1. “International Finance and Payments”
Academy of Economic Studies
Faculty of International Business and Economics
“International Finance and Payments”
Lecture VII
“International Payments”
Lect. Cristian PĂUN
URL:

2. International FX Markets - review
FX Markets is the place where we can buy or sell different currencies;
FX Rates;
Convertibility of a currency;
FX Regimes;
Depreciation vs Appreciation of a currency;
Direct Quote vs Indirect Quote
FX Rate Determinants;
Fisher Relationships;
FX Transactions: Spot Transactions vs Forward Transactions
Lecture 6: International FX Markets

3. International payments
Commercial banks play a fundamental role;
More complex than local payments;
Higher risks require specific money transfer procedures;
In international payments are used:
Non – cash payments (barter, compensation, clearing, buy – back)
Cash payments
Payment instruments
Payment techniques.
Lecture 6: International FX Markets

4. International Payments Methods
Cash in advance
Consignment
Open Account Payments
Bank Drafts:
bill of exchange (sight and time drafts)
checks
money orders
promissory note
Letter of Credit
Documentary collection
Documents against payments
Documents against acceptance
Lecture 6: International FX Markets

5. Lecture 6: International FX Markets
I. Cash in advance
Exporter
Goods
The goods will not be shipped until the buyer has paid the seller.
Time of payment : Before shipment
Goods available to buyers : After payment
Risk to exporter : None (maximum security for the seller)
Risk to importer : Relies completely on exporter to ship goods as ordered
Used for: small amounts, new customers, one-time sales
Lecture 6: International FX Markets

6. Payment of Import at a specific date (4)
II. Consignment
Delivering of goods (1)
Exporter (consigner)
Importer (consignee)
Payment of Import at a specific date (4)
Payment in the local currency (3)
Selling of goods (2)
Clients (third part)
The exporter retains actual title to the goods that are shipped to the importer.
Time of payment : At time of sale to third party
Goods available to buyers : Before payment
Risk to exporter : Allows importer to sell inventory before paying exporter
Risk to importer : None
Lecture 6: International FX Markets

7. III. Open Account Payments
Exporter
Importer
Payment on the agreed time (2)
Delivery of goods (1)
In an open account trade arrangement, the goods are shipped to a buyer without guarantee of payment.
The credit terms are arranged between the importer and the exporter.
These are usually afforded to longstanding partners, or to foreign affiliates where payment is reasonably assumed
Quite often, the buyer does not pay on the agreed time.
3. Unless the buyer's integrity is unquestionable, this trade arrangement is risky to the seller.
4. Time of payment : As agreed upon
5. Goods available to buyers : Before payment
6. Risk to exporter : Relies completely on buyer to pay account as agreed upon
7. Risk to importer : None
Lecture 6: International FX Markets

8. Lecture 6: International FX Markets
IV. Bank Drafts: Check
Check = an order given to a bank in order to pay a specific amount to a person from the company current account.
Exporter
Exporter bank
Importer bank
Importer
Cash deposit (1)
Cheque remittance (2)
Delivery (3)
Payment (4)
Presenting the cheque for payment (5)
Money transfer (6)
Payment (7)
Risk vs Simplicity
Lecture 6: International FX Markets

9. Problems with the payments by checks
Risk of non-payment for lack of funds (the cheque is uncovered);
Banks usually place a hold on funds for 3-4 weeks from deposit date
May be post-dated
Must ensure cheque is properly filled out
Used for: small payments or well-known clients.
Lecture 6: International FX Markets

10. Lecture 6: International FX Markets
Check - example
Check Issuing Date at Issuing Place
This check is to be
Paid to the Order of        Exporter           € Value
              Value                        Euros
by the:
Importer Bank
Importer Bank Address
____Importer Signature____
Lecture 6: International FX Markets

11. Bank Drafts: Money Orders
Money Order = is an order given by a person to its bank in order to pay a specific amount directly in the beneficiary’s account.
Delivery (1)
Importer
Importer Bank
Exporter)
Exporter Bank
Presenting the documents (4)
Payment (5)
Money transfer (3)
beneficiary stipulates the account to which funds will be paid
cannot place conditions on payment, so cannot require proof of delivery of goods
therefore, must exist high level of trust between the parties to use this method
Lecture 6: International FX Markets

12. Bank Drafts: Bill of Exchange
Bill of Exchange = unconditional order in writing to pay a specified amount of money to a specified person or to the bearer, upon presentation of the bill or at a specified future date
BE Bearer
Beneficiary
Debtor
BE Remittance (1)
BE Acceptance (2)
BE Remittance (3)
Presenting BE for payment (4)
Payment at the BE’s maturity (5)
may be endorsed and passed on to another, or just passed on if to the bearer
Lecture 6: International FX Markets

13. Bill of Exchange - sight drafts (documents against payment)
BE Bearer (Exporter)
Beneficiary (Exporter)
Importer
BE Remittance (1)
BE Acceptance (2)
BE Remittance (3)
Presenting BE for payment when exporter delivers the goods (4)
Payment at the BE’s maturity (5)
Sight drafts (documents against payment) : When the shipment has been made, the draft is presented to the buyer for payment. (THE DRAFT ACCEPTANCE IS BEFORE THE DELIVERY OF GOODS)
Time of payment : On presentation of draft
Goods available to buyers : After payment
Risk to exporter : Disposal of unpaid goods
Risk to importer : Relies on exporter to ship goods as described in documents
Lecture 6: International FX Markets

14. Bill of Exchange - time drafts (documents against acceptance)
BE Acceptance (2)
BE Bearer (Exporter)
Importer
BE Remittance (1)
Presenting BE for payment at a specified maturity (4)
Payment at the BE’s maturity (5)
BE Remittance (3)
Beneficiary (Exporter)
Time drafts (documents against acceptance) : When the shipment has been made, the buyer accepts (signs) the presented draft. (THE DRAFT ACCEPTANCE IS IN THE MOMENT OF THE DELIVERY OF GOODS.)
Time of payment : On maturity of draft
Goods available to buyers : Before payment
Risk to exporter : Relies on buyer to pay
Risk to importer : Relies on exporter to ship goods as described in documents
Lecture 6: International FX Markets

15. Lecture 6: International FX Markets
Bill of Exchange - example
Lecture 6: International FX Markets

16. Bank Drafts: Promissory Notes
Promissory note is a written promise to pay a determinate sum of money made between two parties.
Maker: The issuer of a promissory note (the importer)
Payee: The person to whom the note is to be paid (the exporter)
Difference Between a Promissory Note and a Bill of Exchange: The maker of a note promises to personally pay the payee rather than ordering a third party to do so
Lecture 6: International FX Markets

17. Promissory Notes - Example
Nov. 2, $ 10,000
New York, New York
  Ninety days after the above date for value received, the under-
signed jointly and severally promise(s) to pay to the order of: BANK OF THE RIVER, at
100 Hudson Ave., New York, New York 02167
         Ten Thousand and oo/100              DOLLARS
With interest from the date above at the rate of -11- percent per annum (computed on
the basis of actual days and a year of 360 days) payable at maturity
Officer: Jones
No: Importer’s Signature
Lecture 6: International FX Markets

18. V. Letter of Credit - definition
A letter addressed to a beneficiary (exporter) by a bank (issuing bank)
wherein the bank undertakes, on behalf of an applicant (importer)
to effect payment to the beneficiary for merchandise shipped or services performed
provided that the beneficiary presents the required documents in compliance with the terms of the letter of credit
- Letters of Credit (l/c) are the means by which the majority of international transactions occur.
- This is a letter written to the seller, signed by the buyer’s bank.
Lecture 6: International FX Markets

19. Letter of Credit - Mechanism
Lecture 6: International FX Markets

20. Letter of Credit - Terminology
Documentary Requirement – L/C is required for most import/export transactions and is based on documents being independent from de import / export contract
Clean L/C – presented without other documents, it is useful for overseas bank guarantees or security purchases
Irrevocable L/C – cannot be revoked without the specific permission of all parties involved, including the exporter
Confirmed L/C – is issued by on bank and confirmed by another, obligating both banks to honor drafts drawn in compliance
Validity Period: maximum 21 working days from the opening moment (can be extended with an additional cost)
Domiciliation of L / C: the place where the payment is realized (exporter country, importer country, other country)
Lecture 6: International FX Markets

21. Documents Common to an Export L/C
Commercial Invoice
Packing List
Bills of Lading
Certificate of Origin
Other Certificates: Quality, Inspection
Beneficiary Statements
Commercial documents
Transport documents
Insurance documents
Other documents
Lecture 6: International FX Markets

22. Benefits of Letters of Credit
To the Exporter:
Payment protection
Reliance on issuing bank’s credit rather than buyer’s
Rapid, local source of repayment, if payable at a local bank
To the Importer:
Documentary evidence that the ordered goods have been shipped on time
Assurance that necessary clearance documents will be provided
Payment deferred until goods are shipped and documents presented (use of funds)
Lecture 6: International FX Markets

23. Lecture 6: International FX Markets
Problems of L/C
Shipping schedule is not met
Stipulations concerning freight cost are unacceptable
Price is insufficient due to FX rate changes
Unexpected quantity of product
Description of product insufficient or too detailed
Documents are impossible to obtain specified in L/C
Lecture 6: International FX Markets

24. Special Letters of Credit
The Transferable L/C – is where a beneficiary has the right to instruct the paying bank to make credit available to one or more secondary beneficiaries
The Back to Back L/C – exists where the exporter, as beneficiary, offers its credit as security in order to finance the opening of a second credit
The Revolving L/C – exists where the tenor or amount of the L/C is automatically renewed pursuant to terms and conditions. These can be cumulative or non-cumulative
The Red-Clause L/C – used in case of an advance payment in favor for an exporter (a method of finance for the exporter).
Banker’s Acceptance – On a time draft, the bank on whom the draft is drawn commits to pay the face amount at maturity by stamping “Accepted” across the draft .
Stand-by L/C - are an irrevocable commitment issued by a bank for a stated time period to pay a beneficiary a stated amount of money upon presentation of specified documents stating that the applicant did not fulfill their contractual obligations.

25. 8. Pay Discounted Value of BA 13. Pay Discounted Value of BA
Banker’s Acceptance
8. Pay Discounted Value of BA
1 - 7 : Prior to BA
1. Purchase Order
Importer
Exporter
5. Ship Goods
Importer’s
Bank
2. Apply
for L/C
11.
Shipping
Documents
14. Pay
Face Value
of BA
10. Sign
Promissory
Note to Pay 6.
& Time
Draft
4. L/C
Notification
9. Pay
Discounted
Value of BA
7. Shipping Documents &
Time Draft
Exporter’s
3. L/C
12. BA
Money Market Investor
13. Pay Discounted Value of BA
16. Pay Face Value of BA
15. Present BA at Maturity
: When BA
matures
: When BA
is created

26. Standby Letter of Credit
Exporter
Importer
Export contract (1)
Delivery of goods (2)
Importer’s Bank
3. Apply for Standby L/C
4. Standby L/C remittance
5. Standby L/C remittance
It is used if Importer didn’t fulfill it’s obligations
Lecture 6: International FX Markets

27. Transferable Letter of Credit
Exporter
Exporter’s
Bank
Importer’s
Importer
Order to open
the L of C (1)
Beneficiary
Open L of C (2)
Advising the transfer (3)
Delivery (4)
Presenting the documents (5)
Transfer
L of C (6)
Payment (7)
Documents and payment (9)
Documents and payment (8)
Lecture 6: International FX Markets

28. “Back-to-back” Letter of Credit
Importer
Importer’s Bank
Exporter’s Bank
Exporter
Beneficiary (real exporter)
Beneficiary’s Bank
Delivery of goods (1)
Delivery of goods (2)
Apply for L/C 1 (3)
L/C 2 delivery (7)
L/C1 delivery (5)
Apply for L/C 2 (6)
L/C1 delivery (8)
Documents shipment (9)
Documents shipment (10)
L/C1 delivery (4)
Funds (11)
Funds (12)
Documents shipment (8)
Lecture 6: International FX Markets

29. Letter of credit - example

30. Lecture 6: International FX Markets
Documentary Collection
Documents against Payment (D/P)
the buyer may only receives the title and other documents after paying for the goods
Documents against Acceptance (D/A)
the buyer may receive the title and other documents after signing a time draft promising to pay at a later date.
Acceptance Documents against Payment (Acceptance D/P)
the buyer signs a time draft for payment at a later date. Goods remain in escrow until payment is made
Lecture 6: International FX Markets

31. Lecture 6: International FX Markets
Documents against payment (D/P) flow
Lecture 6: International FX Markets

32. Lecture 6: International FX Markets
Documents against acceptance (D/A) flow
Lecture 6: International FX Markets

33. Documentary collection - example

34. Documentary collection – example (2)

35. International Methods of Payment: Advantages and Disadvantages
Lecture 6: International FX Markets

36. Lecture 6: International FX Markets
Risk protection in case of international payments
Buyer
Max
Min
Con-
firmed
Uncon-
Sight
Draft
Time
Cash in
Advance
Letter of
Credit
Documentary
Collection
Open
Account
Seller
Lecture 6: International FX Markets

37. Society for Worldwide Interbank Financial Telecommunications (SWIFT)
Additional Topic
Society for Worldwide Interbank Financial Telecommunications (SWIFT)
Lecture 6: International FX Markets

38. Society for Worldwide Interbank Financial Telecommunications (SWIFT)
Secure, inexpensive international messaging system that exchanges financial data.
More than 7,500 financial institutions in 199 countries.
Helps members, sub-members, and participants reduce costs, improve automation, and manage risk.
Lecture 6: International FX Markets

39. Society for Worldwide Interbank Financial Telecommunications (SWIFT)
SWIFT can only be used between member banks for administrative messages such as:
payment instructions;
funds transfers for customers;
funds transfers for the bank’s account;
advices and foreign exchange transactions;
confirmations and advices concerning loans and deposits;
collection advices and payment acknowledgments;
letters of credit;
balance reports; and
advices and confirmations of securities transactions.
Lecture 6: International FX Markets

40. SWIFT - US Dollars Exporter’s Foreign Bank US Importer Exporter
New York Bank
US$
SWIFT
Network
US$
US$
Where Final payment is EFT - “through Various Mechanisms depending on the banking infrastructure withing the receiving bank’s country
FOR FOREIGN CURRENCY PAYMENT INSTRUCTIONS:
PART 1:
USDO sends SWIFT MT 101 message to FRBNY.
FRBNY uploads file into SWIFT network.
SWIFT network transmits to bank where USDO has a bank account.
Banks pays vendors: either credit payee’s bank account or issue a bank draft
PART 2:
Bank transmits SWIFT MT 941 message through SWIFT network to FRBNY.
FRBNY transmits message to USDO
PART 3:
USDO transmits an ACH payment via Fedline to FRBNY to credit the bank (this is done to settle with the bank for foreign currency purchases made)
Bank deposits foreign currencies at the banks where the USDO has bank accounts
FRBNY debits the USDO via CA$HLINK.
US$
Payment instructions
Funds
USDO Bank
in US
(U.S. Disbursing Officers)
Lecture 6: International FX Markets

41. SWIFT - Foreign Currency
US Importer
Exporter
Exporter’s Foreign Bank
New York Bank
SWIFT
Network
US$
US$
USDO Bank
overseas
FOR FOREIGN CURRENCY PAYMENT INSTRUCTIONS:
PART 1:
USDO sends SWIFT MT 101 message to FRBNY.
FRBNY uploads file into SWIFT network.
SWIFT network transmits to bank where USDO has a bank account.
Banks pays vendors: either credit payee’s bank account or issue a bank draft
PART 2:
Bank transmits SWIFT MT 941 message through SWIFT network to FRBNY.
FRBNY transmits message to USDO
PART 3:
USDO transmits an ACH payment via Fedline to FRBNY to credit the bank (this is done to settle with the bank for foreign currency purchases made)
Bank deposits foreign currencies at the banks where the USDO has bank accounts
FRBNY debits the USDO via CA$HLINK.
USDO Bank
in US
US$
Bank
(or foreign exchange house)
Lecture 6: International FX Markets

42. Society for Worldwide Interbank Financial Telecommunications (SWIFT)
SWIFT BENEFITS
Companies
Eliminates bank and check cashing fees.
Eliminates lost or delayed mail
Assures receipt of payment on payment due date
Agency/Government
Facilitates the elimination of imprest funds.
Maintains funds in the Treasury Account until withdrawn.
Eliminates costs of processing checks
Lecture 6: International FX Markets

43. SWIFT - Example