5-1. International Remittance
Overview
Learning Points
- Two Main Types of Payment Method
- International Wire Transfer and Paying by Check
- Pros and Cons
Two Main Types of Payment Method
In trade, payment methods can be broadly categorized into two main types.
- International Wire Transfer and Check Payment
- Documentary collections (D/A, D/P and L/C)
The former is simply a form of payment, while the latter is a financial instrument that involves banks to make transactions more secure with additional paperwork.
International Wire Transfer
International wire transfer is a simple method of transferring funds where money flows from the importer to the bank and then to the exporter.
This can also be broadly categorized into two main types.
- Telegraphic Transfer (T/T)
- Mail Payment (Mail Transfer, M/T)
Telegraphic Transfer
A telegraphic transfer (T/T), also known as a wire transfer or telex transfer, is a method of electronically transferring funds from one bank to another.
It is a quick and secure way to send money internationally. So, this is often utilized for transactions that require a high level of urgency.
Mail Payment (Mail Transfer)
A mail payment operates on a mechanism similar to telegraphic transfers, but the communication between banks is conducted through the mail instead of the telegraph.
The bank fees are generally lower compared to T/T. However, the payment process takes longer due to the use of postal mail.
Check Payment (Demand Draft)
A demand draft (D/D) is a negotiable instrument to transfer funds from one bank to another.
The importer obtains a cashier’s check from the bank and sends it to the exporter. Once the exporter receives the check, they present it to the local bank, endorse it, and receive the cash.
Pros, Cons, and Others
Here are the pros and cons of international money transfers and check payments without bank guarantees.
Pros
As it does not require any bank procedures or paperwork exchange, it has the following advantages:
- Speedy process
- Simplicity of money flow
Cons
Since transactions occur solely between the exporter and the importer, it has the following disadvantages:
- Increased settlement risk
If any issues arise, the parties involved must resolve them directly.
Negotiating with partners from different languages, cultures, and business practices can be unexpectedly challenging. It’s better to understand the disadvantages before choosing this method.
Payment Method for Small Transactions
Credit cards or PayPal are often used via online services like eBay for personal business.
International wire transfers are more commonly used for larger transactions, such as shipping entire containers.
Risks of Trade Transactions
In trade, gathering information about the economic situation of counterparties is difficult. Therefore, it is necessary to pay close attention to credit risk.
If you enter into a contract without understanding the counterparty’s creditworthiness, there is a risk of encountering issues such as:
- Delayed payments
- Non-delivery of goods
How to Avoid Credit Risks
You can assess the creditworthiness of counterparts by utilizing resources such as a credit research company before initiating the business to mitigate such risks.
- The exporter paid for the goods, but the items were not delivered
- The importer sent the goods, but the payment was not made
Using a Letter of Credit (L/C) is one of the options to mitigate these credit risks associated with overseas companies.
Summary
We explained the methods of overseas remittance, mainly focusing on International wire transfers and check payments.
However, when sending money through banks, you must consider the recipient’s trustworthiness to avoid risks.
The following topic will cover secure payment methods that can help prevent risks. It is important to learn about these methods together.
Enhanced Learning with Videos
Test Yourself
Reinforce your understanding of this topic by working through the exercises. Attempting the exercises without referring to the material as much as possible is advisable.
