The main forms of international payments

International payments for commodity transactions play an important role in the business world of various countries. They cover all foreign trade transactions for the exchange of goods or services, regulate the financial component of non-commercial operations, promote the active movement of capital, and improve the market.

Principles, essence and forms of international settlements

International settlements are carried out through special accounts using banks overseas departments or open correspondent (nostro) accounts of a bank in any foreign bank or current correspondent (loro) accounts for settlements and capital flows.

The organization and forms of payments in international trade are quite diverse. As a rule, all international settlements are carried out in convertible currencies, that is, in national currencies leading in the economic sense of countries.

In the modern financial world, gold settlement obligations have disappeared under special circumstances, but countries may sell parts of their gold reserves in order to acquire convertible currencies. Thus, gold remains the guaranteeing foundation of all international transactions.

Typically, international payments are governed by the currency laws of countries participating in trade relations, the terms of contracts, international trade rules and foreign economic activity of the country. Moreover, in world economic practice, there are many types of cashless payments under contracts, which make it possible to efficiently and flexibly use the financial reserves of countries, contribute to the development of the economy, and apply a variety of banking methods of conducting international currency settlements.

The order and rules integrated into the exchange system

International payments, in fact, duplicate the forms of internal payments, from which they differ only in the currency component: they are the actual exchange of the domestic national currency for any other.

In legal terms, they necessarily stipulate in what currency the transaction should be, as sometimes the requirements of the participants in the trade capture several currencies of different countries.

Physically, banknotes are not involved in international payments, and payments for transactions are carried out in the form of documentary transactions, transfers, letters of credit, checks, bills of exchange. The expression of the form of international settlements is the documentary circulation of countries.

Currently, most of the financial reserves of countries are denominated in US dollars, which can be dangerous for some economically unstable countries, especially during times of financial crisis.

Features of international settlements include

1. Mandatory execution of an international contract, as a way to use the basic forms of international payments.
2. Registration of shipping and payment documents.
3. Accounting and regulation of all international settlements by the laws of countries participating in a foreign trade transaction.
4. Unification of settlements through the documentary nature of transactions without the physical participation of gold and currency reserves of countries.
5. The dependence of international settlements on the impact of currency quotes and rates.
6. The use of unified rules and guarantees of trade operations adopted by the international economic community.

The essence, concept and forms of international cashless payments are the basis of the effectiveness of foreign trade transactions.

There are several main types of payments. They are divided into:

• letters of credit and collection methods of payment;
• Money transfers;
• settlements with advance money transfers using open foreign currency accounts;
• bill and check payments;
• include credit and clearing forms of international currency settlements.

Letter of credit and other forms

Documentary forms of international settlements represent payments based on the documents issued. In fact, it is the bank’s obligation to make payments upon request of the bank’s client to make a payment to a third party.

In international settlement practice, an irrevocable letter of credit is usually used, that is, without the right to revoke a transaction by a bank client. Forms of international settlements include a documentary letter of credit.

In practice, this means that the third party - the party to the transaction (beneficiary) issues documents confirming the shipment of the goods, the client of the bank is obliged to give an order for payment, without physically receiving the goods.

A letter of credit can be confirmed, with guarantees of payment of two participating banks, and not confirmed, with a guarantee of one bank to which the letter of credit is issued. Depending on the importance or riskiness of the transaction, the parties choose one or another form of letter of credit.

In addition, letters of credit of international settlements involve transactions with financial coverage and without coverage.

• With a letter of credit with coverage, the entire transaction amount immediately goes to the seller’s bank account.
• A letter of credit without coverage does not oblige the bank to transfer funds when opening a letter of credit.

Special properties of the letter of credit and their use in foreign trade transactions

The special properties of a letter of credit include its transferability and revolving, as special forms of settlements in international trade.

• A transferable or transferable letter of credit allows you to transfer funds to third parties.
• Revolving letter of credit ensures the use of funds in parts, the ability to pay advances to the full receipt of documentation.

The use of a letter of credit in international transactions provides contracts with guarantees, is a kind of insurance in the implementation of effective and secured foreign trade transactions.

In the practice of bank settlements, several forms of execution of letters of credit have been adopted.

• Deferred payments. They provide for the final payment after the actual receipt of the goods. In the system of foreign economic activity, this is the most disadvantageous form of settlement for the exporter.
• Payments upon presentation. They mean immediate payment upon presentation of documents in the amount indicated in the submitted documents.
• Payments with acceptance of urgent drafts. They provide for payment upon maturity of payments specified in the documents. In this case, it is possible to envisage receipt of payment amounts without taking into account bill interest if settlements by bill are provided.

In the event that such a calculation is not provided, the letter of credit is called with an installment plan of payment and is carried out upon receipt of documents indicating the terms.

Margin of safety: additional types of letter of credit in foreign trade

• Letter of credit with negotiation of drafts, that is, the possibility of making payments by any bank. In such a case, there is a risk of a discrepancy in the rules for documentation. Therefore, choosing the type of letter of credit, it is necessary to carefully study the very concept and forms of international settlements.
• Letter of credit using invoice. In such calculations, the main document is the proforma invoice indicating the type and types of shipment, which guarantees the buyer the delivery of goods after payment.

Settlements with a red line are letters of credit providing for the payment of advances.

Collection form

In the field of business and financial transactions, collection methods of financing contracts are especially popular and unified, and are widely used in the practice of international payments.

Collection is an obligation of the remitting bank (or exporter) to carry out all necessary actions related to the order of the client-trust, and to receive money from the payer - participant of the transaction, to credit the funds to the account of the client

The organization and forms of international payments in the form of collection payments are of two types: pure and documentary.

• Net collection is payments on bills and promissory notes, checks; commercial documents are not involved in this type of receipt of payments.
• Documentary collection is the collection of documents accompanying a commercial transaction: invoices, shipping, transport carnets (carnet-tir) documents.

As a rule, the collection form in international payments is applied between clients who have long-term cooperation.

This form does not provide for unconditional payments, as, for example, with letter of credit forms of payment, but it has its undeniable advantages.

• First of all, a lower risk of payment transactions compared with a letter of credit.
• Simplicity of operations with direct savings on banking transactions, reduction of overhead costs.
• Reduced liability for banks participating in the transaction.

Parties that prefer collection payments in foreign trade transactions are determined by applicable international law. This is the principal, the remitting bank, to which the principal instructed to receive payments; a collecting bank or a bank presenting documents to the payer and, finally, the payer under the contract.

At the same time, the remitting bank is not obliged to verify the documents submitted by the payee - the trustee, the practice of verification is the responsibility of the exporter.

The documents themselves, the availability of details of banks and parties to the transaction are governed by the rules for the execution of collection orders. The rules also govern the basic conditions of a transaction with a collection order.

Other forms and types of settlements

In addition to letters of credit and collection payments, which are the main forms of international payments in foreign trade transactions, their other types are also widely used.

In addition to the above, the following important types are presented:

1. Bank transfer is one of the accepted forms of currency transactions. A transfer is a direct payment of money to a recipient or a transfer of foreign currency from one bank to another on behalf of a bank client. At the same time, the bank does not bear any obligations to fulfill the contract, which are the basis for currency transfers. According to the legislation of the Russian Federation, the agent of currency control is a bank, but it fulfills its obligations within the framework of the law: it draws up passports for transactions, monitors the timeliness of the sale of currency from export operations, and receives confirming customs documents on the passage of the transaction under customs control. All other obligations to fulfill the contract are assigned to the client - a participant in foreign economic activity.
2. One type of bank payment is an advance payment. As a rule, it is carried out by importers, and an advance payment, according to world practice, can reach up to 30% of the transaction value. Advance payments are usually settled when deliveries of expensive metals, valuable equipment, and the execution of individual expensive orders under a contract.
3. A variety of bank transfers are documentary (conditional) transfers - they consist in providing the bank of the exporter with guarantees to the bank of the importer about the payment of the appropriate amount after the submission of documents confirming the shipment and quality of the goods. To carry out documentary transfers, the exporter provides the bank with shipping documents confirming the physical exit of the goods outside the exporting country, i.e., confirming the export of goods from the territory of export.
4. Foreign currency accounts open account - the current practice of applying various forms of international bank payments. This type of payment is applied between customers who have long-term cooperation in the field of export-import operations, and therefore unconditionally trust each other. Open account transactions are characterized by the fact that the exporter, when the goods are shipped, opens an account with his contract partner - the importer of the goods - in the bank in the name of the buyer, entering the transaction payments into the open account debit. After the shipment of the goods, the importer repays the debts of the account, thus, settlements under the contract are closed.

The mechanics of making a bank transfer to open an account are simple. The client opens an account and concludes an agreement with the bank on the obligation of the bank to keep the client’s money in this account and crediting all incoming funds to the account opened by the client in favor of the owner. Wherein:

• The transferring bank, the intermediary bank and the beneficiary (the receiving bank) in foreign exchange transactions are considered as third parties participating in the transaction.
• The procedure for the use of funds, their transfer and storage is negotiated upon conclusion of an agreement on opening a correspondent account.
• In order for the bank to incur a transfer, the customer provides the bank with a payment order. The bank executes payments on the basis of a payment order and an account opening agreement.

Transfers to open an account, as a rule, are carried out in the SWIFT system and take no more than one hour. The mechanics of the reporting periods of some banks sometimes delay the flow of funds, which, passing through the bank's correspondent accounts, are credited to the client's account a day later and much later than the buyer actually made the transfer.

Currency clearing, as one of the forms of bank settlements in foreign trade operations

This is an accepted form of settlement, based on an agreement between the governments of two or more countries. The agreement defines the mandatory mutual offset of obligations and claims.

The goals that are achieved through clearing calculations are diverse. As a rule, when concluding a clearing agreement, each state solves its specific tasks. It could be:

• the task of ensuring balanced expenditures of gold and foreign exchange reserves through foreign trade transactions;
• a method of obtaining a variety of soft loans;
• also used as a measure of counteracting unfavorable contractual conditions on the part of other countries;
• contributes to the provision of free economic assistance and targeted financing of countries with passive balances that are lagging behind in the economic development.

A feature of clearing settlements is the replacement of an international (expensive) currency when settling with clearing banks with the possibility of making payments in national currency to achieve the final offset of all claims.

In the field of international relations, clearing settlements play an important role and contribute to a fuller use of national currencies, mutual exchange of currencies for current payments, provides for the possibility of creating convertibility, within the framework of agreements, of national currencies.

The forms of currency clearing depend on the countries participating in the agreement and can be bilateral and multilateral agreements. A striking example of multilateral clearing settlements is the former, historical association of the CMEA member countries, currently these are the EEC countries.

Conclusion

Banking forms of international payments play an important role in the development of the global economy. They regulate payments and obligations on foreign trade transactions.

Contribute to the development of economic, cultural and business ties between countries.

In direct proportion to the level of economic development of the country, convertibility of the national currency is the feasibility and rules of concluding trade transactions, the choice of the form of bank international settlements.

All these conditions should be discussed in detail between interested parties with the obligatory consideration of mutually beneficial relations and the legislation governing foreign exchange financial relations in the country.

Forms of international banking settlements is the pinnacle of any foreign trade transaction. Banks not only regulate the timeliness of payments, but also act as a kind of guarantors of ongoing trade transactions.

Without banking participation, many trading relationships would not have been possible. The application of unified rules and documents allows exporters and importers - participants of the foreign trade market, to carry out activities efficiently and profitably, thereby contributing to the development of the international economy.