Academy of Economic Studies
Faculty of International Business and Economics
“International Finance and Payments”
Lecture VII
“International Payments”
Lect. Cristian PĂUN
Email: cpaun@ase.ro
URL: http://www.finint.ase.ro
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
2
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
3
International Payments Methods
I.
Cash in advance
II. Consignment
III. Open Account Payments
IV. Bank Drafts:
V.
-
bill of exchange (sight and time drafts)
-
checks
-
money orders
-
promissory note
Letter of Credit
VI. Documentary collection
•
Documents against payments
•
Documents against acceptance
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I. Cash in advance
Goods
Exporter
•
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
•
Lecture 6: International
FX Markets one-time sales
Used for: small amounts,
new customers,
5
II. Consignment
Delivering of goods (1)
Exporter
(consigner)
Payment of
Import at a
specific date (4)
Importer
(consignee)
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
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6
III. Open Account Payments
Delivery of goods (1)
Exporter
Importer
Payment on the agreed time (2)
1. In an open account trade arrangement, the goods are shipped to a buyer
without guarantee of payment.
2. The credit terms are arranged between the importer and the exporter.
3. These are usually afforded to longstanding partners, or to foreign affiliates
where payment is reasonably assumed
4. 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
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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.
Delivery (3)
Exporter
Importer
Payment (4)
Payment (7)
Presenting the
cheque for
payment (5)
Cheque remittance (2)
Cash deposit (1)
Exporter bank
Importer bank
Money transfer
(6)
Risk vs Simplicity
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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.
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Check - example
Check
This check is to be
Paid to the Order of
Value
Issuing Date
at Issuing Place
Exporter
Euros
€ Value
by the:
Importer Bank
Importer Bank Address
____Importer Signature____
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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.
Importer
Delivery (1)
Exporter)
Presenting the
documents (4)
Importer Bank



Money transfer (3)
Payment (5)
Exporter Bank
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
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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 Acceptance (2)
BE Bearer
Debtor
BE Remittance (1)
BE Remittance (3)
Presenting BE
for payment
(4)
Payment at
the BE’s
maturity (5)
Beneficiary

may be endorsed and passed on to another, or just passed on if to the bearer
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Bill of Exchange - sight drafts (documents against payment)
BE Acceptance (2)
BE Bearer (Exporter)
Importer
BE Remittance (1)
BE Remittance (3)
Presenting BE
for payment
when exporter
delivers the
goods (4)
Payment at
the BE’s
maturity (5)
Beneficiary (Exporter)
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
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Bill of Exchange - time drafts (documents against acceptance)
BE Acceptance (2)
BE Bearer (Exporter)
Importer
BE Remittance (1)
BE Remittance (3)
Presenting BE
for payment at a
specified
maturity (4)
Payment at
the BE’s
maturity (5)
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
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Bill of Exchange - example
BILL OF EXCHANGE
Issuing Data
US$:
BE Value
On Payment Data, for value received, pay against this only set of bill of exchange to
the order of Exporter the sum of BE Value Dollars of the United States of America
and BE Value cents, effective payment to be made in Dollars of United States of
America only, without deduction for and free of any taxes, impost, levies or duties
present or future of any nature under the laws of Importer’s Country or any political
subdivision thereof or therein.
This bill of exchange is payable at Importer’s Place
Drawn on:
Importer’s Name
Exporter:
Exporter’s Name
Accepted:
Importer’s Signature
Per aval for account of Importer’s Name
Aval Bank (Full name and Address
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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
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Promissory Notes - Example
Nov. 2, 2004
$ 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
990-11-9999
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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.
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Letter of Credit - Mechanism
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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)
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Documents Common to an Export L/C






Commercial Invoice
Packing List
Bills of Lading
Certificate of Origin
Other Certificates: Quality, Inspection
Beneficiary Statements
A. Commercial documents
B. Transport documents
C. Insurance documents
D. Other documents
Lecture 6: International FX Markets
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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)
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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
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23
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.
Banker’s Acceptance
1. Purchase Order
Importer
Exporter
5. Ship Goods
2. Apply
for L/C
10. Sign
Promissory
Note to Pay
6.
Shipping
Documents
& Time
Draft
11.
Shipping
Documents
14. Pay
Face Value
of BA
Importer’s
Bank
12. BA
16. Pay Face Value of BA
8. Pay Discounted Value of BA
3. L/C
7. Shipping Documents &
Time Draft
Money Market
Investor
13. Pay Discounted Value of BA
15. Present BA at Maturity
4. L/C
Notification
9. Pay
Discounted
Value of
BA
Exporter’s
Bank
1 - 7 : Prior to BA
8 - 13 : When BA
is created
14 - 16 : When BA
matures
Standby Letter of Credit
Export contract (1)
Importer
Exporter
Delivery of goods (2)
3. Apply for Standby L/C
5. Standby L/C remittance
Importer’s
Bank
4. Standby L/C remittance
Importer’s
Bank
It is used if Importer didn’t fulfill it’s obligations
Lecture 6: International FX Markets
26
Transferable Letter of Credit
Delivery (4)
Exporter
Transfer
L of C (6)
Importer
Advising the transfer (3)
Documents and
payment (9)
Order to open
the L of C (1)
Presenting the documents (5)
Beneficiary
Open L of C (2)
Exporter’s
Bank
Payment (7)
Importer’s
Bank
Documents and
payment (8)
Lecture 6: International FX Markets
27
“Back-to-back” Letter of Credit
Delivery of goods (1)
Beneficiary (real
exporter)
Importer
Importer
Exporter
Delivery of goods (2)
L/C1 delivery (8)
Documents
shipment (8)
Apply for L/C 2
(6)
L/C1 delivery (5)
Beneficiary’s
Bank
L/C 2 delivery (7)
Exporter’s
Bank
Documents
shipment (9)
Funds (12)
Apply for L/C 1
(3)
L/C1 delivery (4)
Importer’s
Bank
Documents
shipment (10)
Funds (11)
Lecture 6: International FX Markets
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Letter of credit - example
29
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
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Documents against payment (D/P) flow
Lecture 6: International FX Markets
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Documents against acceptance (D/A) flow
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Documentary collection - example
33
Documentary collection – example (2)
34
International Methods of Payment: Advantages and Disadvantages
Method
cash in advance
Risk
L
Sight draft
M/L
Letters of credit
Irrevocable
Revocable
M
M/H
Time draft
M/H
Consignment sales
M/H
Open account
H
Chief Advantage
No credit extension required
Chief Disadvantage
Can limit sales potential, disturb
some potential customers.
If customer does not or cannot
accept goods, goods remain
at port of entry and no payment is due
If revocable, terms can change
during contract work.
Retains control and title;
ensures payment before
goods are delivered
Banks accept responsibility
pay; payment upon
presentation of paper; costs
go to buyer
Lowers customer resistance Same as sight dragt, plus goods
by allowing extanded payment delivered before payment is due
after receipt of goods
or received
Facilitates delevery; lowers
Capital tied up until sales; must
customer resistance
establish distributor's creditworthiness
need political rish insurance in some
countries; increased risk from
currency controls
Simplified procefure; no
High risk; seller must finance
customer resistance
production; increased risk from
currency controls
Lecture 6: International FX Markets
35
Risk protection in case of international payments
Buyer
Min
Max
Confirmed
Unconfirmed
Sight
Draft
Max
Time
Draft
Min
Seller
Cash in
Advance
Letter of
Credit
Documentary
Collection
Lecture 6: International FX Markets
Open
Account
36
Additional Topic
Society for Worldwide Interbank Financial
Telecommunications (SWIFT)
Lecture 6: International FX Markets
37
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
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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
39
SWIFT - US Dollars
US Importer
Exporter’s Foreign
Bank
Exporter
New York Bank
SWIFT
Network
US$
US$
US$
US$
Funds
Payment
instructions
USDO Bank
in US
(U.S. Disbursing Officers)
Lecture 6: International FX Markets
40
SWIFT - Foreign Currency
US Importer
Exporter
New York Bank
Exporter’s
Foreign
Bank
SWIFT
Network
US$
US$
USDO Bank
overseas
USDO Bank
in US
US$
Bank
(or foreign exchange house)
Lecture 6: International FX Markets
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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
42
SWIFT - Example
43