Find out about International Payment Methods

• Contents

One of the biggest insecurities of companies thinking about entering the international market, sometimes even those that are already part of it, is the means of payment. Among the existing models, there is no right or wrong, the important thing is to consider which is the best for your reality and your company. For this reason, today we will discuss different types of international payments, their functioning, advantages, and disadvantages.

Types of International Payments

Note

Foreign banknotes are hardly used to make payments and international business transactions, due to their disadvantages: risks of theft, loss, forgery, exchange, insurance, and handling. They are rarely compensatory. In addition, depending on the country, certain exchange control regulations may become obstacles to this payment model.

Personal Check

Who participates in personal check operations:

• Drawer: the person who issues the check;

• Drawee: the one (or those) who are the depositary of the drawer's funds, is usually a financial institution;

• Payee: who collects the check.

How the personal check works:

1. The exporter sends the goods and all commercial documents to the importer;

2. The importer forwards to the exporter, after an agreed period of time, a check in the foreign currency;

3. When the exporter receives the check, he deposits it in his bank for the latter to manage the collection;

4. The exporter's bank generates the charge through the paying bank;

5. In turn, the paying bank debits the importer's account and credits the exporter's bank for him to credit the amount to the exporter's account.

Personal checks are issued by the current account holder against funds already deposited there. These checks are used when there is a high degree of trust between the importer and the exporter. In this model, the exporter is not guaranteed to be paid for the sale of his merchandise, even if he receives the check since the payment is subject to the existence of a balance in the account and the validity of the drawer's signature.

In addition, not all countries authorize this form of payment for international commercial transactions, as it depends directly on the importer's domestic legislation. Losing control of the merchandise is also another risk that exists, as all commercial documents are sent directly to the buyer.

Bank Check

Who participates in bank check operations:

• Drawer: bank responsible for issuing the check on top of its own funds;

• Drawee: correspondent bank of the issuing bank (not always involved);

• Importer: who issues the bank check;

• Payee: who collects the check.

How bank check works:

1. The exporter sends the goods and commercial documents to the importer;

2. The importer requests a bank check from his bank;

3. In turn, the issuing bank debits the importer's account and sends him the check;

4. The importer forwards the check to the exporter;

5. The exporter gives the check to his bank (paying bank) for processing and he credits the check to the exporter's account;

6. At the same time, the paying bank debits the transaction amount from the issuing bank's account.

The bank check is issued, at the request of the importer, by a bank in its country and is drawn in another country, by the same bank or another financial institution, in favor of the exporter. Thus, like the previous model, it is advisable to use bank checks only when the relationship of trust between the parties is very strong, when the issuing bank is of a prestigious reputation and when the countries do not have obstacles to this form of payment.

A major difference between a personal check and a bank check is that the former is issued by a person on his or her own checking account, while the latter is by the issuing bank on a checking account at the drawee's bank. In addition, bank discounts occur faster and more fluidly on bank checks than on personal checks.

Finally, the bank check does not have legal blocks and the payment commitment is assumed by the drawing/issuing bank, which gives greater security to the exporter.

Remittances

Who participates in remittance operations:

• Principal: exporter that initiates the operation and provides its bank with documents (financial or not) for it to manage;

• Sending bank: exporter's bank;

• Collecting bank: the one that receives documents from the sending bank and presents them to the importer (presenting bank). It must be different from the sending bank;

• Drawee: importer.

How remittances work:

1. The exporter sends the goods to the customs authorities of the country of destination and forwards the financial and commercial documents to his bank (sender);

2. The sending bank sends the documents to the collecting bank;

3. The collecting bank contacts the importer;

4. In turn, the importer pays or accepts a bill in exchange for the documents;

5. The collecting bank refunds the amount to the sending bank and it credits the exporter's account.

In this type of payment, the exporter entrusts his bank with managing the collection of certain commercial and financial documents, in return for payment or acceptance of a letter from the importer. The legal framework for remittances is agreed upon by the International Chamber of Commerce.

There are two types of remittances:

• Simple: The exporter sends the goods and commercial documents directly to the importer while sending the financial documents separately through a financial institution. In this case, the exporter assumes practically all the risks, as he may lose control of the goods by sending them directly to the importer and the importer may refuse payment or accept it.

• Documentary: the exporter forwards the commercial documents to his bank, including or not the financial instruments, with instructions for them to deliver them to the importer against payment or acceptance of the financial instrument. The risks for the seller, in this case, are that the buyer will refuse the goods, face storage charges and transport costs, fines for late shipment.

Payment Orders

Who participates in operations with payment orders:

• Principal: who requests the issuing bank to issue the payment order;

• Issuing bank: the bank issuing the payment order;

• Paying bank: the bank that makes the payment;

• Recipient.

How money orders work:

1. The exporter sends the goods to the importer with documents proving their ownership;

2. The importer instructs his bank to proceed with the transfer;

3. The issuing bank debits the amount from the exporter's account and sends transfer instructions to the paying bank;

4. The paying bank pays the amount to the exporter.

By means of the payment order, the buyer requests his bank to credit the value of the negotiation to the seller's account, through a second bank (correspondent bank), and this transfer must indicate the reason for the payment.

The payment order must also be used when the exporter and importer have a relationship of trust, as the former sends the goods and documents before receiving the money, believing that the latter will honor their international commitments. A positive point of this model is that it is easier to avoid fraud, forgery, and misplacement.

Letter of Credit or Documentary Credit

Who participates in the letter of credit operations:

• Principal: importer;

• Issuing bank: the one that issues the letter of credit;

• Notifying bank (may be the same institution as the issuing bank);

• Beneficiary: exporter.

How the letter of credit works:

1. The importer asks the issuing bank, by means of a document, to open the letter of credit;

2. The issuing bank assesses the risk and issues the letter of credit to the exporter;

3. The exporter sends the goods to the country of destination and delivers the documentation to the notifying bank;

4. In turn, the notifying bank sends the documents to the issuing bank;

5. The issuing bank pays the notifying bank;

6. The notifying bank makes the transfer to the exporter's account;

7. The issuing bank debits the importer's account and delivers the documentation;

8. The importer presents this documentation at customs and collects his newly purchased products.

Documentary credit is a form of payment in which the issuing bank, acting at the request and in accordance with the instructions of the importer, assumes the obligation to pay the exporter or to accept and pay bills of exchange drawn by him. It also authorizes another bank to make the payment and/or negotiate, against delivery of the stipulated documentation, provided that the terms and conditions of the credit are fulfilled.

Thus, among the models already presented, the letter of credit is the most widespread in the international market and a good option for negotiation between a seller and a buyer who do not have a strong relationship of trust, as it is the means of payment that has the most guarantees and security. The letter of credit guarantees that the exporter will receive the money if it respects the agreed conditions, and that the importer will pay only if the documentation is in order.

In this sense, it is essential to analyze the letter of credit to confirm that all points are in agreement and that the parties are really capable of complying with them. The issuing bank analyzes the document itself but is not responsible for inspecting the stored goods (for this, it is recommended to hire an origin inspection company). However, it is extremely important to check the banks participating in this operation to avoid major problems such as fraud and delays. Make sure they are trusted and prestigious financial institutions.

According to UCP 600, documentary credits are always irrevocable; that is, they cannot be cancelled or modified under any circumstances, unless agreed by all the participants in this transaction (buyer, seller and banks). In addition, these credits need to be confirmed by the banks to certify the existence of the funds.

There are a number of types of credit such as transferable, non-transferable, renewable (revolving), subsidiary (back-to-back), with red clause, green clause and “stand by”.

There are also some factors that impact the letter of credit:

PAYMENT PLACE

• Issuing bank tellers: more time-consuming collection, as it must be presented to that bank before proceeding with the payment;

• Intermediary bank tellers: immediate collection upon presentation of the documentation in order;

• Confirming bank tellers (third party): this situation occurs when the credit is in a currency different from the currency of the exporter and the issuer and/or there is a mutual distrust towards the issuing bank.

FORM OF PAYMENT

• At sight: Payment is immediate and made after the presentation of the necessary documentation in order.

• Terms: The exporter receives as a credit (bill of exchange/LC). Payment is made after a certain agreed period of time.

Summary

Finally, in summary, it is important to remember that before deciding on the payment model(s), some points should be taken into account:

1. Security: this factor can be very relevant for some while others are not very concerned. The fact is it can save you some stress. However, it has cost implications, as the trend is that the safer the payment method is.

2. Characteristics of the buyer and country: depending on the location and type of buyer you are doing business with you need to be more cautious or change your way of relating. So always research this information!

3. Negotiations, risks, and business relevance: it is very common for companies, within the international market, to have to accept unwanted risks in order to continue the negotiation. Therefore, assess whether the agreement is worth following through, with despite the risks. Find out what is the importance and impact of this business on your company.

4. Possibility of financing: international purchase and sale operations are often only possible thanks to financing. So, consider what are the conditions that each form of payment has for financing and which types actually offer it, as not all of them facilitate this process.

5. Exchange variation: the exchange rate risk of currency fluctuation can generate apprehensions. Thus, it would be interesting to look for financial instruments that bring more peace of mind in this regard, such as an FEC (Forward Exchange Contract) modality or Hedge, an insurance instrument to protect against large exchange rate fluctuations.

In fact, it is not so simple to decide which means of international payment to use, since there are several types, and it is necessary to take into account several interconnected factors to make this decision. However, remember that the best payment method is the one that is best for your company, given its nature and reality.

Questions and uncertainties on this topic are common mainly for small and medium-sized companies, but we at B2Brazil are here to simplify the process and facilitate the way for your company to advance in international negotiations.

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