Massimiliano Di Pace1 INTERNATIONAL PAYMENTS Handling international payment can be complicated and risky The problems can be: - currency - transfer of money - assessment of counterpart’s reliability - validity of warrant relating to the transfer of money There are a number of different payment methods for foreign commerce, of which some are riskier than others

Massimiliano Di Pace2 INTERNATIONAL PAYMENTS The solutions for international payment are: - money transfer - open account - cheque - bill of exchange - promissory note - commercial Letter of Credit (LC)

Massimiliano Di Pace3 INTERNATIONAL PAYMENTS Rules on international payments are issued by International Chamber of Commerce, and in particular in ICC Uniform Customs and Practice for Documentary Credits UCP 600

Massimiliano Di Pace4 INTERNATIONAL PAYMENTS Money transfer The buyer sends the money by wire transfer through the Swift (Society for Worldwide Interbank Financial Telecommunication) system All banks linked to Swift have a control code which guarantees the authenticity of the message, and makes the credit operational

Massimiliano Di Pace5 INTERNATIONAL PAYMENTS You have to provide the bank with the following data: - buyer (ordinant) and seller (payee) - amount and currency - reason (i.e. purchase of goods) - creditor’s bank

Massimiliano Di Pace6 INTERNATIONAL PAYMENTS The money transfer can be used: 1) for payment in advance 2) for payment partly in advance and partly at the delivery of merchandise 3) for payment at the delivery of merchandise In the first case the buyer sends the money by wire transfer along with the order The buyer need to be sure about the supplier's reliability

Massimiliano Di Pace7 INTERNATIONAL PAYMENTS Usually, the advance payment includes only a percentage of the value of delivery, being the remaining part paid at arrival of merchandise The third solution requires a relevant trust from seller’s side

Massimiliano Di Pace8 INTERNATIONAL PAYMENTS Cheque (or Check) A cheque is issued by the buyer (the drawer) to pay the seller and it consists in an order to the buyer’s bank (where he has the account) to pay the amount of money reported in the cheque to the payee (the seller) The drawer writes the various details including the money amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay this person or company the amount of money stated It differs from money transfer for the fact that in order to get the payment the payee has to present the cheque to his own bank

Massimiliano Di Pace9 INTERNATIONAL PAYMENTS A type of cheque which makes sure that in drawer’s account there is money is certified cheque In this case the issuing bank verifies there are currently sufficient funds in the drawer's account to honour the cheque Those funds are then set aside in the bank's internal account until the cheque is cashed or returned by the payee Thus, a certified cheque cannot "bounce", and, in this manner, its liquidity is similar to cash, The bank indicates that it is a certified cheque by making a notation on the face of the cheque (technically called an acceptance)

Massimiliano Di Pace10 INTERNATIONAL PAYMENTS Open account The importer pays for the goods with a bank check or international money order on arrival of goods accompanied by the invoice Exporters should be careful in granting open- account status, especially for new accounts abroad

Massimiliano Di Pace11 INTERNATIONAL PAYMENTS Bill of exchange They are written orders drafted by the seller addressed to the buyer, which oblige the buyer to pay the amount due by a specified date The exporter assumes much more risk with a bill of exchange because the importer already has possession of the goods

Massimiliano Di Pace12 INTERNATIONAL PAYMENTS Promissory note The buyer writing the promissory note commits himself to pay a sum of money at a precise date to a specific beneficiary (the seller)

Massimiliano Di Pace13 INTERNATIONAL PAYMENTS Commercial Letter of Credit LC is a letter written by the importer's bank to the exporter to guarantee their ability to pay It’s the most used payment procedure at international level Documentary letters of credit are contractual agreements between two banks and two parties conducting commerce

Massimiliano Di Pace14 INTERNATIONAL PAYMENTS The buyer of goods is called the applicant in the letter of credit The seller is called the beneficiary A bank that acts on behalf of the buyer is called an issuing bank, while the bank acting on behalf of the seller is called an advising or confirming bank (the latter engaging itself to pay the sum agreed)

Massimiliano Di Pace15 INTERNATIONAL PAYMENTS The letters of credit can be of 2 type: - revocable - irrevocable In the latter case the commitment of the buyers’ bank to pay the seller on presentation of agreed documents by the fixed date cannot be called off, while in the former case it can be modified or cancelled without prior notice

Massimiliano Di Pace16 INTERNATIONAL PAYMENTS LCs are usually irrevocable once they've been sent by an importer In this way the buyer is sure that the payment has been made only when the availability of merchandise is guaranteed by documents The seller asks to his own bank to cash the credit, against the delivery of documents required by the letter of credit

Massimiliano Di Pace17 INTERNATIONAL PAYMENTS The letters of credit can be also: - confirmed - not confirmed In the first case the seller’s bank (or another bank, different from the one chosen by the buyer, and located at seller’s premises) engages itself to pay the seller, always under presentation of required documents

Massimiliano Di Pace18 INTERNATIONAL PAYMENTS The documents to be presented usually are: - bill of lading or other freight document - insurance contract, if foreseen - invoice for the goods delivered - third-party verification of quality and quantity of goods sold - other documents required by the agreed Incoterm

Massimiliano Di Pace19 INTERNATIONAL PAYMENTS The control of documents can be carried out by: - issuing bank - advising/confirming bank In the first case the buyer’s bank check that documents are compliant with provisions of letter of credit, while in the second case it’s the seller’s bank to do so The advantage of the latter solution for the seller is evident: he has to interact with a national bank, and not a foreign and far bank

Massimiliano Di Pace20 INTERNATIONAL PAYMENTS The payment foreseen by the letter of credit can be: - without delay, once the documents have been presented - postponed to the moment of presentation - represented by a bill of exchange or a promissory note

Massimiliano Di Pace21 INTERNATIONAL PAYMENTS The seller’s bank sends the documents to the buyer’s bank, which controls the compliance with the content of the letter of credit, and if everything is compliant, carries out the money transfer, or, alternatively the issue of a cheque or of a bill of exchange In the first case we have “documents against payment” or “cash against documents”

Massimiliano Di Pace22 INTERNATIONAL PAYMENTS In the second case we have “documents against acceptance”, that is signing the cheque or the bill of exchange If the seller’s bank has confirmed the letter, or acts as advising bank, it’s up to it the control of documents and consequent payment

Massimiliano Di Pace23 INTERNATIONAL PAYMENTS The buyer’s bank delivers the documents representing the goods only once it has charged the sum paid on the buyer’s account In this way the buyer can get goods from the carrier at the agree place

Massimiliano Di Pace24 INTERNATIONAL PAYMENTS The letters of credit contain: - name of the issuing bank - buyer’s and seller’s addresses - deadline for shipment and payment - list of documents requested - confirmation (optional) The letter of credit is sent to the seller’s bank which can confirm (or not) the letter

Massimiliano Di Pace25 INTERNATIONAL PAYMENTS The commercial letter of credit document provides in detail the evidence the beneficiary must present to the issuing bank for getting money to be transferred from the issuing bank to the advising or confirming bank to complete the transaction

Massimiliano Di Pace26 INTERNATIONAL PAYMENTS The steps of a letter of credit are: 1) signature of the sale contract 2) buyer’s request to his bank to issue a letter of credit 3) notification to the seller of the issue 4) shipment of goods 5) control of documents by the issuing bank, or by the confirming bank 6) payment by the issuing bank, or by the confirming bank, and transfer of documents to the buyer

Massimiliano Di Pace27 INTERNATIONAL PAYMENTS Once the letter of credit has been issued, the seller ships goods to the buyer in accordance with all instructions in the document Once the goods arrive at destination, the seller presents all the documents required in the letter of credit to the confirming bank

Massimiliano Di Pace28 INTERNATIONAL PAYMENTS The issuing/advising/confirming bank reviews all the documentation for completeness and compliance with the letter of credit contract Once the confirming bank certifies that all conditions have been met, funds are transferred to the bank on behalf of the beneficiary

Massimiliano Di Pace29 INTERNATIONAL PAYMENTS In this framework banks act under specific and detailed orders, relating to the control on the respect of conditions stated in the letter of credit In fact the payment is made when the buyer’s bank is sure, under the provision of documents (i.e. bill of lading, or freight documents) transferred by the seller’s bank, that the merchandise sold has been received by the importer

Massimiliano Di Pace30 INTERNATIONAL PAYMENTS The advantage of letter of credit is due to the fact that the buyer’s order to pay the seller cannot be changed once the letter of credit is issued Evidently an irrevocable and confirmed letter of credit guaranties the seller about the payment nearly 100%