Forms of international payments

Forms of payment are historically established in international practice methods of registration, transfer, processing of payment and title documents and making payments. The choice of a specific form in which settlements under a foreign trade contract will be carried out is determined by agreement of the parties and is fixed in the “Terms of payment” section of the foreign trade contract.

Consider the main forms of international payments.

Payments in the form of an advance. Advance payment means receiving full or partial payment before the goods are shipped by the exporter. This form of payment is the most beneficial for the exporter and the worst for the importer. The consent of the importer to these terms of payment is associated with his extreme interest in the supply of goods, or with the pressure of the exporter, who is interested in guarantees of payment. Payments in the form of an advance amount to 10-33% of the contract amount. On behalf of the exporter for the amount of the advance payment, the exporter’s bank usually issues a guarantee to the importer’s bank for the return of the advance received in case of non-fulfillment of the terms of the contract and non-delivery of the goods. The advance form of payment is used in the trade in weapons, nuclear fuel, precious metals, expensive equipment and some other specific goods.

Open account payments. With this form of payment, the exporter regularly delivers the goods to the importer, and the latter, in turn, also makes payments with a certain frequency. At the same time, the supply of goods is ahead of payments, so the exporter actually provides a commodity credit to the importer. Typically, such calculations are used between enterprises of the same financial and industrial group or when partners have been cooperating and trusting each other for a long time. The repayment of debt on an open account is determined by an agreement between counterparties and is made through banks, usually using a bank transfer.

Bank transfer. It is an order from one bank to another to pay a certain amount to the transferee. In the form of a bank transfer, advance payments by the importer or payment for goods or services after they are received (settlements in the form of an open account) are made, which delays the collection of foreign exchange earnings by the exporter. In addition, recalculations and other operations are carried out through the transfer. Typically, bank transfers are combined with other forms of international payments.

The participants of the settlements are:

– the transferor (debtor);

– the transferor’s bank that accepted the order;

– the bank that credits the transfer amount to the transfer recipient;

– recipient.

The bank makes client transfers at the expense of the transferor to a foreign recipient (beneficiary) with an indication of the method of reimbursement to the paying bank of the amount paid by him. The beneficiary’s bank is guided by the specific instructions contained in the payment order. Payment orders are transferred between banks by means of telecommunication means of transferring bank information (SWIFT, telex message). The workflow scheme for a bank transfer is shown in fig. 4.1.

1. – A contract is concluded between the exporter and the importer;

2. – Delivery of goods and provision of documents of title from the exporter to the importer;

3. – The importer (translator) draws up an application for transfer (in three copies);

4. – The importer’s bank sends a payment order (transfers funds) to the exporter’s bank;

5. – The exporter’s bank credits funds to the exporter’s account.

In case of full or partial advance payment, points 2 and 4 are reversed

Rice. 4.1. Payment scheme for bank transfers

The payment order may contain an indication of the payment to the beneficiary of the appropriate amounts against the presentation by them of commercial or financial documents (documentary or conditional transfer). In the section “Terms of payment” of the foreign trade contract, it is indicated that payments for the delivered goods will be made in the form of a bank transfer, as well as the bank details of the transfer recipient and the terms of payment. In case of import operations, the following data shall be indicated in the application for transfer:

– number and date of the application for transfer;

– the amount of the foreign currency transfer (in numbers and words) and the payment currency;

– method of transmission of the message (post, telegraph, electronic means of communication);

– full name of the transfer recipient, his details;

– bank details of the transfer recipient (only the name and BIC of the foreign bank may be indicated);

– purpose of payment (link to the number and date of the contract);

– urgency of payment (depending on what the bank charges a commission for the transfer).

When making a bank transfer, the commission is usually charged by the importer’s bank. It is withheld from the transferor when the latter submits an application for transfer to the bank. After accepting it from the importing client, the bank on its own behalf sends the payment order to the exporting bank. The latter credits funds to the exporter’s account.

The positive aspects of settlements by bank transfers include the speed, simplicity and cheapness of transactions. However, the risk of one of the parties (the exporter with a regular bank transfer, the importer with an advance) is quite high, which indicates the unreliability of this form of payment and prevents its wide distribution.

Settlements in the form of collection. In international settlements, a collection operation can be defined as an instruction by the exporter to his bank to receive from the importer, directly or through another bank, a certain amount or confirmation that it will be paid on time. In accordance with the Uniform Collection Rules developed by the International Chamber of Commerce, collection operations are carried out by banks on the basis of instructions received from the importer.

There are simple (pure) and documentary collections. In both cases, a payment collection operation is envisaged: with a net collection – only for financial documents, with a documentary collection – collection of financial documents accompanied by commercial documents, or collection of only commercial documents. At the same time, banks do not have any obligations to pay for documents, since they act in this operation only as intermediaries. Arising disagreements regarding the quantity and quality of goods in this form of payment are resolved directly between the importer and exporter.

Collection against documents . Issuing a collection against documents is a form of payment security when, through the mediation of a bank, the issuance of documents resulting from a transaction is made under certain conditions. Such conditions may include the issuance of documents:

– for cash (documents against payment – D / P) – an order from the exporter to the bank to recover from the importer the amount indicated in the documents. Documents are issued on a mutual basis upon payment;

– against acceptance (documents against acceptance – D / A) – the order of the exporter to the bank to issue the documents presented to the exporter on the basis of his acceptance of the draft issued by the exporter;

– on the basis of an irrevocable guarantee of payment.

The Bank shall dispose of the documents in accordance with the instructions received in order to receive acceptance or payment, or to issue commercial documents against acceptance or for cash, or to issue documents on other terms. Between the exporter and the importer, as a rule, trusting relationships are established, which are fixed in the agency agreement (service agreement, the execution of which is regulated by the provisions of the law). A collection with a foreign bank can only take place when the legal and political circumstances in the country of the importer are considered to be stable and orderly.

When using collection, a draft is applied. A bill of exchange is a document containing an unconditional order from a creditor (drawer) to a borrower (drawee) to pay a certain amount of money within a specified period of time to a third party (payer) or bearer named in the bill.

The parties to the collection against documents are:

an exporter is a client who instructs his bank to carry out collection (i.e., who entrusts a collection operation to his bank);

the transferring bank is the bank to which the exporter entrusted the collection of payments (or it can be called the remitting bank to which the principal (exporter) entrusts the collection operation);

bank-collector – any bank, with the exception of the transferring bank, which takes part in the receipt of payments (ie, at the choice of the importer – the importer’s bank);

a bank that provides a bill for payment – a bank-collector that presents documents to the drawer (presenting bank);

importer (drawer) – a person to whom, in accordance with a collection order, documents must be presented (as a rule, he is the payer himself).

On fig. 4.2 presents a simplified scheme of settlements for collection.

1. – A contract is concluded between the exporter and the importer;

2. – Delivery of goods from the exporter to the importer;

3. – The exporter gives his bank a collection order and provides him with documents of title related to the delivery of goods to the importer;

4.- The exporter’s bank checks the submitted documents and sends them to the importer’s bank;

5.- The importer’s bank hands over the documents to the importer against payment, i.e. these documents are exchanged for the importer’s payment order;

6.- The importer’s bank transfers money to the exporter’s bank;

7. – The exporter’s bank credits the received funds to the exporter’s account.

Rice. 4.2. Settlement scheme in the form of documentary collection

If the importer fails to fulfill his obligations during the documentary collection and does not make a payment, does not accept the draft, does not pay for the draft accepted by him after the maturity date, in this case the bank-collector follows the instructions contained in the collection order (letter) to such actions, such as protest, warehousing, contacting a contact person if necessary, etc. In all these cases, the costs will be borne by the exporter.

The collection order given by the exporter must contain complete and precise instructions (banks that participate in the transaction act only within the limits of the powers granted to them). Mandatory information includes the date and number of the collection, the amount of payment and (or) acceptance (indicating the currency of payment and (or) acceptance), the term of payment, the drawer, the drawer’s bank, information required to fill out documents, description of goods, method of transportation, place dispatch, dispatch date, destination.

Additional information contains the following information: 1) whether the bank-collector takes part in the transaction, if so, which one; 2) the form (collection against acceptance, etc.) of the issuance of documents; 3) if acceptance is requested, then it must be indicated whether there are instructions regarding the protest, the method of sending documents; 4) who pays the costs of the collection, the necessary measures if the recipient refuses to pay the draft at the first presentation; 5) technical means of communication used in the transfer of information; 6) the need to store goods in a warehouse and the availability of goods insurance; 7) who pays the costs of storage in a warehouse and insurance of goods; 8) the availability of the possibility of paying the draft before the arrival of the goods.

Despite the fact that the collection is characterized by sufficient reliability, the disadvantage of this method for the exporter is that there is no 100% guarantee of payment. He can receive proceeds after the payment made by the buyer or the acceptance of the bill. While in the form of settlements using a documentary letter of credit, the exporter receives the proceeds immediately after the submission of documents, which is more reliable from the point of view of security.

Clean collection. When using calculations in the form of a net collection, the procedure is as follows.

1. The enterprise-importer writes a check to the appropriate bank in payment for the delivery of goods.

2. Exporters submit for collection checks and bills of exchange issued by importers to foreign banks, making an endorsement in favor of the remitting bank.

3. A check received from a foreign bank in the remitting bank, issued on the order of the exporter, is transferred to the exporter. For checks issued by order of the remitting bank, received from a foreign bank, the remitting bank notifies the client of the receipt of such a check by a cover letter.

4. When checking a check, it is necessary to take into account the correctness and continuity of endorsements and compliance with the deadlines for presenting bills of exchange and checks for payment. After checking the checks, an inscription (draft) is made on the back signed by the respondent bank.

5. Issued checks are sent for collection to a foreign bank.

6. Accounting and control over timely payment is carried out by the persons participating in the settlements (importer, collecting bank, remitting bank).

In addition, accepted bills of exchange may be sent to a foreign bank for collection. If the exporter grants the buyer a deferred payment on the draft, he notifies the remitting bank about this. The term of payment in this case will consist of the term of payment of the draft plus the mileage until the receipt of the payment order from the foreign bank . If the contract provides for the receipt of payments according to the deadline specified in the draft, and the foreign partner does not fulfill its obligation, then no later than the next day from non-receipt of payment, the bank sends a request to the foreign bank to confirm non-payment of overdue drafts. If there is a refusal to pay the draft, the information is transmitted to the principal for instructions to the presenting bank on further action.

Thus, the collection form of payments is much more reliable than bank transfers. However, this form is expensive (banks apply fixed rates for this operation, as a rule, this is a fixed percentage of 8–10%, depending on the tariff policy of a commercial bank) and difficult to make calculations.

Settlements under letters of credit are a convenient and reliable form for performing various trade operations, equally taking into account the interests of buyers and suppliers. In international settlements, letter of credit operations are carried out in accordance with the Uniform Customs and Practice for Documentary Letters of Credit. These rules define the concepts and types of letters of credit, the methods and procedure for their execution and transfer, the obligations and responsibilities of banks, the requirements for documents submitted under letters of credit and, in addition, the procedure for their presentation. They are obligatory for banks and their clients carrying out letter of credit transactions.

The letter of credit is a monetary obligation of the bank to make, at the direction and at the expense of the importer, a payment to the exporter in the amount of the value of the delivered goods after the exporter submits the documents of title specified in the contract.

With a letter of credit form of payment, the obligation to pay, along with the importer, is assumed by the bank that opens the letter of credit. The presence of correspondent relations, according to which the importer and the bank undertake to fulfill each other’s instructions for the implementation of letter of credit obligations, make it possible to carry out letter of credit operations much faster and more convenient both in terms of transferring amounts, and in terms of exchanging information and resolving all issues that arise in the course of operations. Technologies for the implementation of letters of credit, depending on their types, can differ significantly, so let’s consider the basic scheme of a letter of credit operation (Fig. 4.3).

1. – A contract is concluded between the exporter and the importer, which determines the form of payment for the delivered goods – a documentary letter of credit. In the section of the contract, which fixes the terms of the letter of credit, it is indicated: which bank opens the letter of credit, through which bank this letter of credit should be advised to the exporter. In addition, the parties agree on the type of letter of credit, the list of documents submitted by the exporter to receive payment, their nature, formalization requirements and other issues;

2. – The buyer-importer sends his bank an application for opening a letter of credit, which indicates all the necessary conditions: in whose favor, for what amount the letter of credit is opened; where and how it is used; the shipment of which particular product it covers; what documents must be submitted; terms of shipment and sending of documents. The importer who instructs to open a letter of credit is called the applicant, and the bank that opens the letter of credit and acts on the instructions of the applicant is the issuing bank ;

3. – Notice of the opening of a letter of credit, called “advice to the beneficiary”, is sent to the beneficiary exporter in whose favor it is opened. The issuing bank sends a letter of credit to the beneficiary through the bank serving him, which in turn carries out the operation of advising (notifying) the letter of credit to the exporter, and is called advising bank ;

4. – The advising bank also receives its own copy of the letter of credit. In some cases, it is appointed by the issuer by the nominated bank, i.e. authorized to make payment.

5. – Upon receipt of a letter of credit (advice to the beneficiary), the exporter checks it for compliance with the conditions of the letter of credit fixed in the contract. In the absence of discrepancies, the goods are shipped. If there are discrepancies, notifies its bank of the conditional acceptance of the letter of credit (or its non-acceptance) and may require the importer to make the necessary changes to its terms.

6. – Upon receipt of transport documents from the carrier, the exporter submits them together with other documents required under the terms of the letter of credit to his bank. The deadline for submitting documents is also determined by the terms of the letter of credit, but no later than 21 days after the shipment of the goods, and no later than the expiration date of the letter of credit.

7. – The exporter’s bank checks the documents within a period of not more than 7 banking days (according to external signs). After that, the exporter’s bank (if it does not have the authority to pay) indicates in its cover letter how the proceeds should be credited.

8. – Upon receipt of the documents, the issuing bank checks them and at the same time collects funds from the importer by debiting his account or, according to the conditions for opening a letter of credit, debits from the funds previously deposited on the account “amount on letters of credit”. After checking the documents, the issuing bank transfers the payment amount to the exporting bank.

9. -The exporter’s bank credits the proceeds to the exporter.

10. – The importer from the moment of receipt of documents from the issuing bank is the owner of the goods.

Rice. 4. 3. Scheme of letters of credit

Types of letters of credit. In international practice, there are many different types of letters of credit. They can be classified according to various criteria.

According to the type of obligation (according to the degree of responsibility of the bank), letters of credit are divided into revocable and irrevocable. According to the Uniform Customs and Practice for Documentary Credits, the latter must have an indication of revocation. If there is none, then the letter of credit is considered irrevocable.

A revocable letter of credit can be changed or canceled at any time by the importer or the bank that opened the letter of credit. At the same time, the consent of all interested parties is not required, it is enough to have doubts about the payment by the importer of commodity documents. An irrevocable letter of credit is a firm obligation of the bank to the exporter to fulfill the payment instructions contained in the letter of credit. It cannot be changed or canceled ahead of schedule, without the consent of both the exporter and other interested parties. Irrevocable letters of credit can be confirmed and unconfirmed.

A confirmed letter of credit is more reliable, since the responsibility of the bank that opened the letter of credit is supplemented by the responsibility of another bank that confirms it. It can be advising and actually executing the letter of credit bank or a third bank. If the bank that pays for the letter of credit on behalf of the issuing bank does not assume any responsibility for paying for shipping documents, the letter of credit is unconfirmed.

Covered and uncovered letters of credit are distinguished according to the method of providing with monetary resources . If the bank preliminarily transfers and provides at the disposal of the nominated bank funds (coverage) in the amount of the letter of credit for the period of validity of the obligation of the issuing bank with the condition that they can be used for payments under the letter of credit, then this letter of credit is covered. If no cover is provided, then it is an uncovered letter of credit. In the event of opening an uncovered (guaranteed) letter of credit, the executing bank is given the right to write off its entire amount from the account of the issuing bank maintained by it. At the same time, the coverage of the letter of credit, i.e. the provision of funds at the disposal of the nominated bank for its payment can be ensured by lending the corresponding account of the nominated bank in the issuing bank or another bank for the amount of the letter of credit and by opening by the issuing bank in the nominated bank of coverage deposits or insurance deposits.

When possible, letters of credit are transferable (transferable), or redirectible, and non- transferable (non-transferable), or non-transferable. If the exporter is not a supplier of products and wants to have part of the payments under the letter of credit transferred in favor of the sub-supplier, he agrees to open a transferable letter of credit in his favor.

By renewability, there are renewable (“revolving”) and non-renewable letters of credit. When the amount of the letter of credit as it is paid (for a series of shipments of goods or for one shipment within the amount of the letter of credit) is automatically renewed within the total established limit and the period of the letter of credit, the letter of credit is “revolving”. A letter of credit is such within the term and amount.

Within the term, a certain amount (limit) is provided, in the amount of which payments are made from the letter of credit. The possibility of using the unused limit in the next period is specifically stipulated.

Within the amount, revolving means that the amount of the letter of credit (limit) is restored as it is used within a certain period established by the agreement. As a rule, such letters of credit set a maximum amount.

A special type of letter of credit is a “red clause” letter of credit. Such can be any type of letter of credit (revocable, irrevocable, confirmed, etc.). It provides for the payment by the executing bank to the exporter of advances up to a certain amount, which can be used by the beneficiary to purchase and pay for the goods intended for the exporter (before it is shipped to the buyer). The bank issues an advance against the presentation by the exporter of a “commitment to ship”. By opening this type of letter of credit, the issuing bank undertakes to reimburse the amount of paid advances to the nominated bank even if the shipment has not been made. This type of letter of credit is considered by banks as an unsecured loan and is rarely issued.

Ways to execute a letter of credit. There are various ways to execute letters of credit:

– payment of a letter of credit by deferred payment is the most unprofitable for the exporter, since he is interested in quickly receiving export earnings;

– Execution of a letter of credit by means of payment at sight is the most profitable for the exporter and the most unprofitable for the importer method of execution, since it is associated with the immobilization of funds;

– implementation of a letter of credit by accepting drafts, providing the exporter with a quick payment, and the importer with a deferred payment;

– implementation of a letter of credit through negotiation, which provides the exporter with a quick payment, and the importer with a deferred payment, but at the same time there is a risk that the issuing bank may refuse to pay due to a discrepancy in the documentation.

Thus, settlements using letters of credit take into account the interests of both the exporter and the importer. A letter of credit is characterized by firm and reliable security for payment, usually received before the start of shipment. It provides guarantees for the importer to receive the goods, while the bank does not track the movement of the goods itself, but strictly controls its shipment. Making a payment under a letter of credit is not connected with the buyer’s consent to pay for the goods. The exporter can receive payment as soon as possible (before the goods arrive at the destination). The exporter can issue a bank loan secured by a letter of credit (this is especially important if the supplier is a reseller). By imposing strict requirements for the execution of documents (for compliance with the terms of the letter of credit), banks protect the interests of importers, as they act on the basis of their instructions.

The disadvantages of the letter of credit form are related to the fact that this is a complex form of calculation, has a complex document flow and requires the professional skills of all participants in the calculations, including highly qualified bank employees. Letters of credit are distinguished by the high cost of settlements in foreign trade operations. As a rule, the fee for a letter of credit is charged as a fixed percentage of the amount of a letter of credit for any operations: opening, advising, confirming, accepting and checking documents under a letter of credit, prolonging its validity, etc.

Instruments of international settlements can also be bills and checksused for payments with the consent of the parties.

In international practice, bills of exchange (drafts) issued by the exporter to the importer are used. When making payments using a bill of exchange, the exporter transfers the draft and commodity documents for collection to his bank, which receives the currency from the importer. The importer becomes the owner of these documents only against payment or acceptance of the draft. The use of a draft in addition to collection and letter of credit gives the right to receive a loan and foreign exchange earnings.

If the payment is made by check , then the debtor (buyer) can make the following choice: issue the check himself (customer’s check) or instruct the bank to write it out (bank check). The participants in the check circulation – the drawer, the holder of the check and the payer of the check – the bank, are strictly defined. Endorsers – persons who have received a check by endorsement, and avaliers persons who put their signature on a check as a guarantor for its payment can participate in check circulation. The right to issue checks implies the existence of a special check agreement between the issuer of the check and the paying bank. The form of the check agreement is arbitrary. The main obligation of the drawer of a check under a check agreement with a bank is to present the “check cover” in a timely manner, i.e. the amount specified in the check, necessary for the bank to pay it to the holder of the check upon presentation of the check for payment. Since the issued check must necessarily have a cover that provides the bank with the ability to pay it at the expense of the drawer, the laws of some states establish liability for issuing a check without sufficient cover. Such actions of the drawer of a check are qualified as fraud, since the issuance of uncovered, unsecured checks adversely affects the development of check circulation.

Traveler’s checks, eurocheques, and credit cards are used in international non-commercial settlements. A traveler’s (tourist) check is a payment document, a monetary obligation (order) to pay the amount indicated on it to the owner of the check. It is issued by large banks in national and foreign currencies.

Eurocheque – a check in Eurocurrency, issued by a bank without a preliminary payment of cash by the client, for large amounts against a bank loan for a period of up to one month. It is paid in any currency of the country participating in the agreement.

A credit card is a nominal monetary document issued by a credit institution, which certifies the presence of money in the account of its owner.

Questions for self-control

1. What are international payments?

2. What are the differences between international and domestic payments?

3. What is the role of banks in international settlements?

4. What is a correspondent relationship?

5. What is the difference between LORO and NOSTRO accounts?

6. What are the monetary and financial and payment terms of foreign economic transactions?

7. Name and describe financial and commercial documents.

8. What forms of international payments in modern conditions are the most common?

9. What is the essence of settlements on an open account?

10. List the types of letters of credit and describe them.

11. What are the main advantages and disadvantages of letters of credit and collection forms of payment?

12. Describe the payment scheme by bank transfer.

Literature

1. Money, credit, banks: textbook. for stud. universities, education according to special “Finance and credit” and “Accounting and audit”: rec. Ministry of Education of Russia / Ed. G. N. Beloglazova / St. Petersburg. state University of Economics and Finance (FINEK); – M. : Yurayt, 2007. – 620 p. – Bibliography. at the end of ch. – ISBN 5-94879-657-4.

2. International monetary and financial relations: textbook. for stud. universities, education according to special 060400 “Finance and Credit”, 060600 “World Economy” / Ed. L. N. Krasavina / Fin. acad. under the Government of the Russian Federation, Center for Fundamental and Applied Research; – Ed. 3rd, revised. and additional – M. : Finance and statistics, 2007. – 573 p. : ill. – Bibliography: p. 563-565. – ISBN 978-5-279-02698-2.

3. Money, credit, banks: textbook. for stud. universities, education according to special “Finance and credit” and “Accounting, analysis and audit”: rec. Ministry of Education of Russia / Ed. prof. E.F. Zhukova.- M.: Banks and stock exchanges, UNITI.2009- 783 p.

4. Movsesyan A.G., Ognivtsev S.B. International monetary and credit relations: textbook – M.: INFRA-M, 2005. – 312 p. – (Higher Education) – ISBN 5-16-002286-4.

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