In the backdrop of Vietnam’s ongoing integration with the international economy and its progressive development, particular attention is being directed towards international economic activities. Within the realm of international trade, the international payment methods assume paramount significance as an integral component. International payments constitute the pivotal and concluding stage in effecting the closure of a commercial transaction involving the exchange of goods or services between entities and individuals from distinct nations. International payments assume an exceedingly vital role, representing the obligations and entitlements of both buyers and sellers, importers and exporters, and catering to the exigencies of commercial transactions in the field of foreign trade. This facilitates a favorable environment for expeditious transactions between domestic and international enterprises. During the negotiation of payment terms, parties invariably strive to elect the safest and most advantageous payment method suiting their respective interests. Despite the attendant risks and limitations, electronic payment mechanisms are gradually supplanting traditional document-based payment methods by virtue of their inherent merits. Hence, it behooves us to delve into an exploration of the prevalent international payment methods in contemporary practice.
What is an International Payment Method?
An international payment method refers to the process of settling payments between parties involved in international sales contracts or service contracts with foreign elements. Simply put, it is the way in which an importer pays the exporter in international commercial transactions.
To facilitate this process, it is imperative for both the buyer and seller to involve financial institutions and employ one of the established international payment methods. The payment process is closely tied to currency exchange at prevailing foreign exchange rates. Presently, there are several payment methods that are commonly utilized, including telegraphic transfer, payment by collection, and documentary credit methods.
International payment serves as the paramount, final step in completing a cycle of buying and selling goods or exchanging services between organizations and individuals from different countries, therefore plays a significantly important role. In terms of the economy, international payments contribute to expanding and promoting foreign economic relations, enhancing the economic position of each country in the international market, and acting as a bridge between nations in payment relationships. For businesses, international payments help fulfill the payment needs of enterprises involved in international trade activities. For banks, international payments generate service revenues and contribute to the development of other banking activities.
Characteristics for identifying international payment methods:
- International payments involve foreign elements. Activities involving foreign elements are considered international payments, whereas those without foreign elements are deemed domestic payments. The foreign element is manifested in the following aspects: The participants in international payments include both residents and non-residents, regardless of their nationality or residency status. The currency used in the payment is transferred from the account of a non-resident to the account of a resident, or between the accounts of two non-residents, regardless of whether the accounts are held in the same bank or different banks within the same country or in different countries. The currency utilized in international payments is the foreign currency for one or both countries involved or may originate from foreign currency sources.
- Implemented by banks. International payment activities is a type of banking service provided to customers by banks. In addition to traditional features shared with other services, international payment services possess the following distinct characteristics: Provision of services across national borders, consumption of services in foreign countries, establishment of service agents in the recipient country, and inherent risks associated with international payment operations. The international payment space is vast, with relatively lengthy payment times, varying levels of infrastructure and technological advancements, disparate legal environments lacking consistency, and significant disparities in the expertise of personnel involved in international payments across different countries. These factors contribute to the emergence of risks in present-day international payments. However, due to the advantages offered by international payments, they are gradually replacing traditional document-based payment methods.
Conditions for implementing international payments:
The conditions for international payments are the rights and obligations that each party must fulfill in a commercial transaction. These conditions are reflected in the payment terms of trade agreements, international payment agreements, and foreign trade contracts between buyers and sellers, including:
- Currency conditions. In international payments, the parties must agree on the use of a specific currency from a particular country. This condition is stated in the agreements and contracts. Additionally, it also specifies the procedures for handling currency fluctuations.
- Payment location conditions. The payment location can be either from importing or exporting countries, or it can be a third-party country. This is clearly specified in the contract. In practice, international payments are agreed upon and decided by both parties. Each party prefers to make payments in their own country as the payment location, as it provides more convenience for the selected party.
- Time conditions. Payment time is an important issue that often causes disputes between parties during contract negotiations on account of the fact that payment time is closely related to capital circulation and profitability, with the ability to avoid payment currency fluctuations. Generally, there are three ways to determine the payment time: Pre-payment: The importer pays the exporter in full or in part after both parties sign the contract or after the exporter accepts the import order; Payment upon delivery: The importer pays immediately after the exporter fulfills the delivery obligation, and the importer receives the goods at the specified location. Payment after a certain period: After a certain period from the delivery, the importer will pay the exporter.
- Payment method conditions. The payment method refers to how the buyer makes the payment and how the seller receives it. There are various payment methods available for international transactions. The specific method is chosen based on the particular conditions agreed upon by the buyer and the seller. It is considered the most important condition in international payment activities.
Common international payment methods currently used include:
The selection of international payment methods is contingent upon the level of trust between the buyer and seller, as determined by their respective preferences. Commonly employed international payment methods include the following:
- International funds transfer method (Remittance). This is one of the fastest payment methods for businesses. The customer (the remitter or importer) requests a bank to serve them through a correspondent bank in a foreign country to transfer a certain amount of money to another person (the beneficiary or exporter) at a specific location within a specified time. However, this method should only be applied when both parties have a reliable relationship, and the payment amount is not high to avoid unwanted risks. The bank acts as an intermediary for the money transfer, earning fees, and is not bound by any responsibility towards the remitter or beneficiary. On the other hand, there are cases where the importer may delay or manipulate the payment to take advantage of the exporter’s funds, posing risks to the exporter when the goods have been delivered but are not fully or timely paid.
- Collection of payment. It refers to the payment method after the exporter ships the goods to the importer and sends the documents to their bank to collect the payment from the importer’s bank. The collection documents are financial instruments such as bills, drafts, checks, or trade documents such as invoices, transport documents, ownership documents, or any documents not considered as financial instruments. There are two forms of collection:
- Clean collection. Only collecting financial documents without trade documents. This form is usually used for commercial services such as electricity or water bills. It is not commonly used because it does not guarantee the rights of both parties since the bank acts only as an intermediary in the payment process. The agent bank cannot control the importer because the goods have been handed over to the importer.
- Documentary collection. Collecting both trade and financial documents or trade documents without financial documents. This method avoids risks for the exporter in case of late, insufficient, or even refused payment by allowing the exporter to entrust the bank to check the payment documents on their behalf. If the importer agrees to make payment by directly endorsing the bill of exchange or accepting it in writing, the bank presents the set of shipping documents to the importer. The bank presents the set of shipping documents to the importer after the importer has transferred enough funds for payment under collection.
The documentary collection method ensures the rights of the exporter, as the importer must pay the money to the presenting bank to receive the goods. However, this method still carries many risks as the exporter incurs time and cost to recover funds or resolve the sent batch of goods.
- Documentary credit method L/C (The Letter of Credit) is issued by the importer’s bank upon the request of the importer. The L/C is a document issued by the importing bank, committing to make payment to the exporter upon the presentation of valid documents. Therefore, this L/C is referred to as a commercial or documentary L/C. The L/C is established based on the terms and conditions of the contract but is completely independent of the contract. Thus, when opening an L/C, the customer should carefully review the content of the contract to ensure there are no inconsistencies when incorporating it into the L/C. There are various types of letters of credit, including cancellable L/Cs, irrevocable L/Cs, confirmed L/Cs, transferable L/Cs, etc. Depending on the requirements and conditions, the bank will issue the requested type of letter of credit for the importer. The importer who wants the bank to issue a letter of credit must submit a written request for the issuance of an import letter of credit to the issuing bank.
In the context of international trade transactions, the selection of a suitable payment method holds significant importance. Both exporters and importers conscientiously assess and deliberate upon the choice of payment method to mitigate potential risks. Further exploration of this topic can be found in subsequent scholarly articles. We strongly encourage you to stay informed and updated by accessing additional valuable information on our website. Should you require any further assistance or detailed guidance, please do not hesitate to contact us at firstname.lastname@example.org.