International Payment Methods – Letter of Credit Consultancy Services

Payment Methods in International Trade

Ozgur Eker (CDCS) Advanced Payment, Bank Payment Obligation, Cash Against Documents, International Payment Methods, Letters of Credit, Open Account 20 February 20194 June 2019Cash Against Documents, Cash in Advance, International Payment Methods, Letters of Credit, Open Account

There are 5 types of payment methods available in international trade.

These payment types are cash-in-advance, open account, documentary collections, documentary credits (letters of credit) and bank payment obligation.

Short Descriptions of International Payment Methods:

Cash-in-Advance: Cash in advance is a payment method in international trade in which an order is not processed until full payment is received by the supplier in advance.

Sometimes cash in advance is called cash with order.

Please always keep in mind that under the cash in advance payment, the funds received by the exporters before the ownership of the goods is transferred to the importers.

Cash in advance posses highest risk to the importer, lowest risk to the exporter.

Open Account: Open account means that buyers pay the cost of the goods after goods have been shipped by the supplier.

In an international trade transaction open account defines as a sale where the goods are shipped and/or delivered before payment is due, which is usually in 30 or 60 days.

Open account posses highest risk to the exporter, lowest risk to the importer.

Documentary Collections: International trade procedure in which a bank in the importer’s country acts on behalf of an exporter for collecting and remitting payment for a shipment.

The exporter presents the shipping and collection documents to his or her bank (in own country) which sends them to its correspondent bank in the importer’s country.

The foreign bank (called the presenting bank) hands over shipping and title documents (required for taking delivery of the shipment) to the importer in exchange for

cash payment (in case of ‘documents against payment‘ instructions) or
a firm commitment to pay on a fixed date (in case of ‘documents against acceptance‘ instructions).

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.

Documentary Credits: Documentary credits, also known as letters of credit, are one of the payment methods in international trade.

Letter of credit defined by International Chamber of Commerce publication of UCP 600 as “any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.”

risks associated with international payment methods — Source : http://trade.gov/media/publications/abstract/trade_finance_guide2008desc.html

Bank Payment Obligation: Bank payment obligation is a new payment method in international trade.

Bank payment obligation (BPO) is an irrevocable undertaking given by an Obligor Bank (typically buyer’s bank) to a Recipient Bank (usually seller’s bank) to pay a specified amount on a agreed date under the condition of successful electronic matching of data according to an industry-wide set of rules adopted by ICC.

What are the Key Points of Consideration When Choosing an International Payment Method?

Financial Needs of the Parties: Open account payment term is a credit granted by the exporter in favor of the importer. In contrast, cash in advance is a credit granted by the importer in favor of the exporter.

Letters of credit available by deferred payment and documentary collections payable with time drafts are also financial credits supplied to the buyers.

For these reasons financial needs of the parties is a key element determining the payment terms in international trade transactions.

Negotiation Power of the Parties: Sometimes exporters are in pressure to sell their products. On the other hand, importers are desperate to find a particular good in a short period of time.

If balance of the trade power diminishes in favor of one party, then the stronger party may want to benefited from the situation and dictates most favorable payments terms.

Country Risk of the Exporter and the Importer: As an example if the importer residents in a developed country whereas the exporter sits in a risky country, then the importer may do not want to take risks and choose the most secure payment method for himself.

Sector of the Transaction Parties: Occupying sector of the exporter and the importer is one of the most influencing element that effects the determination of the payment method. For example, food and textile sector practicing open account payments or documentary collections, on contrary oil sector uses letters of credit.

Willingness to Take Risks of the Parties: Willingness to take risks is one of the key factor determining the payment method in international trade.

Occasionally exporters want to take extra risk, while importers tend to trust their suppliers.

A risk taking exporter may ship the goods against open account terms whereas a risk taking importer may decide to pay in advance.

If both parties want to limit their risks, then they should either choose documentary collections or documentary credits.

Legal Legislation: If you want to export to Algeria, you have to choose either documentary collections or letters of credit as a payment method. This is an Algerian legislation and every exporter that makes business with Algeria has to obey this rule.

“At the beginning of August 2009, the Algerian government released the ‘Complementary Finance Law 2009’ which decreed that all imports into the country, with a value exceeding $1000, would require a documentary letter of credit (LC)”
Source: http://www.tradefinancemagazine.com/Article/2471154/LC-boom-in-Algeria.html

Country Practices: Middle East countries tend to use letters of credit intensely, when importing goods. Chinese exporters also use letters of credit in great volumes. USA importers using documentary collections for small value purchases. German importers would like to pay 30 days after bill of lading date under open account payment terms.

BCG and SWIFT Published Global Payments Report 2014

Ozgur Eker (CDCS) International Payment Methods, News 4 December 20186 April 2019International Payment Methods, News, Trade Finance

The Boston Consulting Group (BCG) published in cooperation with Swift a new report on consumer payments-exploring key trends in Europe, North America, and rapidly developing economies.

Report also examines the wholesale transaction-banking business, with a focus on the implications of regulatory challenges.

The report discusses the steps that all types of payments players must take in order to succeed.

Global Payments Report 2014:

Published on 28 Nov 2014 – The aim of the report is to provide payments and transaction-banking institutions with a comprehensive overview of major business drivers shaping the industry.

It also provides the reader with recommendations on which specific actions should be taken by various types of players in order to achieve or maintain market-leading positions.

In today’s competitive environment, financial institutions must differentiate themselves and bring value to continue to grow.

The report in numbers:

In 2013, payments businesses generated $425 billion in transaction revenues, $336 billion in account-related revenues, and $248 billion in net interest income and penalty fees related to credit cards.
Banks handled $410 trillion in non-cash transactions in 2013, more than five times the amount of global GDP.
The value of non-cash transactions will reach an estimated $780 trillion by 2023, a compound annual growth rate of 7 percent. Payments revenues will reach an estimated $2.1 trillion, a CAGR of 8 percent

Stefan Dab, Senior Partner and Managing Director, BCG, says: “The growth in payments and transaction banking, moreover, is driving stiff competition among not only traditional players but new entrants as well. Consequently, financial institutions must differentiate themselves, refine their strategies, and raise their execution skills if they want to remain competitive.”

Wim Raymaekers, Head of Banking and Treasury Markets, SWIFT, adds: “We are pleased to work with BCG to provide our customers with insights as to how the payments transaction landscape and revenues will evolve over the next 10 years. Banks can use these insights as input to their payment business strategy and execution, since growth will differ widely by region.”

Here is the interactive version of the Global Payments Report 2014.

Bank Payment Obligation – BPO

Ozgur Eker (CDCS) Bank Payment Obligation, International Payment Methods 29 October 201821 January 2023Bank Payment Obligation, International Payment Methods

Each payment method in international trade has strengths and weaknesses.

For example, open account and cash in advance payments are elementary payment options. They are not only simple, but also inexpensive. However, they inherit high volumes of risks either for the importers or the exporters.

Documentary credits, on the other hand, are relatively secure payment methods, but they are complicated and expensive.

Does international trade finance need another payment method? Can bank payment obligation be the right answer?

Definition of Bank Payment Obligation:

Some Important Definitions under Bank Payment Obligation (BPO):

“Obligor bank” means buyer’s bank under Bank Payment Obligations. Obligor bank issues the legally binding, valid, irrevocable but conditional and enforceable payment undertaking to Recipient Bank. Obligor bank is an equivalent term of issuing bank under letters of credit definitions.
“Recipient Bank” means seller’s bank under Bank Payment Obligations.
“Trade Services Utility” (TSU) means a centralized matching and workflow engine providing timely and accurate comparison of data taken from underlying corporate purchase agreements and related documents, such as commercial invoices, transport and insurance.
The URBPO, the Uniform Rules for Bank Payment Obligations ICC publication No. 750, are the rules of Bank Payment Obligation adopted by ICC banking commission.

How Does Bank Payment Obligation Work?

Bank payment obligation and letter of credit have some characteristics in common.

Firstly banks play a key role on both payment methods. Secondly banks are giving the irrevocable payment undertaking.

Figure 1 : Basic Bank Payment Obligation Transaction

Bank Payment Obligation (BPO) has been established on two main expectations,

The use of minimum fields, the buyer, the seller and respective banks agree on the payment terms and conditions and on the minimum trade information required to assess the credit risk;
The dispatch of documents, such as the bill of lading, certificate of origin and certificate of quality, from the seller directly to the buyer.

Given the limited information required by the banks and the accelerated document exchange, companies should expect a lower rate of discrepancies and an acceleration of the settlement process.

Figure 2 : Bank Payment Obligation Transaction Flow in Detail

Step-by Step Bank Payment Obligation Transaction

Baseline Establishment

Step 1 : Buyer and seller agreed on BPO (bank payment obligation) as a payment term on the sales contract. Buyer send its purchase order to the seller.
Step 2 : Buyer provides the minimum data from the purchase order and conditions of the bank payment obligation to the obligor bank.
Step 3 : Seller confirms the data from the PO and send its acceptance of the BPO conditions to the recipient bank. If both buyer’s and seller’s data are matched on the Transaction Matching Application than the baseline is established. Both buyer and seller will be receiving a matching reports from their banks.

BPO is irrevocable but conditional payment method. (payment is subject to the electronic matching of agreed data-sets)

Matching

Step 4 : Seller ships the goods as agreed on the sales contract.
Step 5 :Seller presents the shipment data and invoice data to its bank, which submits it to Transaction Matching Application for matching.
Step 6 : Buyer receives a match report from its bank. Buyer is invited to accept any mismatches if any.
Step 7 : Seller’s bank inform seller about the successful data-set match.

BPO becomes operative and due according to the agreed payment terms.

Settlement

Step 8 : Seller sends the trade documents directly to the buyer. Buyer will clear goods from the customs with these documents.
Step 9 : On the due date, the obligor bank debits the proceeds from buyer’s account

Bank Payment Obligation Video Presentation

Bank payment obligation (BPO) is the newest payment method in international trade.

Exporters , importers and bank professionals need learning material to understand its usage.

On this page you can find bank payment obligation video presentation. It is prepared by Commerzbank, one of the world’s leading banks in international trade services solutions sector.

What are the Advantages of the BPO (Bank payment Obligation) for the Exporters?

Bank payment obligation is a secure payment method in international trade for the exporters. BPO can be more secure than the letter of credit, because the documents will not be checked by human beings, by which process eliminating alleged discrepancy risks.
The bank payment obligation is cheaper than letter of credit.
Exporters could get their money very fast from the banks under the BPO transactions as documents are checked by an automatic system instantly.
Exporters have more control over the goods until they have been paid by the banks under the BPO transactions as shipment documents will be held by the exporters during the BPO process. Exporters do not send paper documents to the banks. Once exporters receive their money from the banks, they dispatch the documents to the importers separately.
Exporters could reach pre-shipment and post-shipment finance in BPO transactions.
Once the bank payment obligation is opened, it is almost impossible for the importer to cancel the order without the consent of the exporter.
Non-payment risk shifts from importer to importer’s bank, which is called obligor bank in the BPO transaction.

What are the Advantages of the BPO (Bank payment Obligation) for the Importers?

As a payment method the bank payment obligation is more secure than the advance payment, because the BPO is a conditional payment method. Under the BPO transactions, banks send payment amounts to the exporters only after the shipment of the goods, not before.
Issuing a bank payment obligation may prove that the importer is a financially secure and strong company.
The Bank payment obligation is an irrevocable payment method like the letter of credit. As a result importers can convince exporters to make shipments with the BPO much more easily comparing to open account or documentary collections.
The BPO facilitates financing of the shipment for the importers.
It is possible for the importers to pay the transaction amount after receiving the shipment, if a deferred payment has been agreed upon such as “60 days after match”, “90 days after match” etc.
The BPO may protect the buyers, at least in theory, against non-shipments, late shipments and inferior quality of goods shipments.

Bank Payment Obligation – Comparison to Letter of Credit and Open Account

Bank Payment Obligation Comparison to Letter of Credit:

Both bank payment obligation and letter of credit have an irrevocable structure.
Bank payment obligation and letter of credit are governed by ICC rules. BPO rules are URBPO, letters of credit rules are UCPDC.
The conditional payment guarantee is given by a bank to another bank in BPO transactions. BPO is a bank-to-bank payment obligation. The conditional payment guarantee is given by a bank to a commercial company in L/C transactions. (Letters of credit can be issued bank-to-bank transactions as well.)
Letter of credit is paper intensive. BPO is an electronic payment method.
Documents have been checked by banks’ staff manually under letter of credit transactions. Data match completed by online means under BPO transactions.
Under BPO transactions shipment documents would not be sent to the banks.
Letter of credit is slow and expensive. BPO is fast and not as expensive as L/Cs.

Bank Payment Obligation Comparison to Open Account:

Both bank payment obligation and open account are fast and easy to handle.
Open account is the riskiest payment method for the exporters. Nonpayment risk is stemmed from the importer and must be covered by the exporter in full under open account payments. On the contrary, under the BPO the obligor bank is the entity that is giving the payment guarantee to the exporter through the recipient bank. As a result non-payment risk mitigates from the importer to the importer’s bank under BPO transactions.
There are no rules exist for open account payments. On the other hand bank payment obligations can be issued subject to the URBPO 750.
Under open account transactions exporters must finance importers, whereas they can be benefited pre-shipment finance and post-shipment finance under the BPO.

Sources:

Bank Payment Obligation A new payment method, July 2016, SWIFT’s Corporate and Supply Chain Market Management team,
Bank Payment Obligation – Comparison To Letter Of Credit And Open Account, J.P. Morgan,

Cash in Advance Payment

Ozgur Eker (CDCS) Advanced Payment, International Payment Methods 27 October 20186 April 2019Cash in Advance, International Payment Methods

Cash in advance (CIA) is a payment method in international trade. Cash in advance is also known as cash with order or advance payment by most exporters and importers.

Key Characteristics:

One of the main characteristics of a cash in advance payment is that the full order amount will be paid by the importer to the exporter prior to the transfer of ownership of the goods.
In most cases, exporters demand significant advance payments on order confirmation in order to protect themselves against order cancellations. Some common phrases stipulated in sales contracts to this effect are as follows:
- %50 of proforma invoice total will be paid on order confirmation, remaining %50 will be paid 1 week before shipment.
- %30 of proforma invoice total will be paid 1 week after order confirmation, remaining %70 will be paid against copy of shipment documents send via e-mail or fax.
Cash in advance payment is the most secure payment method in international trade for exporters, because it eliminates non payment risk especially when money transfer is done via wire transfer.
By paying total value of the goods before shipment, importers have to bear some risks such as;
- non shipment risks
- low quality goods
- non compliance risks
- custom clearance risks

Cash in Advance Payment Rules:

There is no set of rules exists that governs cash in advance payment used in international trade.

UCP 600 is the set of rules for letters of credit (LOC) transactions and URC 522 is the set of rules for cash against documents (CAD) payments.

Both UCP 600 and URC 522 is published by ICC (International Chamber of Commerce). On the other hand ICC has not published any rules for the cash in advance payments.

For this reason, exporters and importers have to identify cash in advance payment details on the proforma invoice in order to prevent misunderstandings and possible mistakes.

Payment Settlement Methods for Cash in Advance Payment:

Wire Transfer: Wire transfer is the most secure and preferred cash-in-advance payment settlement method used in international trade transactions.

A wire transfer is an electronic payment service for transferring funds by wire for example, through the Federal Reserve Wire Network or the Clearing House Interbank Payments System (CHIPS). (1)

Wire transfer can either be sent via online banking or traditional banking applications.

In order to complete an international wire transfer correctly you need to specify below details;

Currency of the wire transfer and wire transfer total
Name of the account holder:
Full Name and address of the bank:
Bank Branch:
Account number:
Swift Code: SWIFT is the short form of “Society for Worldwide Interbank Financial Telecommunication”. SWIFT is an industry-owned co-operative supplying secure, standardized messaging services and interface software to nearly 8,100 financial institutions in 207 countries and territories. SWIFT members include banks, broker-dealers and investment managers. While not always required, a SWIFT Code (also known as BIC Code) may be required by some banks for the completion of wire transfers.
IBAN Number: (if applicable) The International Bank Account Number (IBAN) is the international standard for identifying international bank accounts across national borders. The IBAN is comprised of a maximum of 27 alphanumeric characters within Europe and a maximum of 34 outside of Europe (German IBAN: 22 characters). At present, the United States does not participate in IBAN. Therefore, US banks do not have an IBAN number.

Credit Card: For small scale orders credit cards could be used as a viable cash-in-advance payment method in international trade.

As international credit card transactions are typically placed via online, telephone, or fax methods that facilitate fraudulent transactions, proper precautions should be taken to determine the validity of transactions before the goods are shipped.

Although exporters must endure the fees charged by credit card companies, this option may help the business grow because of its convenience.

Payment by Check: Advance payment using an international check may result in a lengthy collection delay of several weeks to months.

Therefore, this method may diminish the original intention of receiving the payment before the shipment.

Moreover, there is always a risk that a check may be returned due to insufficient funds in the buyer’s account.

As a result payment by check is a less-attractive cash-in-advance settlement method in international trade finance.

Sources:

Wire Transfers FAQs, Bank of America, https://www.bankofamerica.com/deposits/wire-transfers-faqs/

Documentary Collections – Cash Against Documents (CAD)

Ozgur Eker (CDCS) Cash Against Documents, International Payment Methods 26 October 201818 April 2021CAD, Cash Against Documents, Documentary Collections, Documentary Collections Rules, International Payment Methods, URC 522

Documentary collection (D/C) is a payment method in international trade.

Documentary collection is also known as Cash Against Documents (CAD) by most exporters and importers.

Documentary collection is more like formal name usually used by bank professionals, whereas cash against documents is a daily life name usually used by importers and exporters.

Key Characteristics:

Importers normally pay for the goods after the shipment in whole. But it is also possible to make an partial advance payment under the documentary collections. For example, it is possible to pay %25 of the transaction amount in advance and %75 is payable via cash against documents (CAD).
Generally, there are two payment options available under the documentary collections: Documents Against Payment (D/P) and Documents Against Acceptance (D/A).
The title of goods belongs to the exporter until the exporter is paid by the importer. But exporter must be very careful about land, rail and air shipments. The transport documents issued under these shipments do not represent the title to the goods.
Although banks play an essential role in documentary collections, they neither check or verify the documents, nor take any risks.
Documentary collections are less complicated than letters of credit. Also documentary collections are less expensive comparing to the letters of credit.

Rules:

Documentary collections are governed by the Uniform Rules for Collections, 1995 Revision, ICC Publication No. 522, shortly known as URC 522.

Documentary collection rules, URC 522, published by International Chamber of Commerce, ICC.

URC 522 will only be effective if it is incorporated into the text of the “collection instruction“.

Collection Instruction and its Scope:

Collection Instruction is a separate document, which the exporter should supply to his bank along with other commercial and financial documents under a documentary collection.

Collection instructions are written in a cover letter format and normally should contain below points.

Governing Rules for the Collection: As an example “This collection is subject to The Uniform Rules for Collections, 1995 Revision, ICC Publication No. 522.”.
Details of the bank from which the collection was received including full name, postal and SWIFT addresses, telex, facsimile numbers and reference.
Details of the principal including full name, postal address, and if applicable telex, telephone and facsimile numbers.
Details of the drawee including full name, postal address, or the domicile at which presentation is to be made and if applicable telex, telephone and facsimile numbers.
Details of the presenting bank, if any, including full name, postal address, and if applicable telex, telephone and facsimile numbers.
Total amount and currency of the documentary collection.
Documents to be supplied: URC 522, the rules of the documentary collections, define two types of documents; financial documents and commercial documents.
- Financial Documents : Financial documents means bills of exchange, promissory notes, cheques, or other similar instruments used for obtaining the payment of money.
- Commercial Documents: Commercial documents means invoices, transport documents, documents of title or other similar documents, or any other documents whatsoever, not being financial documents
How many number of originals and copies of each document supplied
Conditions for release of documents
- Documents Against Payment (D/P): Documents may be released only if the importer makes immediate payment according to the contracted agreement between the exporter and the importer. Also known as sight collection.
- Documents Against Acceptance (D/A): Documents may be released only if the importer accepts the accompanying draft, thereby incurring an obligation to pay at a specified future date. In this arrangement the exporter is exposed to the credit risk of the importer and the political risk of the country. Also known as a term collection.

Note: It should be noted that the party preparing the collection instruction should have to clearly define how documents should be handed over to the drawee. If instructing party fails to do so they will be liable for any consequences arising therefrom.

Charges: Charges to be collected, indicating whether they may be waived or not and who is going to pay for charges in detail.
Interest: Collection of interest is a very rare case in documentary collections but if applicable, collection instruction should be indicating whether it may be waived or not, with following information:
- a. rate of interest
- b. interest period
- c. basis of calculation (for example 360 or 365 days in a year) as applicable
Method of payment and form of payment advice.
Instructions in case of non-payment, non-acceptance and/or non-compliance.

Sample Collection Instructions:

Almost every bank has its own collection instructions format available to its clients either in electronic format or hard-copy.

These collection instructions follow the requirements indicated in URC 522, the Uniform Rules for Collections.

Their structure is almost identical. Please click to reach corresponding collection instructions examples provided below.

Parties in a Documentary Collection:

Main parties in a documentary collection and their roles and responsibilities are summarized below:

the “principal” who is the party entrusting the handling of a collection to a bank;
the “remitting bank” which is the bank to which the principal has entrusted the handling of a collection;
the “collecting bank” which is any bank, other than the remitting bank, involved in processing the collection;
the “presenting bank” which is the collecting bank making presentation to the drawee.
the “drawee” is the one to whom presentation is to be made according to the collection instruction.

Documentary Collection Process (Cash Against Document Transaction Flow)

Exporter and importer sign a sales contract indicating the payment method and shipment terms in addition to other details.
The exporter makes the shipment.
The exporter submits the documents and collection instructions to it’s bank with instructions for delivery.
The exporter’s bank sends the documents to the importer’s bank together with the exporter’s instructions.
The importer’s bank reaches out the the importer and informing about the documentary collection.
The importer fulfills his collection obligations and gets the documents from his bank. The importer’s bank hands the documents to the importer on payment or acceptance of a bill of exchange.
The exporter receives payment.

What are the Advantages of a Documentary Collection?

Advantages of a documentary collection can be examined in exporters or importers perspective.

Below figure shows the advantages of a documentary collection for both exporters and importers.

Advantages of a Documentary Collection for Exporters:

Under documentary collections, the documents will not be handed over to the importers unless payment or acceptance of a time draft has been obtained. As importers could not clear goods from the customs without the documents, at least in theory, documentary collections give considerable payment warranty to the exporters.
Documentary collections are less complicated than its alternatives such as letters of credit.
Documentary collections are less expensive than its alternatives such as letters of credit.
Exporters remain the title of goods (only with sea shipments under negotiable b/l) until payment has been received.

Advantages of a Documentary Collection for Importers:

Documentary collections are less expensive than its alternatives such as letters of credit.
Documentary collections are less complicated than its alternatives such as letters of credit.
Under documentary collections, generally, importers make the payment after the shipment of goods.
Importers may be able to review copies of the shipment documents before payment.
Importers may be able to make the payment after they received the documents from their banks by accepting usance bills of exchange (time drafts).

Risks for the Exporters:

Non-Acceptance of Documents Risk: This is one of the major risk factor in a documentary collection for exporters.

Under current documentary collection rules, which are called URC 522, importers are not obligated to collect documents from their banks.

As a result exporters have to understand that upon arrival of the cargo to the importing country, buyers may decide not to pay for the documents and simply left goods unclear at the customs.

Under such a scenario exporters have couple options.

Option 1: Exporters can find another customer to the goods within the country that cargo has arrived. For example if you shipped one container of textile products to Algiers and your buyer do not clear goods from the customs by not having the documents from the bank, then you may try to find another buyer to your goods from Algiers. You may have to give additional discount to make the container attractive to the new buyer.
Option 2: Exporters may try to bring back the container to its home country.
Option 3: Exporters may try to sell the container to the same buyer under more favorable terms.

Non-Payment Risk: Nonpayment risk is the second most frequently seen risk factor in documentary collections.

In most cases we would expect to see a nonpayment risk in a documentary collection which is available by Documents Against Acceptance (D/A).

Nonpayment risk would be happened if the importer accepts a time draft but not be paying on maturity.

“Exporters may seek to have importer’s banks aval to the time draft or bill of exchange in order to eliminate non-payment risk.”

Risk of Delivery of Goods to the Importer without Original Shipment Documents: Importers may clear goods from the customs without having original shipment documents on road, air and rail transportation.

It is also possible for buyers to receive goods from transport companies under sea shipments if express bills of lading (non-negotiable bills of lading) has been utilized.

Under all these conditions as explained above, the importers will be able to receive the goods without the need of original shipment documents, which may lead to a non-payment for the exporters under documentary collections.

Risks for the Importers:

Low Quality Goods Shipment Risk: This is one of the major risk factor in a documentary collection for the importers.

Under current documentary collection rules, which are called URC 522, banks do not check or control the documents.

As a result importers pay for the documents without knowing the quality of the goods.

This risk is higher when the documentary collection is utilized with “documents against payment” (D/P).

Even if the documentary collection is utilized with “documents against acceptance” (D/A), importers may be forced to pay low quality goods according to the local law that governs bill of exchange (draft) procedures.

“Importers can limit their Low Quality Goods Shipment Risk by requesting a pre-shipment inspection from the exporters when working with a new supplier under a documentary collection payment.”

What Are the Differences Between Cash Against Documents and Letters of Credit?

Ozgur Eker (CDCS) Cash Against Documents, International Payment Methods, Letters of Credit 20 May 20187 April 2019Cash Against Documents, International Payment Methods, Letters of Credit

Letters of credit (l/c) and cash against documents (documentary collections, cad) are both payment methods in international trade.

Their combined share is around 50% in all trade finance practices.

Letters of credit and cash against documents have some similarities. We can identify major common points of these two payment methods as follows:

Both payment methods are executed by banks,
Documents play a key role under both payment options,
Both of them are governed by internationally accepted rules.

Despite these similarities they have significant differences as well.

On this article I would like to identify the main differences between Letters of credit (l/c) and cash against documents (documentary collections, cad).

What are the Main Differences Between Cash Against Documents and Letters of Credit?

Let us examine the differences between these two important payment methods of international trade article by article below.

Governing Rules: Letters of credit transactions are governed by UCP 600 and cash against documents are governed by URC 522 rules. You can get detailed information regarding these two sets of rules by reading my related articles.

Transaction Flow: Letters of credit are opened by the issuing banks with the request and authorization which they have received from the applicants.

Applicant is the importer in a commercial letter of credit. As a result letters of credit are initiated by the importers.

On the other hand, cash against documents or documentary collections as we called them in trade finance are initiated by the exporters.

Basic cash against documents transaction flow

Risk Degree: Letters of credit give more assurance to the exporters than cash against documents. For this reason the letter of credit is accepted as a more secure payment method in international trade than the documentary collection.

Responsibilities of Banks : Banks play a key role in letters of credit transactions and they have high levels of responsibilities against the exporters.

On the other hand in documentary collections banks have almost no valid responsibilities against the exporters.

As an example, the banks do not control the documents in documentary collections, but in documentary credit transactions banks check the documents to determine whether the presentation is complying or not.

Complexity : Documentary collections are much more easy in operational perspective than letters of credit.

Cost : The costs of the documentary collections are less than the cost of the documentary credits.

Letters of credit are one of the most expensive payment methods in international trade.

Please read my article for detailed information : How to deal with high banking commissions under letters of credit as an exporter?