International Transaction Channels
Let’s learn more about International Transaction Channels. Operations in the international market are not the same as selling in the local market. From a logistics viewpoint, there are two unique aspects in the transaction channel: choosing the terms of sale and handling the payment. Choosing the terms of sale involves looking at the distribution channel and determining when and/or where to transfer the following between buyer and seller.
- The physical goods
- Payment for the goods
- Legal title to the goods
- Responsibility for,
- Insuring the goods
- Paying for transporting the goods
- Controlling or caring for the goods(e.g. in the case of livestock)
Transfer of these can be expressed in terms of calendar time or geographic location or upon completion of some actions. So, when developing the agreement to sell, one must consider both time and location. From a seller’s point of view, a list of different locations or stages for quoting a price to an overseas buyer is as follows.
- At seller’s dock
- At seller’s dock, packaged for export
- Loaded aboard surface carrier which will take it to port of export
- Delivered next to the ship, ready for loading
- Loaded aboard ship
- Crossed ocean
- Unloaded at port of import
- Passed through Customs and other inspections
- Loaded aboard surface carrier that will take it to the importer
- Delivered to importer’s receiving dock
The significance in above is that it also determines to or from which point each party has responsibility. Many terms of payments can be used but the seller must take extra precautions to ensure that the payment is received. There are 3 standard ways of payment methods in the export import trade international trade market – Clean Payment, Collection of Bills and Letters of Credit L/C.
Clean Payments in International Transaction
In clean payment method, all shipping documents, including title documents are handled directly between the trading partners. The role of banks is limited to clearing amounts as required. Clean payment method offers a relatively cheap and uncomplicated method of payment for both importers and exporters.
There are basically two types of clean payments:
- Advance Payment: In advance payment method the exporter is trusted to ship the goods after receiving payment from the importer.
- Open Account: In open account method the importer is trusted to pay the exporter after receipt of goods. The main drawback of open account method is that exporter assumes all the risks while the importer get the advantage over the delay use of company’s cash resources and is also not responsible for the risk associated with goods.
Payment Collection of Bills in International Trade
The Payment Collection of Bills also called “Uniform Rules for Collections” is followed by more than 90% of the world’s banks. In this method of payment in international trade the exporter entrusts the handling of commercial and often financial documents to banks and gives the banks necessary instructions concerning the release of these documents to the Importer. It is considered to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system. It is important segment of International Transaction.
There are two methods of collections of bill.
- Documents against Payment D/P: In this case documents are released to the importer only when the payment has been done.
- Documents against Acceptance D/A: In this case documents are released to the importer only against acceptance of a draft.
Letter of Credit L/C
Letter of Credit also known as Documentary Credit is a written undertaking by the importers bank known as the issuing bank on behalf of its customer, the importer (applicant), promising to effect payment in favour of the exporter (beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated documents. It is important segment of International Transaction.
Various types of L/Cs are:
- Revocable & Irrevocable Letter of Credit (L/C): A Revocable Letter of Credit can be cancelled without the consent of the exporter. An Irrevocable Letter of Credit cannot be cancelled or amended without the consent of all parties including the exporter.
- Sight & Time Letter of Credit: If payment is to be made at the time of presenting the document then it is referred as the Sight Letter of Credit. In this case banks are allowed to take the necessary time required to check the documents. If payment is to be made after the lapse of a particular time period as stated in the draft then it is referred as the Term Letter of Credit.
- Confirmed Letter of Credit (L/C): Under a Confirmed Letter of Credit, a bank, called the Confirming Bank, adds its commitment to that of the issuing bank. By adding its commitment, the Confirming Bank takes the responsibility of claim under the letter of credit, assuming all terms and conditions of the letter of credit are met.
The most common financial device used is the irrevocable letter of credit as it is found to be most secured in realizing payments. Currency risk is a type of risk in international trade that arises from the fluctuation in price of one currency against another. This is a permanent risk that will remain as long as currencies remain the medium of exchange for commercial transactions. Market fluctuations of relative currency values will continue to attract the attention of the exporter, the manufacturer, the investor, the banker, the speculator, and the policy maker alike.
While doing business in foreign currency, a contract is signed and the company quotes a price for the goods using a reasonable exchange rate. However, economic events may upset even the best laid plans. Therefore, the company would ideally wish to have a strategy for dealing with exchange rate risk.
