Dilshad Ahmed

INTERNATIONAL Roll no. 22.

B.A.LLB.(Hons.)
PAYMENTS 5th Semester
(Regular Batch).
In this research paper I will deal with International
Trade & Finance and specifically International
Payments method with help of the kinds of
International Payments Methods and Cases
regarding the International Imports and Exports.
Introduction
To succeed in today’s global marketplace and win sales against foreign
competitors, exporters must offer their customers attractive sales terms supported
by appropriate payment methods. Because getting paid in full and on time is the
ultimate goal for each export sale, an appropriate payment method must be chosen
carefully to minimize the payment risk while also accommodating the needs of the
buyer. there are four primary methods of payment for international transactions.
During or before contract negotiations, you should consider which method in the
figure is mutually desirable for both you and your customer.

The International Payments Framework (IPF) was an initiative launched in

2010 to create a global framework for payment processing by the International
Payments Framework Association, a trade association headquartered in Atlanta, in
the United States.1 The IPF standard is currently used by some organisations to
process payments between the United States and Europe.2

Key Points :

1. To succeed in today’s global marketplace and win sales against International

trade presents a spectrum of risk, which causes uncertainty over the timing
of payments between the exporter (seller) and importer (foreign buyer).
2. For exporters, any sale is a gift until payment is received.
3. Therefore, exporters want to receive payment as soon as possible, preferably
as soon as an order is placed or before the goods are sent to the importer.
4. For importers, any payment is a donation until the goods are received.
1
Miller, Geoffrey; Cafaggi, Fabrizio (2013). The Governance and Regulation of International
Finance. Cheltenham, UK: Edward Elgar. pp. 124–25.
2
 Milkau, Udo (September 2010). "A new paradigm in payments: The strengths in
networks". Journal of Payments Strategy & Systems.
 5. Therefore, importers want to receive the goods as soon as possible but to
delay payment as long as possible, preferably until after the goods are resold
to generate enough income to pay the exporter.

Cash-in-Advance :
With cash-in-advance payment terms, the exporter can avoid credit risk because
payment is received before the ownership of the goods is transferred. Wire
transfers and credit cards are the most commonly used cash-in-advance options
available to exporters. However, requiring payment in advance is the least
attractive option for the buyer, because it creates cash-flow problems. Foreign
buyers are also concerned that the goods may not be sent if payment is made in
advance. Thus, exporters who insist on this payment method as their sole manner
of doing business may lose to competitors who offer more attractive payment
terms.

Pros

 Payment before shipment

 Eliminates risk of non-payment

Cons

 May lose customers to competitors over payment terms

 No additional earnings through financing operations

Key Points :
  Full or significant partial payment is required, usually via credit card or bank
or wire transfer or escrow service, before the ownership of the goods is
transferred.
 Cash-in-advance, especially a wire transfer, is the most secure and least
risky method of international trading for exporters and, consequently, the
least secure and an unattractive method for importers. However, both the
credit risk and the competitive landscape must be considered.
 Exporters may select credit cards as a viable cash- in-advance option,
especially for small consumer goods transactions.
 Exporters may also select escrow services as a mutually beneficial cash-in-
advance option for small transactions with importers who demand assurance
that the goods will be sent in exchange for advance payment.
 Insisting on cash-in-advance could, ultimately, cause exporters to lose
customers to competitors who are willing offer more favorable payment
terms to foreign buyers.
 Creditworthy foreign buyers, who prefer greater security and better cash
utilization, may find cash-in-advance unacceptable and simply walk away
from the deal.

Characteristics of Cash-in-Advance :

1. Applicability: Recommended for use in high-risk trade relationships or

export markets, and appropriate for small export transactions.
2. Risk : Exporter is exposed to virtually no risk as the burden of risk is placed
almost completely on the importer.
3. Credit Card : Exporters who sell directly to foreign buyers may select
credit cards as a viable cash-in-advance option, especially for small
 consumer goods transactions. Exporters should check with their credit card
companies for specific rules on international use of credit cards. The rules
governing international credit card transactions differ from those for
domestic use. Because international credit card transactions are typically
placed using the Web, telephone, or fax, which facilitate fraudulent
transactions, proper precautions should be taken to determine the validity of
transactions before the goods are shipped. Although exporters must tolerate
the fees charged by credit card companies and assume the risk of unfounded
disputes, credit cards may help the business grow because of their
convenience and wide acceptance.
4. Payment by Check: A Less-Attractive Cash-in-Advance Method :
Advance payment using a check drawn on the importer’s account and mailed
to the exporter will result in a lengthy collection delay of several weeks to
months. Therefore, this method may defeat the original intention of
receiving payment before shipment. If the check is in U.S. dollars and drawn
on a U.S. bank, the collection process is the same as it would be for any U.S.
check. However, funds deposited by non-local checks, especially those
totaling more than $5,000 on any one day, may not become available for
withdrawal for up to 10 business days due to Regulation CC of the Federal
Reserve (§ 229.13 (ii)). In addition, if the check is in a foreign currency or
drawn on a foreign bank, the collection process can become more
complicated and can significantly delay the availability of funds. Moreover,
if shipment is made before the check is collected, there is a risk that the
check may be returned due to insufficient funds in the buyer’s account or
even because of a stop-payment order.

When to Use Cash-in-Advance Terms :

  The importer is a new customer and/or has a less-established operating
history.
 The importer’s creditworthiness is doubtful, unsatisfactory, or unverifiable.
 The political and commercial risks of the importer’s home country are very
high.
 The exporter’s product is unique, not available elsewhere, or in heavy
demand.
 The exporter operates an Internet-based business where the acceptance of
credit card payments is a must to remain competitive.

Letters of Credit :
“A letter of credit adds a bank's promise to pay the exporter to that of the foreign
buyer provided that the exporter has complied with all the terms and conditions of
the letter of credit. The foreign buyer applies for issuance of a letter of credit from
the buyer's bank to the exporter's bank and therefore is called the applicant; the
exporter is called the beneficiary”.

“A letter of credit is a written commitment by a bank to make payment at sight of a

defined amount of money to a beneficiary (exporter) according to the terms and
conditions specified by the importer (applicant). The letter of credit should set a
time limit for completion and specify which documents are needed to confirm the
transaction's fulfillment”.

Types of Letter of Credit :

There are Two Basic Forms of letters of credit: Standby and Documentary.
Documentary Letters Of Credit can be either Revocable or Irrevocable, although
the first is extremely rare. Irrevocable Letters Of Credit can be Confirmed or Not
Confirmed. Each type of credit has advantages and disadvantages for the buyer and
for the seller, which this information will review below. Charges for each type will
also vary. However, the more the banks assume risk by guaranteeing payment, the
more they will charge for providing the service.

Documentary Revocable Letter of Credit: Revocable credits may be modified or

even cancelled by the buyer without notice to the seller. Therefore, they are
generally unacceptable to the seller.

Documentary Irrevocable Letter of Credit: This is the most common form of

credit used in international trade. Irrevocable credits may not be modified or
cancelled by the buyer. The buyer's issuing bank must follow through with
payment to the seller so long as the seller complies with the conditions listed in the
letter of credit. Both the buyer and the seller must approve changes in the credit. If
the documentary letter of credit does not mention whether it is revocable or
irrevocable, it automatically defaults to irrevocable. See Credit Administration,
Sample Procedure for Administration of a Documentary Irrevocable Letters of
Credit for a systematic procedure for establishing an irrevocable letter of credit.

Tips on using a Letter of Credit :

 When preparing quotations for prospective customers, exporters should keep

in mind that banks pay only the amount specified in the letter of credit - even
if higher charges for shipping, insurance, or other factors are incurred and
documented.
 Upon receiving a letter of credit, the exporter should carefully compare the
letter's terms with the terms of the exporter's pro forma quotation. This step
is extremely important, since the terms must be precisely met or the letter of
credit may be invalid and the exporter may not be paid. If meeting the terms
 of the letter of credit is impossible or if any of the information is incorrect or
even misspelled, the exporter should contact the customer immediately and
ask for an amendment to the letter of credit.
 The exporter must provide documentation showing that the goods were
shipped by the date specified in the letter of credit or the exporter may not be
paid. Exporters should check with their freight forwarders to make sure that
no unusual conditions may arise that would delay shipment.
 Documents must be presented by the date specified for the letter of credit to
be paid. Exporters should verify with their international bankers that there
will be sufficient time to present the letter of credit for payment.
 Exporters may request that the letter of credit specifies those partial
shipments and transhipment will be allowed. Specifying what will be
allowed can prevent unforeseen last minute problems.

Proper Letters of Credit have the following basic components :

 Applicant: The party applying for the letter of credit, usually the importer in
a grain transaction.
 The Issuing Bank: The bank that issues the letter of credit and assumes the
obligation to make payment to the beneficiary, usually the exporter.
 Beneficiary: The party in whose favor the letter of credit is issued, usually
the exporter in a grain transaction.
 Amount: The sum of money, usually expressed as a maximum amount, of
the credit defined in a specific currency.
 Terms: The requirements, including documents that must be met for the
collection of the credit.3

3
Halsbury's Laws of England, 4th Edn., Vol. 3, p. 99, Para. 131.
Information to be provided in the Letter of Credit by the paties :

Once the exporter and importer have concluded a transaction that calls for payment
under some form of letter of credit, the importer makes application for the credit to
the bank, either locally or in another country that will issue the credit. The
importer/applicant will give the issuing bank instructions that cover such items as:

 The full, correct name addresses and contacts information of the

beneficiary, usually the exporter.
 A brief description of the grain involved, including the quantity, quality
and unit price.
 The method, place and form of shipment, the location of the final
destination and other shipping issues including transhipment, partial
shipment and the latest shipping date.
 The full, correct description of the documents required, including the
period of time after the documents are issued within which they must be
presented for payment. In addition, the credit should specify if payment is
to be immediate (at sight) or with some degree of deferment (i.e., four days
after acceptance).
 Details of the letter of credit itself, including the amount (usually expressed
as a maximum), the expiry date, how the credit will be made available and
the transferability of the credit.

Tarapore and Corporation Madras v. Tractoroexport, Moscow4

Facts: The suit has been brought by M/s. Tarapore & Co., Madras (hereinafter
referred to as the (“Indian firm”). That firm had taken up on contract the work of
excavation of a canal as a part of the Farakka Barrage Project. In that connection

4
AIR 1970 SC 891.
they entered into a contract with M/s. V/O Tractoro export, Moscow (which will
hereinafter be referred to as the “Russian firm”), for the supply of construction
machinery such as scrapers and bulldozers. In pursuance of that contract, the
Indian firm opened a confirmed, irrevocable and divisible Letter Of Credit with the
Bank of India Ltd., for the entire value of the equipment, i.e., Rs. 66,09,372, in
favour of the Russian firm negotiable through the bank for foreign trade of the
U.S.S.R., Moscow. Under the said Letter Of Credit the Bank of India was required
to pay to the Russian firm on production of the documents particularised in the
Letter Of Credit along with the drafts. One of the conditions of the Letter Of Credit
was that 25 per cent, of the amount should be paid on the presentation of the
specified documents and the balance of 75 per cent, to be paid one year from the
date of the first payment. The agreement entered into between the Bank of India
and the Russian firm under the Letter Of Credit.

Decision: The parties shall continue to be bound by the original contract subject to
the extension of the time granted under the Delhi agreement for the payment of the
price and thus, the appeal was allowed.

In Urquhart Lindsay and Co. Ltd. v. Eastern Bank Ltd 5, the King’s Bench held
that the refusal of the defendants bank to take and pay for the particular bills on
presentation of the proper documents constituted a repudiation of the contract as a
whole and that the plaintiffs were entitled to damages arising from such a breach. It
may be noted that in that case the price quoted in the invoices was objected to by
the buyer and he had notified his objection to the bank. But under the terms of the
Letter of Credit the bank was required to make payments on the basis of the
invoices tendered by the seller. The court held that if the buyers had an enforceable

5
[1922] 1 K. B. 318.
claim that adjustment must be made by way of refund by the seller and not by way
of retention by the buyer.

Benefits of using a Letter of Credit :

By conducting an export sales transaction under an irrevocable Letter of Credit, the

Seller does not have to determine the credit standing of the foreign buyer. Letters
of Credit are issued in many different forms from foreign banks and financial
institutions. The variations are due to differences in customs and regulations of
trade and finance in the country of origin of the issuing bank or financial
institution. If, for any reason, a Seller cannot comply with one or more conditions
of a Letter of Credit, it is absolutely imperative for the Seller to contact the buyer
to arrange for one or more amendments to the original agreement.

Documentary Collections :
A documentary collection (D/C) is a transaction whereby the exporter entrusts the
collection of a payment to the remitting bank (exporter’s bank), which sends
documents to a collecting bank (importer’s bank), along with instructions for
payment. Funds are received from the importer and remitted to the exporter
through the banks involved in the collection in exchange for those documents.
D/Cs involve using a draft that requires the importer to pay the face amount either
at sight (document against payment) or on a specified date (document against
acceptance). The draft gives instructions that specify the documents required for
the transfer of title to the goods. Although banks do act as facilitators for their
clients, D/Cs offer no verification process and limited recourse in the event of non-
payment. Drafts are generally less expensive than LCs.
Open Account :
An open account transaction is a sale where the goods are shipped and delivered
before payment is due, which is usually in 30 to 90 days. Obviously, this option is
the most advantageous option to the importer in terms of cash flow and cost, but it
is consequently the highest risk option for an exporter. Because of intense
competition in export markets, foreign buyers often press exporters for open
account terms since the extension of credit by the seller to the buyer is more
common abroad. Therefore, exporters who are reluctant to extend credit may lose a
sale to their competitors. However, the exporter can offer competitive open
account terms while substantially mitigating the risk of non-payment by using of
one or more of the appropriate trade finance techniques, such as export credit
insurance.

Conclusion
In this project I have dealt with the International Payment methods. In which I
studied that there are different types of risk in payment systems depends on their
stage of development. The main concern of this research work is to give a detail
information about International Payment systems along with risk. However the
recognition of payment system risk has been Universal. We have done a detailed
study on two types of payment method (i) Cash-in-Advance & (ii) Letters of
Credit.

In Cash-in-Advance methods, we have covered its pro & cons including its
keynotes followed by its characteristics. Therefore in Letters of Credit we have
covered its types, component and with some important cases.