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International Payment

Definition international payment

Payment made between countries, whether in settlement of a trade debt, as a unilateral transfer of funds, for capital investment, or for some other purpose. The reasons for such payments and the methods of making them and accounting for them are matters of concern to economists and national governments. International debts are settled either from accumulated balances of foreign currency or claims on foreign currency, or by loans from creditor to debtor, or by drawing on the International Monetary Fund, or by movements of gold. How a country balances its international accounts is one of the most important decisions for its balance of payments.

Balance of international payments

A system of recording all of a country's economic transactions with the rest of the world over a period of one year; "a favorable balance ofpayments exists when more payments are coming in than going out" balance of payments accounting - a system that provides quantitative information about financescapital account - (economics) that part of the balance of payments recording a nation's outflow and inflow of financial securities current account - that part of the balance of payments recording a nation's exports and imports of goods and services and transfer payments A balance estimated for a given time period showing an excess or deficit in total payments of all kinds between one country and another country or other countries, including exports and imports, grants, debt payments, etc.

International Terms of Payment

Method Usual Goods Risk Time of Available to Seller Payment To Buyer Risk to Comments Buyer Seller's goods must be special in one way or another, or special circumstances prevail over normal trade practices (e.g., goods manufactured to buyer-only specification).
Letters of Credit require total accuracy in conforming to terms, conditions, and documentaion. Consult your United Shipping Associate member for determining feasibility of terms and conditions. The inclusion of a second assurance of payment (usually a U.S. Bank) prevents surprises, and adds assurance

CASH IN Before After ADVANCE shipment payment


Complete. Relies on seller to ship exactly the goods expected, as quoted and ordered

LETTER CREDIT (See next items.)

OF (L/C) two

Commerical Invoice must match the L/C exactly. Dates must be carefully headed. "Stale" documents are unacceptable for collection. Gives the seller a double assurance of payments. Depends on the terms of the letter of Assures shipment is made but relies on exporter to ship goods as described in

CONFIRED After After IRREVOCABLE shipment is payment CREDIT made, documents presented to the bank.


documents. Terms may be negotiated prior to L/C agreement, alleviating buyer's degree of risk.

that issuing bank has been deemed acceptable by confirming bank. Adds cost and an additional requirement to seller.


as Same above

DRAFTS (See next items.)

Remittance time from two buyer's bank to seller's bank may still take one week to one month.

Seller has single bank assurance of payment and seller remains dependent on foreign bank. Seller as should Same contact his above banker to determine whether the issuing bank has sufficient assests to cover the amount. Drafts, by design, should contain terms and conditions mutually agreed upon.

Credit can be changed only by mutual agreement, as stipulated in a sales agreement. Becomes open as account with buyer's bank as collection agent. Foreign bank may have problems making payment in sum or timeliness. A draft may be written with virtually any term or condition agreeable to both parties. When determining draft tenor (terms and conditions), consult with your banker and freight forwarder to

If draft not honored, goods must be returned SIGHT DRAFT On After or resold. (with documents presentation payment to Storage, against of draft to buyer's handling, acceptance) buyer. bank. and return freight expenses may be incurred.

Assures shipment but not content, unless inspection or check-in is allowed before payment.

TIME DRAFTS (with documents On maturity against of the draft acceptance)

Relies on Before buyer to payment, honor draft after upon acceptance presentation.

Assures shipment but not content. Time of maturity allows for adjustments, if agreed to by seller.


As agreed, Before usually by payment invoice

Relies None completely on buyer to pay account as agreed

determine the most desirable means of doing business in a given country. A draft can be a collection instrument used to exchange possession and title to goods for payment. Seller is essentially drawing a check against the bank account of the buyer. Buyer's bank must have pre-approval, or seek approval of the buyer prior to honoring the check. Payble upon presentation of documents. Payable based upon the acceptance of an obligation to pay the seller at a specified time. Although a time draft has more collection leverage than an invoice, it remains only a promissory note, with conditions. All terms of payment, including extra charges and terms should be mutually

understood and agreed upon prior to open account initiation. Companies conducting ongoing business are candidates for open account terms of payment. Seller must measure not only buyer's credit reliability but the country's as well. Terms Ranked from LEAST RISK to MOST RISK for the Seller

Methods of Payments in Import.


Consignment Purchase Cash-in-Advance (Pre-Payment) Down Payment Open Account Documentary Collections Letter of Credit

There is no predefined definition of personal import. In general a personal import is a direct purchase of foreign goods from overseas mail order companies, retailers, manufacturers or by an individual for the purpose of personal use. The most common terms of purchase are as follows:

Consignment Purchase Cash-in-Advance (Pre-Payment) Down Payment Open Account Documentary Collections Letters of Credit

Consignment purchase terms can be the most beneficial method of payment for the importer. In this method of purchase, importer makes the payment only once the goods or imported items are sold to the end user. In case of no selling, the same item is returned to the foreign supplier. Consignment purchase is considered the most risky and time taking method of payment for the exporter.



Cash in Advance is a pre-payment method in which, an importer the payment for the items to be imported in advance prior to the shipment of goods. The importer must trust that the supplier will ship the product on time

and that the goods will be as advertised. Cash-in-Advance method of payment creates a lot of risk factors for the importers. However, this method of payment is inexpensive as it involves direct importer-exporter contact without commercial bank involvement. In international trade, Cash in Advance methods of payment is usually done whssen

The Importer has not been long established. The Importer's credit status is doubtful or unsatisfactory. The country or political risks are very high in the importers country. The product is in heavy demand and the seller does not have to accommodate an Importer's financing request in order to sell the merchandise.

Down Payment In the method of down payment, an importer pays a fraction of the total amount of the items to be imported in advance. The down payment methods have both advantages and disadvantages. The advantage is that it induces the exporter or seller to begin performance without the importer or buyer paying the full agreed price in advance and the disadvantage is that there is a possibility the Seller or exporter may never deliver the goods even though it has the Buyer's down payment.



In case of an open account, an importer takes the delivery of good and ensures the supplier to make the payment at some specific date in the future. Importer is also not required to issue any negotiable instrument evidencing his legal commitment to pay at the appointed time. This type of payment methods are mostly seen where when the importer/buyer has a strong credit history and is well-known to the seller. Open Account method of payment offers no protection in case of non-payment to the seller. There are many merits and demerits of open account terms. Under an open account payment method, title to the goods usually passes from the seller to the buyer prior to payment and subjects the seller to risk of default by the Buyer. Furthermore, there may be a time delay in payment, depending on how quickly documents are exchanged between Seller and Buyer. While this payment term involves the fewest restrictions and the lowest cost for the Buyer, it also presents the Seller with the highest degree of payment risk and is employed only between a Buyer and a Seller who have a long-term

relationship involving a great level of mutual trust.

Documentary Collection is an important bank payment method under, which the sale transaction is settled by the bank through an exchange of documents. In this process the seller's instructs his bank to forwards documents related to the export of goods to the buyer's bank with a request to present these documents to the buyer for payment, indicating when and on what conditions these documents can be released to the buyer. The buyer may obtain possession of goods and clear them through customs, if the buyer has the shipping documents such as original bill of lading, certificate of origin, etc. However, the documents are only given to the buyer after payment has been made ("Documents against Payment") or payment undertaking has been given - the buyer has accepted a bill of exchange issued by the seller and payable at a certain date in the future (maturity date) ("Documents against Acceptance"). Documentary Collections make easy import-export operations within low cost. But it does not provide same level of protection as the letter of credit as it does not involve any kind of bank guarantee like letter of credit.

A letter of credit is the most well known method of payment in international trade. Under an import letter of credit, importers bank guarantees to the supplier that the bank will pay mentioned amount in the agreement, once supplier or exporter meet the terms and conditions of the letter of credit. In this method of payment, plays an intermediary role to help complete the trade transaction. The bank deals only in documents and does not inspect the goods themselves. Letters of Credit are issued subject to the Uniforms Customs & Practice for Documentary Credits (UCPDC)(UCP). This set of rules is produced by the International Chamber of Commerce and Industries (CII).

Market Practice Guidelines for the International Payment Charges Claiming Process (Version 1.0, September 2010) Note: Relevant regulations and any applicable legislation take precedence over the guidance notes issued by this body. These Guidelines represent an industrys best effort to assist peers in the interpretation and implementation of the relevant topic(s). The PMPG - or any of its Members - cannot be held responsible for any error in these Guidelines or any consequence thereof.

1. Introduction
The Payments Market Practice Group (PMPG) is an independent body of payments subject matter experts from Asia Pacific, Europe and North America. The mission of the PMPG is to: take stock of payments market practices across regions, discuss, explain, and document market practice issues, including possible commercial impact, recommend market practices, covering end-to-end transactions, propose best practice, business responsibilities and rules, message flows, consistent implementation of ISO messaging standards and exception definitions, ensure publication of recommended best practices, recommend payments market practices in response to changing compliance requirements The PMPG provides a truly global forum to drive better market practices which, together with correct use of standards, will help in achieving full STP and improved customer service. This document has three main sections: Market Practice Guidelines: Describes the guidelines that the PMPG

proposes to the global payments community. Frequently Asked Questions: Addresses specific questions that have been raised to the PMPG in relation to the subject that is addressed in the document. Observations and Recommendations: Comments on the general impact of the guidelines and areas of further discussion. The text starts by giving the background and contains a glossary at the end. The PMPG will regularly review these guidelines, using the frequently asked questions and community feedback as input.

2. Background
The purpose is to establish market practice guidelines for the claiming process for charges resulting from cross border payments, including best practices for claims related inquiries. The market practices guidelines apply only to cases for which no different preliminary agreement exists. The proposed guidelines address below concerns and questions in the community and -more importantly- costs and customer experience issues: while the SWIFT User Handbook definitions for BEN/SHA/OUR charging codes remain constant, individual or some local practices have evolved substantially away from the legacy definitions in absence of different preliminary agreements, for example, the grouping of claims in regular invoices, there are no clear cut standards in the area of the claiming process for charges related to cross border payments1, including method, message types, timing and currency there has been a substantial increase in claims for OUR charges, amendments, cancellations, repairs, investigations, etc financial institutions and their customers can be uncertain of the process to address claims and charges financial institutions have seen a substantial increase in reconciliation challenges and customer service inquiries related to charges 1 Cross border payments are defined as international transactions between two countries, except if those countries are subject to regional agreements or regulations. The PMPG believes that: cross border and correspondent relationships should be supported by a clear servicing agreement, including the claiming process, in particular when a direct account relationship is established (for example, on a billing and reporting basis; using senders and receivers charges fields on a pre-agreed single transaction basis). This is essential to streamline the claiming process avoiding redundant processes, expensive claims requests and related investigations

the proposed market practice guidelines -in the absence of different preliminary agreement- provide a standard methodology that will enhance the customer experience by clarifying, for the originating customer and bank, the purpose, types and currency of charges that are being claimed and the timing of said charges the market practices guidelines outlined herein will reduce enquiries between banks about charges, and enquiries internal to financial institutions between customer services and finance and reconciliation departments.

3. Market Practice Guidelines (MPG) for the international payment charge claiming process
MPG Charges Claiming Process #1: Charges should be claimed and not debited Payment charges, for example, those related to the use of the OUR charging code by a sending financial institution, should be claimed in respect of the payment chain from the previous bank. They should not be debited from the proceeds or be charged to the previous sending bank in the transaction chain without submitting a claim, unless bilaterally agreed. MPG Charges Claiming Process #2: Claims should be submitted on or after the transaction execution date Payment charges claims should not be presented before the transaction execution date. To ensure efficiency and to contain enquiries, the claiming bank should issue a single claim per transaction (and if needed, explicitly itemize the types of charges) except where national or regional agreement or regulation exist and in absence of a bilateral servicing agreement2. A bilateral servicing agreement is recommended, whenever possible in order to further streamline the charges claiming process (including rules for charges payment and reporting). 2 A bilateral servicing agreement could for example stipulate to use periodical versus transactional invoicing. 3 Subject to community specific regulatory constraints. Also refer to the recommended claiming process described under MPG #4. MPG Charges Claiming Process #3: Claims should be denominated in the currency of the payment The payment charge should be denominated in the currency of the payment to mitigate currency risk and reconciliation issues, unless bilaterally agreed otherwise or prescribed by local or regional agreement or regulation. MPG Charges Claiming Process #4: Claims should be made through MT n91 or equivalent message. Enquiries should be done through MT n95 or equivalent message The SWIFT MT n91 message or equivalent should be used for claiming payment charges unless bilaterally agreed otherwise. Claims should be authenticated and thus paper, telex or faxed claims are not recommended practice.