2 + Do not take all advantages of bank
2
Clean Collection Documentary Collection

Applying cases
1 Paying service expenses of importing and exporting activities
Documentary collections are collections of financial documents,

2 Importer and exporter trust each other/one another
which may have attached commercial documents, or collections of
commercial documents without financial documents.
3 Parent company and branches (MNCs, MNEs)
Documentary Collection Types of Documentary Collection

Procedure Three types of collections

Remitting 8 8 Collecting 1. Documents against payment (D/P): In D/P terms, the collecting
Bank Bank bank releases the documents to the buyer only upon full and
4
4 immediate cash payment. D/P terms most closely resemble a
9 3 6 7 traditional cash on delivery transaction.
3 6
7 2. Documents against Acceptance (D/A): In D/A terms the
9 5
collecting bank is permitted to release the documents to the
1
buyer against acceptance (signing) of a bill of exchange or
Exporter Importer
signing of a time draft at the bank promising to pay at a later date
2 (usually 30, 60, or 90 days)
6
Types of Documentary Collection Role of bank in documentary collection
3. Acceptance Documents against Payment: Banks act upon specific instructions givens by the principal (seller) in the
An acceptance documents against payment has features from collection order.
Banks are required to act in good faith and exercise reasonable care to verify
both D/P and D/A types; that the documents submitted APPEAR to be as listed in the collection order.
(a) The collecting bank presents a bill of exchange to the buyer for Banks are not liable nor can they be held accountable for the acts of third
acceptance parties.
(b) The accepted bill of exchange remains at the collecting bank Banks also assume no liability or responsibility for loss arsing out of delays or
together with the documents up to maturity loss transit of messages, letters, documents, ect…
Banks assume no responsibility regarding the quantity or quality of goods
(c) The buyer pays the bill of exchange at maturity shipped
(d) The collecting bank releases the documents to the buyer who Without explicit instructions, the collecting bank takes no steps to store or
takes possession of the shipment insure the goods.
(e) The collecting bank sends the funds to the remitting bank, which If a collection remain unpaid or a bill of exchange is not accepted and the
then in turn sends them to the seller. collecting bank received no new instructions within 90 days, it may return the
documents to the bank from which it received the collection order.
Documentary Collection
* Advantages
Overcome disadvantages of clean collection. Payment and
Shipment is connected together
Collecting bank will control commercial documents instead of DOCUMENTARY CREDIT
sending directly to importer when deliver the cargo
* Disadvantages
The importer can refuse to receive the cargo
Payment time is slow
40
Contents Definition
Definition and Features Documentary credit is the written promise of a bank undertake
Legal documents on behalf of a buyer, to pay a seller the amount specified in the credit
Documentary Parities in documentary credit method provided the seller complies with the terms and conditions set forth in
credit method Functions of documentary credit method the credit. The terms and conditions of a documentary credit revolve
Main elements around two issues: (1) the presentation of documents that evidence
title to goods shipped by the seller, (2) payment.
Types of L/C
Procedure of L/C payment
Samples of L/C
7
Features of Letter of credit – L/C Legal documents
L/C is different from international sales of contract and it separates

UCP: Uniform Customs and Practice for
with sale contract.
Documentary Credits
L/C is considered to be an economic contract between importing
UCP 600 are the latest version of the
bank and importer or between remitting bank and the buyer.
Uniform Customs and Practice that
In documentary credit method, documents plays very important role
govern the operation of letters of credit.
in payment activity
UCP is issued by ICC
The documentary credit method is the safest payment methods among
UCP 600comes into effect on 01 July
parities in international payment
2007
44
UCP 600 Parties

* Defintion
Uniform Customs and Practice for Documentary Credits (UCP) 1 Applicant 6 Confirming Bank
are the most successful private rules for trade ever developed.
2 Issuing Bank, Opening Bank 7 Nominated Bank
Bankers, traders, lawyer, transporters, academics and all who
deal with letter of credit transactions worldwide will refer to
UCP 600 on a daily basis 3 Beneficiary 8 Paying Bank
* Legal features of UCP
UCP is not a compulsory legal documents 4 Advising Bank 9
Accepting Bank
All versions of UCP are implemented when used
In cases, commercial documents apply UCP, it become a 5 Negotiable Bank 10 Bank by deferred Payment
compulsory legal documents
Functions of L/C Terms of a L/C

(1) Swift output of Sender : Code of issuing bank

1 (2) Swift input of Receiver: Code of Exporting bank
Payment Ex: Swift Code of BIDV: BIDVVNVXAXXX
(2) Sequence of total: The number of original L/C is issued to be one
paper
(3) Form of documentary credit
2 Credit
Ex: Revocable, Irrevocable
(4) Date of issue
- The date being duration period of LC
3 Assurance of payment - The date from which the issuing bank commits to pay commercial
transaction if the beneficiary presents suitable documents.
- It is the basis for exporter checking importer’s contract implement.
8
Terms of a L/C Terms of a L/C
(5) Documentary credit number

Each L/C has a separated number. This number is up to the issuing bank’s regulations. 6) Date and place of expiry
However, it has some main elements as follows: Time and date in which the issuing bank will finish its payment
- Market code
- Code of issuing bank obligation to the beneficiary.
- Code of issuing year Date of expiry is latter than shipping date
- Code and number of issued L/C
Ex: 010ILC06KR000422, in which Duration period of L/C is a time duration in which the issuing
010: Code of issuing bank bank commits to pay to beneficiary if he presents suitable
LC: Letter of Credit
06: L/C is issued in 2006 documents
KR: Beneficiary is Korean Duration period of payment: L/C can be paid at sight or after
422: Number of L/C is issued of the issuing bank in that year
sight it is up to Bill of exchange’s regulations.
Terms of a L/C Terms of a L/C

(7) Name and address of parities in L/C: Importer, Exporter, Issuing Bank, (12)Description of goods and/or services
Exporting bank Write the same of goods terms in the sale contract
(8) Currency code and amount
(13)Documents Required
L/C currency amount has been written by figure and word
Ex: “For a sum or sums not exceeding a total of ……” or using tolerance “for Documents which the beneficiary has to present at the bank to require
an amount of……more and less x%”. payment
UCP 600: “about” means tolerance 10% (14)Additional Conditions
(9) Date of shipment
Credit subject to the UCP (2007 Revision) ICC No.600, the number and the
Date of shipment in L/C duration period
(10)Issues of shipment
date of the credit must be quoted on all documents required. Each
Incoterms, Delivery, Transshipment presentation must be noted on the reverse of the original credit by the
(11)Date of payment negotiating bank
Up to terms of international sale contract All required docs must be out in English
Terms of a L/C Types of L/C

(15) Regulations of charges

Ex: All banking charges and commissions outside Vietnam including Revocable L/C
advising, negotiating, reimbursement and amendment charges for

account of beneficiary Irrevocable L/C
Standard
(16) Confirmation Instruction
types
If L/C needs to be confirmed by another bank, the issuing bank must
of L/C Confirmed Irrevocable L/C
write the name, address and code of that international bank in the L/C
(17) Instructions to Paying/Accepting/ Negotiating Bank
(18) Signature, stamp of the issuing bank Irrevocable without Recourse L/C
9
Special types of L/C Types of L/C
(1) Revocable L/C

Transferable L/C
L/C that may be amended or canceled any time by the buyer (the account
Back to back L/C party) without the approval of the seller (the beneficiary).
(2) Irrevocable L/C
This L/C cannot be canceled (or its terms amended) without
Revolving L/C
the seller's (beneficiary's) prior written approval, and comes usually as
Special a confirmed irrevocable letter of credit. Also called irrevocable credit.
Standby L/C (3) Confirmed Irrevocable L/C
types
of L/C L/C that adds the endorsement of a seller's bank (the accepting-bank) to that
Reciprocal L/C of the buyer's bank (the issuing bank). It provides the highest level
of protection to the seller because not only the L/C cannot be canceled (or
(Red Clause L/C its terms changed) unilaterally by the buyer (the account party), but also
both banks involved in the transaction guaranty its payment on
Deferred payment L/C
its due (maturity) date.
Some special types of L/C Some special types of L/C

(1) Transferable L/C (3) Revolving L/C

A transferable letter of credit is a letter of credit that permits A letter of credit established one time that enables
the beneficiary of the letter to make some or all of the credit available to
the receiver to access specific amounts of credit for scheduled shipments
another party, thereby creating a secondary beneficiary.
over a specified period of time. Issued as a cumulative or non-cumulative
(2) Back to back L/C
L/C, the former allows for unused credit amounts to rollover into
Back-to-back letters of credit consist of two letters of credit
(LCs) used together to finance a transaction. A back-to-back LC is usually subsequent periods while the latter maintains affixed amount of
used in a transaction involving an intermediary between the buyer and seller, credit available each period.
such as a broker, or when a seller must purchase the goods it will sell from a
supplier as part of the sale to his buyer.
Some special types of L/C Some special types of L/C

(4) Standby L/C (6) Red clause letter of credit

A standby letter of credit (SLOC) is a guarantee of payment issued
by a bank on behalf of a client that is used as "payment of last resort" The red clause letter of credit is a specific type of letter of
should the client fail to fulfill a contractual commitment with a third party. credit in which a buyer extends an unsecured loan to a seller. Red Clause
Standby letters of credit are created as a sign of good faith in Letters of Credit permit documentary credit beneficiaries to receive funds
business transactions and are proof of a buyer's credit quality and for any merchandise outlined in the letter of credit. These letters are
repayment abilities. The bank issuing the SLOC performs brief commonly used by beneficiaries who act as purchasing agents for buyers
underwriting duties to ensure the credit quality of the party seeking the in another country.
letter of credit, then sends notification to the bank of the party requesting (7) Green clause letter of credit
the letter of credit (typically a seller or creditor). A condition in a guarantee document that allows a purchaser to
(5) Deferred payment L/C
receive advances ahead of shipment against collateral property represented
A type of letter of credit that enables the buyer in a transaction to
pay the seller and receive the goods immediately, and to pay by warehouse receipts. Use of a green clause letter of credit is often used
the bank back for the sale amount at a later date. Also called a usance in the agricultural business where a company can fund the harvest of a new
letter of credit. crop by pledging available stock as collateral.
10
Procedure of L/C payment Samples in L/C payment
Settle by payment 1. Sign the sale contract

2. Fill in L/C application
4 3. Issuing bank analyses (1) DOCUMENTARY CREDIT APPLICATION
Issuing Bank Advising Bank credit risks
12 4. Open draft of L/C
5. Advising bank analyses (2) DOCUMENTARY CREDIT
risks
13 10 5 6. Advising bank informs to
3
the exporter about L/C (3) ADVICE/AMENDMENT OF DOCUMENTARY CREDIT
14 7. Open original L/C
16 9 8. Ship the cargo
2 +
6 9. Present documents
15 11 10. Issuing bank checks the (4) PRE-ADVICE OF DOCUMENTARY CREDIT
presented documents
11. L/C payment
Importer Exporter 12. Return documents
13. Check documents
14. Return documents to the
1 bank
7 15. Debit to the importer
16. Return documents to the
8 importer
Methods in international payments

Methods in international payments
METHODS IN Remittance Open Account Collection Documentary credit
INTERNATIONAL PAYMENTS
Documentary
Clean Collection Collection
Delivery Documents
Delivery Document Delivery Document
Against other
Against Payment Against Acceptance Terms and Conditions
63
Role of commercial bank

in international payments Review
1 Remittance & Open account Compare methods in international payments ?

2 Indicate lessons from applying methods in international
Clean collection
payments ?
Documentary collection
Find and correct mistakes in a L/C ?
Documentary credit
3 Compare UCP 500 and UCP 600 ?
4
11
Nguyen Thi Dieu Chi. PhD – Course of International Payments
CHAPTER 7
Q&A
67
12

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CONTENTS

Nguyen Thi Dieu Chi. PhD – Course of International Payments

School of Banking and Finance – International Finance Department

Parities in bank transfer

Requirements of Bank Transfer

Procedure of Bank Remittance

Definition Parities in bank transfer

Bank transfer is a method of transferring money by

Telegraphic Value date/ transferring date

Procedure of Bank Remittance Advantages & Disadvantages of TTR/TT

Exporter and Importer trust each other

Features of open account method Procedure of open account payment

This method is the most advanteageous option to the importer in

Advantages of method Risks in method of open account payment

Definition Features of collection payment

Documents in collection of payment Parities in collection of payment

* Financial documents Principal

The ICC Uniform Rules for

The collection order The collection order

* Key provisions of the collection order as follows:

Types of collection of payment Clean collection

Clean collection Documentary collection

Clean Collection Documentary Collection

1 Paying service expenses of importing and exporting activities

Documentary collections are collections of financial documents,

3 Parent company and branches (MNCs, MNEs)

Documentary Collection Types of Documentary Collection

Procedure Three types of collections

L/C is different from international sales of contract and it separates

UCP 600 Parties

Functions of L/C Terms of a L/C

(1) Swift output of Sender : Code of issuing bank

(5) Documentary credit number

Terms of a L/C Terms of a L/C

Terms of a L/C Types of L/C

(15) Regulations of charges

advising, negotiating, reimbursement and amendment charges for

(1) Revocable L/C

Some special types of L/C Some special types of L/C

(1) Transferable L/C (3) Revolving L/C

Some special types of L/C Some special types of L/C

(4) Standby L/C (6) Red clause letter of credit

Settle by payment 1. Sign the sale contract

Methods in international payments

Methods in international payments

METHODS IN Remittance Open Account Collection Documentary credit

Role of commercial bank

1 Remittance & Open account Compare methods in international payments ?

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