ĐẠI HỌC KINH TẾ QUỐC DÂN
VIỆN NGÂN HÀNG - TÀI CHÍNH
CHAPTER 6
INTERNATIONAL PAYMENT
Hanoi Sep 2024
Dr. Phan Thị Thanh Hương
Viện Ngân hàng - Tài chính - Đại học Kinh tế quốc dân
Methods of International Payment
Group of methods that are not governed by
international custom
1. Advanced payment
2. Open account
3. Remittance
4. Authorised payment
5. Cash on delivery
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Methods of International Payment
Group of methods that are governed by
international custom
1. Collection
2. Documentary Credit
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Advance Payment
◼ Definition:
An advance payment is a
transaction where a buyer agrees to the seller’s
price by placing a firm order (non-cancelable)
and simultaneously transfers a portion or the
full payment occurs before the goods are
delivered by the seller to the buyer
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Advance Payment
Time of Advance Payment
-Immediately after contract signing
-After a certain period from the contract’s effective
date
-A specified period before goods delivery
Purpose of Advance Payment
-Importer provides credit to the exporter
-Ensures contract fulfillment
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Advance Payment
Importer provides credit to the exporter
 Despite of advanced payment, importer is discounted
to purchase goods
V = A (1 + r.t)
In which:
V: the value of contract
A: the amount of advance payment
r: interest rate (%/year)
t: time of advance payment (year)
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Advance Payment
Importer provides credit to the exporter
Ex: A contract has value: 100.000 USD. Parties agree
to pay 100% the value of contract 6 months before
delivering goods, the applied interest rate is 15%/year
-How much is the amount of advanced payment?
A=100.000/(1+15%.0,5)= 93.023 USD
-How much is the rate of discount?
(V-A)/V= (100.000-93.023)/100.000=6,98%
V=A(1+r.t)
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Advance Payment
Importer provides credit to the exporter
Ex: A contract has value: 100.000 USD. Parties agree to
pay 100% the value of contract 6 months before
delivering goods, the applied interest rate is 15%/year
-How much is the rest amount need paying?
X = 100.000 – 50.000(1+0,15*0,5) = 46.250
V = A (1 + r.t) + X
-How much is the rate of discount? (%)
= (100.000 – (50.000 + 46.250))/100.000
= 3,75%
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Advantage and Disadvantages
Importer
Exporter
- Benefits from discounts - Avoids risk of importer’s
- Increase responsibities
bankruptcy
Advantage
with the exporter
- Saves costs on credit
checks
- Strengthens financial
capacity
- Exporter may fail to
- The importer does not
deliver the goods as per
make advance payment
Disadvantage
contract=> guarantees
to perform contract
- Risks related to goods
during transportation=>
the beneficiary of the
Dr. Phanbe
Thi Thanh
insurance must
the Huong
Open account
Definition:
After completing the delivery of goods, the
exporter grants a credit to the importer. The
payment for these debts is usually made
periodically as agreed upon in the contract
In fact: the exporter is extending a commercial
credit to the importer
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Open account
Features
✓No bank involvement
✓Open account is a unilateral agreement
✓Both the buyer and seller must trust each other
✓Commonly used in “barter” transactions or for
frequent, regular deliveries
✓The price is typically higher than for immediate
cash payment
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Evaluation
Importer
Exporter
Advantages
-Not have to pay immediately
-Reduces financial pressure
-Reduces transaction fees with
the bank
-Simple, easy to implement,
low cost
-Increase competitiveness
-Reduces transaction fees
with the bank
Disadvantages
-The exporter may not deliver
the goods or may deliver the
goods not on time, of the
wrong type, or of poor quality
- The import may not pay or
not able to pay after
receiving the goods
- Difficult to control goods
once they have been
transferred to the importer
- Bears the costs of tax
control and collection
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www.themegallery.com
Remittance
Denifition
A customer requests a bank to transfer a
specific amount of money to another person at
a designated location within a specified
timeframe
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Classification
2 ways
Telegraphic
Transfer
Mail transfer
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1.
2.
3.
Mail Transfer
Telegraphic Transfer
A payment order from a
bank is sent by mail to
the paying bank
Low cost
Slow payment time
1.
2.
3.
A payment order from a
bank is included in the
content of a telegram sent
to the paying bank via
fax,telex,SWIFT
High cost
Fast payment time, and
the remitter’s funds are
not tied up.
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The parties joining payment
(beneficiary)
(remitter)
(Paying bank)
(Remitting bank)
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Payment procedure
Exporter
1.Goods and Goods documents
Importer
2.Payment
order
4. Payment
3. Payment order
Remiting bank
Paying bank
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Pros and Cons
Pros
Sufficient foreign
currency is provided
for customer
transactions if
requested
Quick
transactions,
fewer steps,
less paperwork
Customers can open an
account at one location
but conduct transactions
at any branch of the bank
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Pros and Cons
Both sellers
and buyers
must trust
each other
Cons
Irregularly
apply to the
international
trade
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Authority to Purchase(A/P)
◼ Letter of Authority to Purchase – A/P
The importer requests their servicing bank to
issue a document requesting the correspondent
bank in the exporter’s country to issue an A/P
- The bank issues a commitment to purchase the
exporter’s bill of exchange
- Condition: The presented documents must
conform to the A/P and be confirmed for payment
by the importer’s representative in the exporter’s
country
-
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Cash in delivery - COD
◼ Cash in delivery (COD) : The payment and
receipt of money between the buyer and seller
takes place immediately upon the completion
of the delivery of goods
◼ Primarily used in the sale of consumer godos
through intermediary delivery systems
=> Rarely used in international payment
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Collection
Denifition:
An exporter, after fulfilling the obligation of
delivering goods or providing a service to a
customer, authorizes a bank to collect the
payment from the importer based on a bill of
exchange or other documents issued by the
exporter
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Features
◼ Banks only participate as a collection
service provider
◼ The payment process does not have a strict
binding of responsibilities between parties
◼ Payment depends on the buyer’s goodwill
◼ There are many potential risks for the seller
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The joining parties
◼ Principal
◼ Remitting Bank, sending Bank
◼ Collecting Bank
◼ Presenting Bank
◼ Drawee
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Governing Law
Uniform Rule for Collection
- First issued by ICC in 1956: A
unified principle for collecting
commercial documents
- Has undergone 3 revisions:
+ First in 1967: for collecting commercial
documents
+ Second in 1978: a unified principle on
collections (URC,1978).
+ Third in 1995: a unified principle on
collections (URC,1995) - URC522
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The form of collection
(Clean Collection)
2 forms
(Documentary Collection)
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Clean collection
Denifition: the method of payment which the collection documents
only include financial papers. Commercial documents are sent directly
to the importer without going through the bank
Financial documents: Bills of Exchange
Commercial documents: Bills of Lading, Insurance certificates, Goods
documents
Features:
- Simple, easy to implement
- Relies solely on financial documents
- Risk primarily borne by the exporter (importer’s insolvency,
intentional fraud,etc.)
Applications:
- Collecting payment for services rendered (freight, insuranc,etc.)
- Transactions between parent and subsidiary companies
- Collecting penalties, compensation…
Dr. Phan Thi Thanh Huong
Clean collection process
Export
(7)
Credit
note
(1) Goods & documents
(2)
Draft
Import
(4)
Draft
(5)
Payment
Order
(3) Draft
Remitting bank
Collecting bank
(6) Payment
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Documentary collection
Denifition
-A payment method where the documents sent for collection
include both commercial documents and financial documents or
only commercial documents
-The collecting bank will only release the documents to the
importer when the importer pays or agrees to pay
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Documentary Collection
(1) Goods
Export
(8)
Credit
note
(2)
Draft&
Documents
Import
(4)
Draft
(5)
Annouc (6)
Docu
ement
ments
(3) Draft & Documents
Remitting bank
Collecting bank
(7) Payment
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DOCUMENT TRANSFER CONDITIONS
❖Documents against payment (D/P): The commercial
documents wil be delivered when the importer makes
full payment (within 3 days)
❖Documents against at X days sight (D/P at X days
sight): The commercial document will be delivered
upon payment at maturity
❖Document against acceptance (D/A): The commercial
document will be delivered upon the acceptance of the
draft
❖Documents against other terms and conditions (D/OT or
D/TC) : Payment in installments, deferred payment,etc.
Q: D/A is more risky than D/P to the exporter???
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Pros and Cons
Pros
Overcomes the drawbacks of a clean
collection
Ensures better protection of the
exporter’s rights
+ Only guarantees ownership of goods for
Cons
the exporter, but cannot control the
importer’s payment
+ The importer can extend the payment
term
+ The bank only acts as an intermediary to
collect the seller’s money and is not
responsible
for the import’s payment
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Letter of Credit
Denifition:
Article 2, UCP600: “ A documentary credit is
any arrangement, however named or described
which represents a definite and irrevocable
undertaking on the issuing bank to pay a certain
sum of money on presentation of complying
documents”
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Features of L/C
-
L/C is a bilateral commercial contract between the issuing
bank and the beneficiary
L/C is independent of the contract of the premises and
goods
L/C transactions are based solely on documents and
payment is made strictly according to these documents
L/C must clearly state whether it is revocable or
irrevocable. If not specified, it is considered irrevocable
L/C requires strict compliance with the set of documents
L/C is a payment tool that mitigates risk and serves as a
tool for rejecting payments and preventing fraud
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Applications
◼ Unfamiliar partner, infrequent economic and
commercial relationship
◼ Low level of trust
◼ Large value of commercial transactions,
multiple deliveries of goods
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Pros and Cons of L/C
Pros
✓ For the importers:
▪ Better protected benefits
▪ Easily sponsored from the issuing bank when needed
✓ For the exporters:
▪ Payment is guaranteed and received fastest
▪ Reduces the risk of debt collection
▪ L/C can be used to finance exports
✓ For the banks:
▪ Earn fees, expand credit…
Dr. Phan Thi Thanh Huong
Pros and Cons of L/C
L/C is completely independent of foreign trade contract
- Payment is completely based on the documents, not
regarded to goods and service
- Complicated L/C process, high cost...
-
Dr. Phan Thi Thanh Huong
Governing Legal Document
- Uniform Customs and Practice for
Documentary Credits (UCP600)
- International standard banking practice
for documentary examination under
L/C (ISBP 681, 745)
- Uniform Rules for Collections under
L/C (URR 522)
- UCP 600 Supplement on the
presentation of electronic documents eUCP
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Terms under UCP600
1.
Complying presentation
2.
Presentation
3.
Presenter

Presenter: the beneficiary, nominated bank, confirming bank
4.
Place of Presentation
5.
Payment and Undertaking to pay (Honour)
-
Payment at sight when L/C has the value at sight
-
Deferred payment undertaking when L/C has the value of deferred
payment
-
Acceptance of Bill of Exchange when L/C has the payment value
by accepting bill of exchange
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Terms under UCP600
6.
Negotiation: Nominated bank purchases drafts and
compliant presented documents by advancing funds to the
beneficiary
7.
L/C is available with by..: Payment or discount at a bank
(confirming bank, issuing bank, nominated bank)
8.
Distinction between “deferred” and “acceptance” LC:
“deferred” – no draft and “acceptance” – draft
9.
Distinction between“payment” and “negotiation” LC:
10.
Distinction between“negotiation” and “Discount” LC
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The parties joining L/C
The obligatory parties:
1. Applicant for LC
2. Beneficiary of LC
3. Issuing bank
4. Advising bank
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The parties joining L/C
The parties can joining:
5. Confirming bank
6. Nominated Bank
7. Transferring Bank
8. Reimbursing Bank
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LC process
LC has the value at the issuing bank
(3)
(6)
Issuing bank
(8)
(9)
(7)
(2)
Advising bank
(7)
(6)
(1)
Importer
(5)
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Exporter
(4)
LC process
LC has the value at the(3)nominated bank
(8)
Issuing bank
(10
)
(11)
(9)
(2)
Advising bank
&Nominated
bank
(7)
(6)
(1)
(5)
Importer
Dr. Phan Thi Thanh Huong
Exporter
(4)
CONTENT OF L/C
Number: All L/C must have a unique number. This number is
also used for reference on related documents.
2. Issuing Place L/C: This is the location of the bank that issues
the L/C and commits to paying the exporter
3. Issuing Date: This is the date the bank’s commitment to the
exporter begins, marking the start of the L/C’s validity period.
Exporters use this date to verify if the importer has opened the
L/C as agreed upon in the contract.
4. Names and addresses of all parties involved in the
transaction.
5. Amount: The amount of the L/C must be stated both in
numerals and in words and must match. The unit of currency
must be clearly specified.
1.
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CONTENT OF L/C
Validity Period of the Letter of Credit: is the period during
which the issuing bank commits to pay the exporter if the
exporter presents a set of documents within that period and in
accordance with the terms and conditions stipulated in the L/C.
7. Payment term of the L/C: is the term for payment at sight or
deferred payment, depending on the provisions in the contract
8. Delivery Term: Stated in the L/C and determined by the
sales-purchase contract.
6.
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CONTENT OF L/C
9. Goods
Details: Includes the name of the goods,
quantity, weight, price, quality, specifications,
packaging, product code, etc.
10. Transportation and Delivery: Includes the terms of
delivery (FOB, CIF, CFR), shipping point,
destination, mode of transport and method of delivery
11.Documents must be submitted by the exporter:
Original L/C, commercial invoice, insurance
documents, bill of lading, inspection certificate,
certificate of origin and packing list
12. Payment Commitment of the Issuing Bank
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Classification of L/C
1.
Based on the usage of L/C:
-
Revocable L/C: can be canceled or amended without
notifying the beneficiary.
-
Irrevocable L/C: Once opened by a bank, cannot be
amended, supplemented or canceled during its
validity period unless there is an agreement from all
parties involved.
-
Confirmed irrevocable L/C: is an irrevocable L/C that
has been confirmed by another bank to make
payment => providing the highest level of assurance
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for the exporter
Classifications of L/C
2. Based on Payment terms:
-
-
At sight L/C: Cannot be canceled and must be paid
immediately upon presentation of the draft.
Deferred L/C: Payment is made a certain number of days after
the presentation of a complete set of documents or after the
delivery date.
Acceptance L/C: The issuing bank accepts the draft or
designates a drawee.
3. Based on Relationship:
-
Straight L/C: Requires the beneficiary to present documents
directly to the issuing bank.
Negotiation L/C: The issuing bank authorizes another bank to
purchase a complete set of documents presented by the
beneficiary
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Some special types of L/C
Reciprocal L/C
Standby
L/C
Red clause L/C
Special L/C
Revolving L/C
Transferable L/C
Back-to-back
L/C
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1. Red clause L/C
A specific type of L/C that includes a special provision: the Issuing
bank will transfer funds or authorize the Advising Bank to advance a
sum of certain money to the beneficiary prior to shipment
Criteria
Advantages
Disadvantages
Parties
Seller
Reduced financial difficulties,
creating conditions for
preparing for export, having a
stable market for products
Buyer
Can buy goods at a lower price, Have to open the L/C early
have a stable source of goods
before shipment, bear the costs
and risks of advance payments
Bank advancing
the L/C
Receives interest from the
advanced loan amount
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Have to sell goods at a lower
price
2. Revolving L/C:
◼
◼
A type of L/C that cannot be canceled and will automatically
restore its value after being used or after the L/C expires without the
need to open a new L/C.
There are 3 ways to revolve:
•
Automatic revolving
•
Non-automatic revolving
•
Semi-automatic revolving
◼
Used in payments with regular customers, with a stable quantity
and type of goods purchased over a long period of time.
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Criteria
Advantages
Disadvantages
Seller
Stable market for product sales
May suffer losses when
international prices
fluctuate
Buyer
Can purchase quantities of
goods over a long period when
the market is advantageous; no
need to open multiple L/Cs with
low amounts, reducing storage
costs, insurance fees and
preventing capital stagnation
Must continue to
receive goods, unable to
cancel L/Cs if there are
adverse fluctuations in
the market
Parties
Bank
advancing the
L/C
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The buyer’s risks will
eventually lead to risks
for the issuing bank
4. Transferable L/C:
Definition:
A L/C where the first beneficiary can request the bank serving
to transfer all or part of the original L/C value to one or more
second beneficiaries.
Features:
- L/C can only be transferred once, meaning the second
beneficiary cannot transfer it to a third beneficiary.
- Commonly used when the first beneficiary is an agent or
intermediary supplying goods to the importer.
Dr. Phan Thi Thanh Huong
5. Back-to-back L/C
When a beneficiary receives a L/C (original L/C)
that is not transferable but is unable to supply the
goods by themselves, they can then agree with their
bank to issue a second L/C with similar terms to the
supplier of the goods. This is called a back-to-back
L/C
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Criteria
Original L/C
Back-to-back L/C
Issuing bank
Importer bank
Exporter bank
Amount of money Usually larger
Usually smaller
Unit price
Higher
Lower
Delivery time
Later
Earlier
Validity period
Longer
Shorter
Payment
execution
After the bank issues back- Before receiving payment
to-back L/C and pays for
from the original L/C
exporters
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5. Standby L/C:
➢ This is a type of L/C where the importer requires the related
bank to issue an L/C containing a commitment to the importer
that the bank will refund the deposited amount: advance
payment and L/C opening fees to the importer in the event that
the exporter encounters difficulties in shipping or fails to fulfill
the shipping obligations as stipulated in the L/C.
Dr. Phan Thi Thanh Huong
6. Reciprocal L/C:
A type of standard L/C that only becomes
effective when the reciprocal L/C is opened
Used in cases such as:
- Barter transactions
- A supplier of raw materials and a manufacturer
located in different countries
Dr. Phan Thi Thanh Huong
REVIEW
◼ Compare the advantages and disadvantages of
each international payment method.
◼ Evaluate the role of banks in each method in
ascending order
◼ Evaluate the level of risk for both the seller and
the buyer in each method
◼ Draw lessons on which payment method to
apply in which conditions
◼ Catch the main content of a L/C
◼ Be able to correct errors in a L/C
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