International Trade Cross-Border Remittances: Essential Payment Methods You Must Know!

In the vast stage of international trade, the simple logic of “pay on delivery” often doesn’t work.

At this point, choosing a reasonable and reliable payment method becomes crucial, not only as the cornerstone of ensuring smooth transactions but also as a tool to prevent potential disputes and safeguard the rights of both parties.

Thus, adopting a reasonable payment method in international trade is of significant importance for the smooth conduct of international goods transactions.

Today, let’s specifically discuss some common international trade settlement methods.

Letter of Credit (L/C)

A Letter of Credit (L/C) is a payment guarantee issued by a bank, ensuring that the seller receives payment from the buyer according to the contract terms. This financial instrument is very common in international trade because it reduces the risk for both parties involved.

• For the seller, a letter of credit reduces the risk of non-payment, as long as the submitted documents meet the requirements, ensuring payment is received.
• For the buyer, a letter of credit ensures that the quality and quantity of goods meet the contract requirements, as only compliant documents can receive payment.
• A letter of credit also provides a financing tool, allowing the buyer to obtain funds from the bank after the goods are shipped, thereby improving cash flow.

A letter of credit is an important risk management tool in international trade, helping to facilitate smooth trade and providing a degree of protection for both buyers and sellers.

Example of Opening a Letter of Credit with HSBC Hong Kong:

1.The buyer (applicant) submits a written application to HSBC Hong Kong, requesting the issuance of a letter of credit. The application usually includes detailed transaction information, such as the names and addresses of both parties, contract number, description of goods, value, and shipping terms.

2.HSBC Hong Kong reviews the buyer’s application and related commercial contracts to ensure all information is accurate and that the letter of credit terms comply with the International Chamber of Commerce’s Uniform Customs and Practice (UCP).

3.If the application is approved, HSBC Hong Kong issues the letter of credit and sends it to the seller’s designated bank (advising bank) or directly to the seller.

4.Upon receiving the letter of credit, the seller needs to carefully check if the terms match the original contract. If consistent, the seller can start preparing for shipment; if not, the seller should immediately contact the buyer or the issuing bank to negotiate amendments.

5.The seller ships the goods as per the letter of credit requirements and prepares a full set of documents, including commercial invoices, shipping documents, certificates of origin, etc.

6.The seller submits the full set of documents to the advising bank or directly to HSBC Hong Kong (in the case of a direct credit).

7.Upon receiving the documents, HSBC Hong Kong conducts a detailed review to ensure all documents comply with the letter of credit terms. If the documents are correct, HSBC Hong Kong pays the advising bank or directly to the seller.

8.The buyer, upon receiving the documents and confirming their accuracy, can present the documents to the shipping company to collect the goods.

Note that the type of letter of credit (such as irrevocable, revocable, confirmed, etc.) can affect certain process stages. Therefore, it is advisable to understand the specific requirements and processes before actual operation.

Collection Payment

Collection payment is an international trade settlement method where the seller sends the goods through a bank while submitting related commercial documents, requesting the buyer to pay for the goods. This method involves two main banks: the seller’s bank (remitting bank) and the buyer’s bank (collecting bank).

Depending on the conditions of document presentation, collection can be divided into:

① Documents against Payment (D/P) A settlement method in international trade where the seller sends the goods through a bank while submitting related commercial documents, requiring the buyer to pay before collecting the goods.

② Documents against Acceptance (D/A) A payment method in international trade where the seller sends the goods along with complete commercial documents to the buyer’s bank (collecting bank), requiring the buyer to make payment after a certain period (usually 30 days, 60 days, 90 days, or longer). During this period, the buyer needs to sign the documents indicating their willingness to pay at maturity, a process known as “acceptance.”

The advantage of collection payment is its simplicity and lower cost, especially suitable for transactions between reputable buyers and sellers. However, the risk of collection payment lies in the possibility that if the buyer refuses or is unable to pay, the seller might not recover the payment. Therefore, when using the collection payment method, the seller should ensure the buyer’s credit status is good and consider appropriate risk management measures.

Remittance

1.Telegraphic Transfer (T/T)

Telegraphic Transfer (T/T) refers to a remittance method where the remitter requests the transmission of a telegraph or SWIFT message to a branch or correspondent bank in another country (the beneficiary bank), instructing the payment of a specified amount to the beneficiary. T/T payments are settled in foreign exchange cash. Once the goods are ready, if the customer pays the full amount, the documents can be sent directly to the customer without going through a bank.

2.Demand Draft (DD)

Demand Draft (DD) is typically issued by the payer’s bank, creating a demand draft, which is then mailed to the beneficiary. The demand draft is a written order from one bank to another, instructing payment of a specified amount to the named payee upon presentation of the draft.

3.Mail Transfer (M/T)

Mail Transfer (M/T) is a traditional international remittance method, transferring funds from the payer’s bank to the beneficiary’s bank through the postal system. It is a more economical remittance method but slower and less secure compared to modern electronic remittance methods.

4.Western Union

Western Union is a global remittance and payment services company that provides fast international and domestic money transfer services. Customers can send and receive funds through Western Union agent locations, online platforms, or mobile applications.

5.PayPal

PayPal is a U.S. company that provides global online payment solutions, allowing users to transfer money securely and pay for online purchases using email addresses and passwords. It supports transactions across multiple countries and currencies and is widely used in international e-commerce.

6.BiyaPay

BiyaPay currently supports the exchange and remittance of over 200 currencies worldwide, allowing real-time exchange rate viewing and conversion. There are no limits on the amount that can be remitted globally. Global remittance fees are as low as 1%, significantly lower than traditional methods and competitors (e.g., Wise at 1.5% and Xoom at 1.8%). BiyaPay completes global remittances online, supports full-chain tracking, and holds multiple compliance qualifications: currently holding U.S. MSB financial service license, Canadian MSB financial service license, U.S. SEC RIA license, with comprehensive KYC certification and professionally legal offshore accounts, ensuring user funds security. It currently supports over twenty legal currencies and real-time exchange rate inquiries and exchanges for over 200 digital currencies. Traditional remittance methods (such as TransferWise, Xoom) have limit and policy restrictions. BiyaPay’s digital currency exchange for fiat currency has no limit and allows instant transfers, widely used in international remittances.

Factors to Consider When Choosing a Payment Method

Due to the different characteristics of various payment methods, the following factors should be considered when choosing the appropriate payment method:

1.Customer’s Credit Rating

If the customer’s credit rating is average, or if it is the first trade between the parties, the L/C method should be chosen.

2.Goods Supply Status

If the goods are in high demand, the seller can choose a payment method that is favorable to themselves, such as requiring settlement via L/C or even requiring the buyer to prepay.

3.Trade Terms and Contract Amount

Different trade terms stipulate the responsibilities and risk-sharing for both parties differently, and the payment method should be chosen accordingly. Additionally, if the contract amount is not large, faster and cost-effective methods like T/T or clean collection can be considered.

In summary, in international trade remittances, one should not only consider their own risks but also the costs to the other party to achieve a win-win goal. The decision should be based on the counterparty’s credit rating, supply and demand status of the goods, contract amount, mode and type of transportation, and financial settlement costs. At the same time, flexibly using a combination of comprehensive payment methods for international trade settlement helps to diversify settlement risks.