LOGO
Chapter 5
INTERNATIONAL PAYMENT IN
FOREIGN TRADE
Objectives of Chapter 5
❖ Understanding international payment methods.
❖ Mastering international payment operations according to
transaction methods, proficient in transactions with
banks.
❖ Preventing and handling risks in international payment
methods in foreign trade.
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International Payment
Overview of International
Payment
Common methods of
International Payment
Special methods of International
Payment
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International Payment
International payment is the activity of
paying financial obligations to a foreign
partner.
International Payment
❖Characteristics:
• Currency is the local or foreign currency
for one or both parties;
• Governments control foreign exchange,
exchange rates and foreign trade under
restriction policies.
International Payment
Objective factors Subjective factors
• Foreign exchange • Commercial
policy and exchange practices of the
rate fluctuations parties
• Economic and • Regulations of the
political changes of State and
the parties participating banks
• The development of • Coordination of
the financial market relevant parties to
and international provide documents
payment network of • Experience of
the Bank International customs
• The development of clearance of import-
IT export enterprises
COMMON METHODS OF
INTERNATIONAL
PAYMENTS
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Common methods of international
payments
❖Currency used in payment can be foreign
currency to one or both parties.
❖Exchange rate
▪ Freely convertible/transferable/strong
currency
▪ Under the control and restriction policies of
the governments
Common methods of international
payments
❖(?) Can the payment currency be different
from the contract signing currency?
❖(?) Can the payment currency be different
from the calculation currency?
Common methods of international
payments
Cash
Telegraphic Transfer
Collection
Letter of Credit
Cash
(2)
Importer Exporter
(1)
(1) Payment
(2) Shipment
•Pros:
•Simple
•Cons:
•Risks on the time of payment and the time of delivery.
•Risk management and delivery of goods
•Checking money quality is difficult.
•Apply when: Direct cross-border trading
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Telegraphic Transfer
TT before shipment
(1) Sale contract
Importer Exporter
(5) Goods are shipped
(2)
Payment (4)
request Payment
is advised
Importer’s Bank Exporter’s Bank
(3) Bank
arrange
transfer
Telegraphic Transfer
TT after shipment
(1) Sale contract
Importer Exporter
(2) Goods are shipped
(3)
Payment (5)
Instructions Payment
is advised
Importer’s Bank Exporter’s Bank
(4) Bank
arrange
transfer
Telegraphic Transfer
❖ Advantages:
▪ Simple, convenient
▪ Guaranteed money quality and safety in delivery.
❖ Disadvantages:
▪ Risks on the time of payment and the time of delivery.
▪ Transfer money by mistake, excess or deficiency. Bank does not
accept any responsibility.
❖ Apply when: Buyer - seller have a regular, trusting or
dependent relationship.
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Collection
❖Payment is made when the seller has delivered
the goods.
❖The bank only acts as an intermediary to collect
money on behalf on the seller.
❖Use international payment method, Bill of
Exchange (B/E- Bill of Exchange) to make
payment.
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Clean Collection
Drawee Drawer
(Buyer/Importer) (Seller/Exporter)
(0) Contract
(1) Shipment +
invoice and
documents
(4) (2)
(5) Pay
informs Submit Draft (7)
the
the (Bill of Payme
Draft
importer exchange) nt
about And
the Draft collection
order
(3) Send Draft and collection
order
(6) Payment
Collecting Bk/ Remitting Bk
Presenting Bk (Seller’s Bank)
(Buyer’s Bank)
Clean Collection
❖Pros:
▪ Collect money through banks.
❖Cons:
▪ Seller delivered the goods but has not received the
money yet.
▪ Bank is only responsible for claiming money on your
behalf. Buyer has rights to refuse payment.
❖Applied when:
▪ A parent - subsidiary relationship.
▪ Payment for services without documents: freight,
insurance, compensation, etc.
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Collection based on Documents
Documents against Documents against
Payment (D/P) Acceptance (D/A)
❖ Apply for immediate ❖ Apply for late payment.
payment. Buyer must Buyer only signs to
immediately pay the bill of accept payment of the bill
exchange before the of exchange, then the
bank hands over the bank will hand over the
documents. documents.
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Documents against payment
Export
Import
(0) Sale Contract
(1) Shipment
of Goods
(4) (7)
(5) Credit
informs
Payment (2) paymen
the
and Submit Draft, t
importer
receive Documents and
about the
document collection order
arrival of
s
document
s
(3) Pass Draft, documents and
collection order
(6) Payment
Remitting Bank
Collecting Bank/
Presenting Bank
Documents against payment
❖Pros:
▪ The bank collects money and controls documents
❖Cons:
▪ Can not control the payment right of buyer.
▪ Loss of banking fees, shipping costs and business opportunities
for goods.
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Documents against payment
✓ Hoá đơn thương mại- Comercial Invoice
✓ Vận đơn đường biển – Bill of Lading
✓ Giấy chứng nhận Số lượng – Certificate of Quantity
✓ Giấy chứng nhận chất lượng – Certificate of Quality
✓ Phiếu đóng gói hàng hoá - Packing list
✓ Giấy chứng nhận xuất xứ hàng hoá Certificate of
Original
✓ Hối phiếu – Bill of Exchange
Bill of Exchange (Draft)
✓ Bill of exchange is a mandatory payment order drawn by
the seller demanding money from the buyer.
✓ Form of bill of exchange: Made in writing, the language
on the bill of exchange must be consistent, multiple bills
of exchange can be signed but must be numbered to
distinguish them.
✓ Content of bill of exchange: according to the Uniform
Law for Bill of Exchange 1930 (ULB 1930).
A sample of draft
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Letter of Credit
A letter of credit is an arrangement in which the bank opens the letter of
credit (the buyer's bank) at the request of the buyer, will pay a certain
amount of money to another person (the seller, the beneficiary). ) or
accept a bill of exchange drawn by the seller when the seller presents
to the bank a set of documents in accordance with the provisions of the
letter of credit.
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Issue a Letter of Credit
25
26
Letter of Credit
(6)
Exporter’s bank Importer’s bank
(Advising L/C bank) (Issuing bank)
(2)
(5) (3) (1) (7) (8)
Contract
Exporter Importer
(4)
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Letter of Credit
❖Pros:
▪ Ensure fair rights for buyers and sellers.
❖Cons:
▪ Risk occurs when either party has different
regulations from usual.
▪ There are many types of letters of credit: counterpart,
standby, confirmed, deferred L/C... Each type has
different risks for the buyer and seller.
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Letter of Credit
❖ UCP = The Uniform Customs and Practice for
Documentary Credit, the latest version is UCP 600 (6th
revision) issued by ICC on October 25, 2006, effective
on July 1, 2007.
❖ UCP 600 has 39 provisions, regulating all relationships
between parties participating in the L/C payment,
responsibilities and obligations of parties participating in
the L/C payment. Regulations on how to prepare and
check documents presented under L/C.
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Letter of Credit
❖ ISBP = International Standard Banking Practice for
Examination of Documents in Documentary Credits”, the
latest version is ISBP 745 (3rd revision) issued by the
ICC in 2013.
❖ ISBP 745 is understood to be integral to and inseparable
from UCP 600.
❖ The purpose of ISBP 745 is to interpret and guide the
application of the provisions of UCP600, within the terms
and conditions of the letter of credit or any amendments
to the letter of credit attached thereto.
❖ ISBP 745 does not amend or repeal the provisions of
UCP600
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Types of Letter of Credit
❖ Confirmed, Irrevocable L/C
▪ A letter of credit can’t be cancelled yet confirmed by another
bank to guarantee payment at the request of the issuing bank.
▪ Used when the buyer's bank and the seller's bank don’t have a
relationship or the seller's bank doesn’t trust the reputation of the
buyer's bank.
▪ This type of L/C is the most secure for the exporter. The cost of
opening L/C of the importer is higher.
▪ This method is usually applied to first-time direct sales.
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Types of Letter of Credit
Confirming bank (2)
(2)
(6) (6)
Exporter’s bank Importer’s bank
(Advising bank) (Issuing bank)
(5) (3) (1) (7) (8)
Contract
Exporter Importer
(4)
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Types of L/C
❖ Deferred L/C
❖ As an irrevocable L/C, the issuing bank commits to the exporter to
pay gradually for the full amount of the L/C within the time limit
specified in the L/C.
❖ A deferred letter of credit usually makes periodic payments (interest
payments) and payments in installments.
❖ The deferred payment letter of credit is suitable for purchase and
sale of goods on installments, purchase and sale of equipment in
installments and financing by the exporter.
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Types of L/C
❖ Irrevocable without resource L/C
▪ Once the exporter has been paid, the bank that opened the L/C
no longer has the right to claim the money back regardless of the
circumstances.
▪ To use this type of L/C, the exporter must write on the bill of
exchange "Without recourse to drawer". The L/C must also write
the same.
▪ This type of L/C is also commonly used in international
payments because it is safe for the seller.
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Types of L/C
❖ Transferable L/C
▪ L/C gives the first beneficiary the right to request the L/C opening
bank to transfer all or part of the L/C money to one or more other
people.
▪ The seller is a commercial intermediary, buying goods from
producer.
▪ Transferable L/C is a non-transferable L/C that can be cancelled.
▪ Transferable letters of credit can only be transferred once.
▪ Transfer costs are borne by the beneficiary.
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Types of L/C
❖ Revolving L/C
▪ Revolving L/C is irrevocable. After the validity period expires, the
L/C automatically has the same value until the total value of the
contract is fulfilled.
▪ Revolving letters of credit are often applied to agents.
▪ There are 3 types of circulation:
• Automatic circulation: Automatically has the same value, bank. Opening a
L/C does not require notification to the exporter.
• Limited circulation: Only when the bank opening the L/C notifies the exporter
will the next L/C take effect.
• Semi-automatic recirculation: When the previous recirculation is used, if after
a few days the bank opening the L/C has no opinion on the exporter, the L/C
will automatically have the same value as before. 36
Types of L/C
❖ Stand-by L/C
▪ Exporter's bank will commit to refunding all money and fees if
exporter cannot perform its duty (4) - delivery.
▪ Transaction (1) (2) (3) is performed like a common L/C
▪ (4) Before delivering the goods, the exporter issues a backup
L/C commitment to reimburse the importer if the contract is not
fulfilled.
▪ (5) (6) (7) similar to regular L/C. Unless the exporter fails to
deliver the goods, the exporter must refund all money according
to the standby L/C.
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Types of L/C
❖ Back to back L/C
▪ Back-to-back L/C is a type of L/C based on a L/C with a larger
value and time allowed to take effect.
▪ Back-to-back L/C is often used for re-export sales to reduce
costs and mobilized capital of traders.
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Back-to-back L/C
Issuing (2) Bank of (5)
Advising
Bank re- bank
exporter
(3) (4) (6)
(1)
(8)
(9)
Importer Re- Exporter
exporter
(7)
Master – baby L/C
❖ Master – baby L/C
▪ Party A has delivered the goods and performed the task (4) but
party B for some reason does not deliver the finished product,
L/C baby has the right to collect money for previously delivered
materials.
▪ This L/C is suitable for international processing, in the form of
purchasing raw materials – selling finished products.
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Master-Baby L/C
Purchase raw materials - Sell finished products
6
Master L/C at sight
Outsourcee’ Bank Outsourcer’
2
Bank
Baby L/C at sight
3 5
7 1
(4)
Outsourcer
Outsourcee
8
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Types of L/C
❖ Reciprocal L/C
▪ Both parties commit to the obligation to repay each other when
unforeseen events occur.
▪ In fact, this method does not use money for payment but only
uses documents for control.
▪ This L/C is only valid when there is another L/C issued.
▪ This method is suitable for barter.
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Types of L/C
❖ Reciprocal L/C
▪ Note:
▪ The time to execute both the original L/C and the reciprocal L/C
must be consistent with each other.
▪ The reciprocal L/C is only valid if and only when the original L/C
takes effect.
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Reciprocal L/C
2’
A’s Bank B’s Bank
2
1’
3’ 1
3
4’-y
A B
4 -x
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LOGO
END OF CHAPTER 5
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