International Payments & Settlements

Business English Department, College of Foreign Languages, Hunan University

by Wang Yiping

Questions

We have studied some courses about international trade and practices, what do you think is the most important factor in international trade?

What is the most difficult part in international trade practice?

Lecture One

Introduction to the courseObjectives of studying the courseCourse requirementsSuggestions of learning the course

Introduction to the course

This course is one of the important courses of international trade and banking practice. It will introduce the evolvement of the international payments and settlements, the principles of draft, documentary collections, letters of credit, forfeiting and factoring and their usage as well as the international rules and regulations regarding international payments and especially introduce UCP 500 and UCP600.

Aim of the course

The overall aim of this course is to develop the students’ understanding in international payments and settlements and to increase the students’ ability to conduct international trade and banking practices. The students will develop a better understanding of the advantages as well as the risks involved in using these payments methods.

Aim of the course

By the end of the course, the students will be able to understand the documentation, international rules and regulations regarding international trade finance; to understand the principles of letter of credit, documentary collections, instruments, etc.; to understand the different types of letters of credit and their usages in practice. This course will also keep the students well-informed of the latest developments in international finance.

What will you learn in this course?

1. Three major financial instruments: bill of exchange（汇票） , promissory note（本票） , check

(cheque支票 ) 2. Four major international settlement methods remittance（汇款） , collection（托收） , letter of credit（信用证） , letter of guarantee （保函）

3. Other documents commercial invoice（发票） , transport documents（运输单据） ,

insurance documents（保险单） 4. International customs and practice for international settlements URC522（托收统一规则） , UCP600（跟单信用证惯例） ,

Incoterms （国际贸易术语）

Requirements

After studying the course ， the students are required to be able to draw a draft, check or promissory note, know the procedures of major payment methods, issue and examine documents under a letter of credit or collection transaction, and apply the terms of UCP 500 and UCP600 to analyze cases.

Suggestions of learning the course

Text book reading: previewing and reviewing;

Pay special attention to the rules and customs in international payment and settlements;

The working procedures of different types of payment methods; Always keep in mind the four-party chart.

Remember the special terms

Seller

Seller’s Bank

Buyer

Buyer’s Bank

Resources of the course are available:

http://kczx.hnu.cn/G2S/Template/View.aspx?action=view&courseType=0&courseId=2567

International Payments

and Settlements (IPS)

Chapter One Introduction

Opening Remarks

In international transactions, the movement of merchandise and the transmission of payments identify difficult technical and legal problems.

In international transactions, both buyers and sellers are a distance from each other, sellers want to get paid and buyers want to get what they paid for.

The course provides students with the fundamentals of payments and settlements in international trade;

The course also empowers students to think in terms of the International Payments and Settlements.

Moreover, it is no easy matter to ensure that a payment or delivery, having been promised, will actually be made.

This curriculum provides an introduction to the principal instruments for achieving security of paymentsecurity of payment (documentary collections and L/C etc.) and security of security of performanceperformance (bank guarantees) in international trade.

Opening Remarks

It also deals with financial instruments by which international payments are facilitated (bills of exchange, promissory notes and checks etc.).

We hope the course will provide the learners with useful advice and information about payments and settlements at every stage of an international transaction.

It will also appeal to students and general public who wish to acquire a basic understanding of the risks of international trade and the means by which they can protect against various risks.

Definition of IPS

The general implication of IPSThe general implication of IPS

IPS are financial activities conducted among different countries in which payments are effected or funds are transferred from one country to another in order to settle accounts, debts, claims, etc. emerged in the course of political, economic or cultural contacts among them.

Definition of IPS

As everybody knows, most international payments originate from transactions in the world trade. They are money transfers as a result of international clearing, such as visible trade, invisible trade/financial transaction/payments between governments/ others.

How many international transactions can you list?

visible trade 有形贸易 invisible trade 无形贸易 financial transaction 金融交易overseas remittances 海外汇款 educational expenses 教育开支 inheritances 遗产继承

How many international transactions can you list?

technology transfer 技术转让patent 专利copyright contract 版权合同foreign exchange market transactions 金融市场

交易 export credits 出口信贷 syndicated loans 辛迪加贷款 / 银团贷款 international bond 国际债券

DefinitionDefinition of IPS of IPS The special implication of IPS practice

1.International Trade Settlement With the expansion of global trade amongst

countries, the role of banks in international trade finance is becoming more important. Most transactions must be settled through banks.

Without the bank’s participation, international trade would not have been developed to the stage we have reached today.

DefinitionDefinition of IPS of IPS The special implication of IPS practice

2. International Non-Trade Settlement2. International Non-Trade Settlement There are many ways by which funds can be

transferred from one country to another under trade service. When the tourists, merchants, delegations or other people go abroad, they need money to spend, to buy something, or to pay for various expenses and charges there.

The most common means for them to carry funds are cash, traveler’s check, traveler’s letter of credit and credit card.

Evolution of IPS: from cash settlement

to non-cash settlement

Before the sixth century B.C, goods were exchanged between traders in different countries on a barter basis. A barter system put the trading parties at great inconvenience.

A medium of exchange was created in the form of coins at the beginning of the 15th century B.C., thereby ending the barter transactions.

These coins were measured and exchanged by weight and fineness among trading countries for settling international payments.

1. From cash settlement to non-cash settlement

13 century A.D.

InstrumentsBill of exchangePromissory NoteCheque/check

Non-Cash Settlement 非现金结算

Exchange for GBP1,250.00 Beijing,1 April,2003

At sight pay to the order of DEF Co.the sum

of Pounds one thousand two hundred and fifty only

To XYZ Bank, For ABC Co., Beijing

London (signature)

End of 18 century

ExpensiveRisky

Turnover of funds slow

Foreign exchange bank

Bill of exchange Foreign exchange bank

13 century A.D. end of 18 century A.D.

Foreign exchange market

From cash settlement to non-cash settlement

Since then, international payments have been effected by shipping precious metals taking the form of coins, bars or bullions to or from the trading countries.

This direct transfer of precious metals is called a cash settlement.

The shipment of gold or silver across The shipment of gold or silver across national boundaries was both expensive national boundaries was both expensive and risky. and risky.

Freight costs were high, the risk of being lost, stolen or robbed was omnipresent （无

处不在） , and what is more, the speed of transferring funds depended on the speed of transportation facilities, which often slowed the turnover （周转） of funds.

Evolution of IPS

 Non-cash settlementsFrom the thirteenth century A.D., bills of

exchange were created, gradually taking the place of coins in international payments, and the bill of exchange market began to develop.

With the establishment of foreign exchange banks With the establishment of foreign exchange banks at the end of the at the end of the eighteenth centuryeighteenth century, international , international payments could be settled by way of transferring payments could be settled by way of transferring funds through the accounts opened in these banks. funds through the accounts opened in these banks. From then on, the non-cash settlement era began. From then on, the non-cash settlement era began.

Evolution of IPS

Nowadays non-cash settlements are universally adopted all over the world.

There is no denying the fact that the establishment of foreign exchange markets does play a very important role in creating and developing non-cash settlements, for foreign exchange banks are allowed to buy and sell foreign exchange freely in these markets so as to meet the needs of international banking business.

2. From direct payment made between traders to payment through a financial intermediary

As mentioned above, initially,

international trade payments were made by the buyers directly to the sellers by means of precious metal shipments.

As foreign exchange banks were set up over time in different regions the world over, the payment channel changed, especially after a new means of payment, namely the bill of exchange, had been widely used in IPS.

These banks acted as intermediaries effecting international payments by the buyers to the sellers.

Evolution of IPS

With the worldwide banking network and modern banking technicality, banks can not only provide easy and quick transfer of funds needed for conducting international trade but also furnish their customers valuable economic and credit information.

Nowadays they have become the center of international settlements.

3. From payments under simple price terms to payments under more complex price terms

In the past, international trade payments were In the past, international trade payments were settled on very simple price terms, such as cash settled on very simple price terms, such as cash on delivery, cash on shipment, cash with order, on delivery, cash on shipment, cash with order, cash before shipment, etc. In modern cash before shipment, etc. In modern international trade, a more comprehensive and international trade, a more comprehensive and exact set of terms has been developed.exact set of terms has been developed.

As indicated in INCOTERMS 2000 (International Rules for the Interpretation of Trade Terms) ICC Publication, the price terms available for use are multifarious （各种各

样） and more complicated than before. 13 terms

Incoterms 2010, 11 terms

EXW EX WORKS(…named place)工厂交货条件FCA FREE CARRIER(… named place)交至承运人条件FAS FREE ALONGSIDE SHIP (… named port of shipment)船边交货条件FOB FREE ON BOARD (… named port of shipment)装运港船上交货条件CFR COST AND FREIGHT (… named port of destination)成本加运费条件CIF COST, INSURANCE AND FREIGHT (… named port of shipment)成本

加运保费交货条件CPT CARRIAGE PAID TO (… named port of shipment)运费付至——交货CIP CARRIAGE AND INSURANCE PAID TO (… named port of shipment)

运保费付至——交货条件DAT Delivered At Terminal (… named place)目的港交货条件

DAP (new delivery term) Delivered At Place 特定地点交货条件

DDP DELIVERED DUTY PAID (… named port of shipment)完税交货条件

4. Internet era

With the development of computer technology, business is done and payments and settlements are effected by means of all kinds of payment systems, which make it quicker and safer and more convenient for both the buyer and seller.

Internet is developing very fast, people are trying to make payment on line. This is called net banking.

Although there are a lot of problems to be solved, net banking is very promising.

ＳＷＩＦＴ ＣＨＩ P ＳＣＨＡＰＳ ＦＥＤＷＩ R Ｅ

环球银行间金融电讯协会

纽约清算所交换银行相互收付系统

伦敦交换银行自动收付系统

联邦储备清算系统

Communication network

Domestic Settlement International settlements

settlement

International Trade SettlementInternational Non-Trade Settlement

Instruments Methods Documents Rules

Bill ofExchange

Main methodsOther methods basic Additional

Promissory note

Check

Remittance

Letter of credit

Collection

Factoring

Letter of guarantee

Forfeiting

Standby letter of credit

Invoice

Bill of Lading

Insurance documents

Packing list

Weight list

Certificate of Original

All kinds of Certificates

URG

UCP

URC

Correspondent Banking Relationship

Definition of Correspondent BankInternational banking is effected through the

cooperation of commercial banks all over the world. This cooperation comes from the establishment of correspondent relationships between banks.

The so-called correspondent bank may be defined as “a bank having direct connection or friendly service relations with another bank.”

Even for large international banks such as the Bank of China, the establishment of correspondent relationship is still very important because they cannot do any business without the cooperation of local banks.

Agency ArrangementAgency Arrangement

Under an agency arrangement, a Chinese bank, for example, may have a prior agreement with a foreign bank to the effect that each will function as the agent of the other in its own country.

The banks may open deposit accounts with, and entrust business to each other on a reciprocal basis.

Control DocumentsControl DocumentsWhen establishing a correspondent

banking relationship, two banks concerned will exchange information on the services they can perform or cooperate for each other.

Usually “A” Bank and “B” Bank shall be supplied with the control documents when they are establishing an agency banking relationship. The control documents include:

List of Specimen Authorized Signatures

The authorized signatures are used for authentication of the messages, letters, remittances, letters of credit, etc. addressed by the bank to its correspondent bank.

A bank’s signature book contains facsimiles （ 副 本 ） of signatures of authorized officers. A bank draft will not be paid if it bears no authorized signatures.

When signatures thereon, such as letter of credit are found out of their previous shapes compared with the specimen in authorized signature book, they have to be confirmed by tested telex.

Telegraphic Test Keys

The telegraphic test keys are code arrangements that enable the banks receiving cables from other banks to verify that the cables/telexes are authentic in the absence of written signatures. These codes are strictly confidential.

Telegraphic Test Keys

In compliance with the request in “A” Bank, “B” Bank is enclosing under sealed cover a table of his serial and rotation numbers to be used in conjunction of Telex/Cable messages from “B” to “A”.

It is important to destroy the testing documents and confirm that fact by returning letter duly signed as soon as “A” receives the canceling letter.

Terms and Conditions

By negotiation, both correspondent banks may reach some agreements on the terms and conditions of their business.

Terms and Conditions

For example: “If instructions to cancel a collection are received prior to the presentation of bills to drawees, commission will be charged at minimum rate for collections.

Postage, cable charges and any other expenses arising from transactions entrusted to our care are to be collected from you at their actual costs.”

SWIFT Authentic Key

This is an electronic “key” that is used between SWIFT member banks for authenticating all messages to be transmitted through SWIFT.

    Inter-bank Accounts

A current account or a checking account may be opened between banks with the establishment of a correspondent banking relationship.

Any bank before opening an account in its correspondent bank, must be aware of the detailed conditions of this connection,

such as amount of initial deposit, minimum credit balance for covering the cost of services provided, interest rate of the account, overdraft permission, and how often the statement of account is sent.

Nostro and Vostro AccountNostro accounts are the foreign currency

accounts (due from account) of a major bank with the foreign banks abroad to facilitate international payment and settlement.

As the counterpart of nostro account, Vostro account is an account (due to account) held by a bank on behalf of a correspondent bank.

due from bank: 存放同業；應收同業銀行款項 (Mainland China & HK); 同業借項；應收同業銀行款項 (Taiwan)

amount due from banks (abroad)  存放 ( 海外 ) 银行同业的款项

amount due to banks abroad ( 海外 )银行同业的存款

Example

From the point of view of a UK bank, a nostro account is our bank’s account in the books of an overseas bank, denominated in foreign currency. An example would be an account in the name of Midland Bank, in the books of Bank of New York, denominated in USD. Midland Bank is a customer of Bank of New York.

When funds are remitted from the United Kingdom, nostro accounts are used if the payment is denominated in foreign currency, and vostro account are used if payment is denominated in GBP.

Services provided by correspondents

1.Collecting checks, drafts, and other credit instruments;

2.Making loan or investments as agents for their customer banks;

Services provided by correspondents

3.Making credit investigations of firms that borrow in the open market;

4.Providing banks with foreign exchange facilities, including commercial and traveler’s checks;

5.Providing banks with funds/loans in case of need.

Homework

Search the ICC website, and download the different versions of Incoterms, and analyze the differences between these versions.

Reference book:

网上支付与结算（第 2 版） 2013-08-01 / 电子工业出版社