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INTRODUCTION

Against the backdrop of the current economic climate, when the earnings derived from exports and the efficiency of the import system are so important to national economies, this Guide has been drawn up as a practical document that serves as a succinct reminder of the various International Payment Methods, International Risk Insurance and Financing for Imports and Exports.

The role of financial institutions

There are always at least four players involved in any international trade operation: the importer, the importer’s bank, the exporter and the exporter’s bank.

Financial institutions become involved at critical moments to mitigate the uncertainty and unknown factors that usually surround the parties to the transaction (the seller and the buyer) and to ensure that the necessary transfer of funds proceeds smoothly and unimpeded.

Correspondent banking agreements:

An international network of banking relationships enables banks to provide critical assistance in channelling funds for international transactions; this rests on what are known as correspondent banking agreements, which the financial institutions establish with each other.

The goal is to overcome the stumbling block that would exist if the systems used to move banking funds within countries were isolated from one other. Each has a system that is separate from the others. The US has its own system denominated in dollars, Japan has another one in yen, the United Kingdom has another one in sterling, the Eurozone has another one in euros, etc.

What do these agreements consist of? Fundamentally it is a matter of opening mutual accounts in the banks’ respective branches. These accounts are used to channel their customers’ credits and debits between the two countries.

It is important to underline therefore that transactions denominated in dollars pass through a US bank, those denominated in euros pass through a bank in a Eurozone country, those denominated in yen pass through a bank in Japan, etc.

Communications System

The existence of a communications system between banks enables them to interact and keep each other informed about the transactions that are generated. The most widely used system is based on the Society for Worldwide Interbank Financial Telecommunication, known globally by its initials, SWIFT. Virtually every bank in the world is connected, directly or indirectly, to the SWIFT software, which is used exclusively for banking and where every entity and transaction is codified and standardized. The transmission of data is practically instantaneous throughout the world.

Methods for collecting payments

This refers to the various contractual banking models that enable funds to be transferred from the buyer to the seller; the financial institutions are able to offer:

  • Flexibility. Stemming from the correspondent banking agreements and communications systems outlined above.
  • Security. Depending on which payment collection methods are used, they may include such matters as insurance for the seller and the purchaser in the two areas where they incur most uncertainty: for the former, the risk of not being paid; and for the latter, the risk that the merchandise will not be sent or may not correspond to what had been agreed. In other words, the banks may take on risks that originally fell on the buyer and seller.

Finance

It is important to keep this subject separate from payment collection services. They are completely distinct and independent operations, and different rates apply: fees in the case of the services, and interest payments in the case of finance. Every international transaction requires the involvement of at least two financial institutions (one in the buyer’s country and another in the seller’s), but this will be for the purposes of collection and payment: it is not necessarily the case that these institutions will provide finance too.

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