Different types of Payment Methods used in International

Trade with their advantages and disadvantages.

Harmonized System (HS) Codes

Presented by:
Md. Abu Yousuf Khan
MBA, CDCS, CAMS, CERM
SPO & Faculty Member, RBTA.
Regulatory Framework for Foreign Trade
Domestic Regulations:
Foreign Exchange Regulations Act 1947
Import Policy Order
Export Policy
Guideline for Foreign Exchange Transaction Vol-1 &2.
BB Circulars & RBL Circulars etc.
International Regulations:
Uniform Customs and Practice for Documentary
Credit(UCPDC) 600
Uniform Rules for Collection (URC 522)
Uniform Rules for Bank to Bank Reimbursement(URR 725)
Incoterms 2020
International Standard Banking Practice (ISBP 745)
International Standby Practices (ISP98)
Others.
Role of Bank in Foreign Trade
To facilitate the payment
To provide finance
Modes of International Trade Payment

•Advance Payment
•Open Account
•Documentary Collection
•Documentary Credit
 Advance Payment:
In this method, the buyer sends funds to the seller prior to
shipment of goods. Advance payment is the form of settlement
that offers the least risk to the seller, but a high level of risk to the
buyer. The process is described below:

1. The contract is agreed between the buyer and seller, indicating

advance payment as the method of settlement.
2. The buyer instructs its bank to make payment to the seller’s
account with a specific bank.
3. The banker of the buyer makes payment, as requested.
4. The banker of the seller credits the amount to the account of the
seller under advice.
5. The seller ships the goods.
 Advance Payment:
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Buyer’s Bank Seller’s Bank

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Advantages and Disadvantages.
In this case, the buyer made payment in accordance with the
contract, but had no guarantee that the goods would be shipped
once the payment had been made or that the goods would be of the
required quality.
The reasons for adopting this method :
◆ The seller may be unwilling to ship goods to the country in
which the buyer is located prior to receipt of payment, for reasons
of ‘country risk’.
◆ The buyer may wish to encourage the seller to enter into a
long-term trade relationship.
◆ The seller may not have finance with which to buy or prepare
the goods for shipment.
◆ The buyer may feel comfortable with its relationship with the
seller, and with both the credit and country risks relating to that
seller.
 Open account
In this method, the seller sends goods to the buyer prior to receive
payment. Open account is the form of settlement that offers the
least risk to the buyer, but a high level of risk to the seller. The
process is described below, which covers a transaction payable on
a sight basis.
1. The contract is agreed between the buyer and seller, indicating open
account terms as the method of settlement.
2. The seller arranges shipment of the goods according to the agreed terms
and also forwards the underlying shipping documents to the buyer.
3. If the buyer is satisfied with the goods and / or the documents, it
instructs its bank to make settlement to the seller in the manner
requested.
4. The banker of the buyer makes payment to the banker of the seller.
5. The banker of the seller credits the amount to the account of the seller
under advice.
 Open Account:
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Buyer’s Bank Seller’s Bank

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 Advantages and Disadvantages

When business is conducted on open account terms, the seller dispatches goods
to the buyer without any guarantee of payment.

Open account trading is most commonly used when the two companies
concerned have a long-established trading relationship. For example, transactions
between sellers and buyers located in countries in Western Europe and the United
States are often conducted on this basis.

Sellers may also use open account trading to secure contracts with parties in
some developing countries to which documentary credit terms have been applied
in the past.
 Advantages and Disadvantages

Open account trading offers several advantages – particularly

that it is simple to administer and involves minimal banking fees
or other costs.
The system is particularly attractive to buyers because it affords
them the opportunity to examine the goods before they have to
make payment.

Sellers using open account methods obtain no security for

payment, and have to rely entirely on the creditworthiness and
good faith of the buyer.
The only involvement by banks in open account trading is in the
transfer of funds on behalf of the buyer to the seller.
 Documentary collection
Payable on a Sight Basis
Payable on a Usance Basis

Under a documentary collection, the seller ships the goods to the

buyer in the importing country. At the same time, it hands over to its
bank the shipping documents relating to the goods and their
shipment. The bank forwards these to a correspondent bank in the
buyer’s country, which is often the buyer’s bank, to handle the
documents in accordance with the instructions of the seller, as
instructed by the seller’s bank in its collection instruction.
 Documentary collection payable on a sight
1. The contract is agreed between the buyer and seller, indicating a
documentary collection payable at sight as the method of settlement.
2. The seller arranges shipment of the goods according to the agreed terms
and forward underlying shipping documents to its bank, known as the
‘remitting bank’.
3. The remitting bank sends the documents to the bank of the buyer,
known as the ‘collecting bank’.
4. The collecting bank makes the documents available for review at its
counters, so that the buyer may make a decision regarding payment.
5. The buyer authorises payment, and the collecting bank remits the
proceeds to the remitting bank and releases the documents to the buyer,
so that the goods may be collected.
6. The remitting bank credits the amount to the account of the seller under
advice.
 Documentary Collection Payable on a Sight Basis

Collecting Bank 3 Remitting Bank

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 Documentary Collection Payable on a Usance Basis
1.The contract is agreed between the buyer and seller, indicating a documentary
collection payable on a usance basis as the method of settlement.
2. The seller arranges shipment of the goods according to the agreed terms and
forwards the underlying shipping documents to its bank, known as the
‘remitting bank’, including a draft drawn on the buyer on the agreed payment
terms.
3. The remitting bank sends the documents to the bank of the buyer, known as
the ‘collecting bank’.
4. The collecting bank makes the documents available for review at its
counters, so that the buyer may make a decision regarding acceptance.
5. The buyer accepts the draft, and the collecting bank informs the remitting
bank of this fact and releases the documents to the buyer.
6. The collecting bank can retain the accepted draft, in which event an advice
of acceptance is sent to the remitting bank, or the draft can be returned to the
seller via the remitting bank for presentation just prior to the maturity date. The
seller will receive the accepted draft for re-presentation near to the maturity
date or an advice of acceptance.
Documentary Collection Payable on a Usance Basis
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Collecting Bank 3 Remitting Bank

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 Advantages and Disadvantages
Documentary collection payable on a sight basis is a form of settlement
that can offer reduced risk for both the buyer and seller. The buyer need
not pay the collection until it has viewed the documents at the offices of
its bank, which will be known as the ‘collecting bank’. The seller knows
that its documents will be held within the banking system until such time
as they are honoured. However, the seller, known as the ‘principal’, has no
guarantee of payment.

Documentary collection payable on a usance basis is also a form of settlement

that can offer reduced risk for both the buyer and seller. The buyer need not
accept the draft presented with the collection until it has viewed the documents at
the offices of its bank, which will be known as the ‘collecting bank’. The seller
knows that its documents will be held within the banking system until such time
as the draft is accepted. However, the seller has no undertaking that the draft will
be honoured on the due date, even if accepted by the buyer.
 Advantages and Disadvantages

Under this procedure, banks manage the document-handling process, but they
do not usually themselves give any payment undertaking. This solution offers
the seller less security than a documentary credit, but as a consequence the
costs are lower. It nonetheless gives the seller some measure of security for
payment. The seller’s interest is best served where the buyer is not able to
obtain possession of the goods without the documents that are sent through the
banking system. The full security of a documentary collection applies only if
the transport document is a negotiable bill of lading and / or if the goods are
consigned to the bank in the importing country, with the consent of that bank.
If the seller has agreed to supply the goods on short-term credit, it can stipulate
that the documents be handed over against the buyer’s acceptance of a bill of
exchange or signature on a promissory note. The seller may be able to discount
the bill or note in return for an immediate payment.
Documentary Credits
 Documentary Credit
Credit means any arrangement, however named or described, that is
irrevocable and thereby constitutes a definite undertaking of the
issuing bank to honour a complying presentation.

The structure of a basic documentary credit transaction

A trade transaction will normally begin with the establishment of
a purchase or sale contract, or proforma invoice, between a buyer
and seller. The contract or proforma invoice will indicate the
method of settlement, among other details such as the nature of
the goods, the amount, and the names of the buyer and seller.
 The structure of a basic documentary credit transaction

1. The contract is agreed between the buyer (‘applicant’) and seller

(‘beneficiary’) indicating a documentary credit as the method of
settlement.
2. The applicant applies to its bank for the issuance of a documentary credit,
usually by completing the bank’s standard application form.
3. Subject to a credit facility being in place and the bank agreeing to the terms
and conditions that have been stated in the application form, the bank issues
the documentary credit and advises it through a bank in the country of the
beneficiary, known as the ‘advising bank’.
4. The advising bank issues its advice of the documentary credit and sends it
to the beneficiary.
5. The beneficiary, if in agreement with the terms and conditions of the
documentary credit, arranges shipment of the goods.
 The structure of a basic documentary credit transaction

6. Having shipped the goods, the beneficiary issues, collates and presents the
documents stipulated in the documentary credit to the advising bank, which is
also the ‘nominated bank’ named in the documentary credit.
7. Because the advising bank has not added its confirmation to the credit, it may
or may not examine the documents prior to sending them to the issuing bank.
It is also under no obligation to honour or negotiate the beneficiary’s
documents.
8. The issuing bank determines that the documents comply and arranges to debit
the applicant’s account for the value of the drawing. In return, the documents
are handed over to the applicant so that it may take control of the goods. At
the same time, the issuing bank reimburses the advising/nominated bank.
9. The advising/nominated bank, upon receipt of the proceeds from the issuing
bank, effects settlement to the beneficiary in the manner requested
The structure of a basic documentary credit transaction
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8 Advising /Negating Bank
Issuing Bank

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 Import Procedure

BD UK
RBL RBS
LC
IMP EXP

 Proforma Invoice/Indent
 Insurance Cover note
LCAF  Issuing Bank
CF 7  Advising Bank
SCB NY
Confirming Bank
IMP Form Reimbursing/Paying
Application in company Bank
Nominated/Negotiating
letter head Bank
Presenting Bank
 Advantages and Disadvantages

 Under the documentary credit, the applicant is able to indicate

the terms and conditions that is to be complied with by the
beneficiary before honour or negotiation would occur.
 Conversely, the beneficiary know that if it complies with those
terms and conditions, it would receive settlement according to the
payment terms in the documentary credit and under the
undertaking provided by the issuing bank.
In international trade, seller expects timely payment and buyer
wants required quality of goods which ensures by documentary
credit method. Documentary credit method requires some
mandatory cost.
Types of Letter of Credit (LC)
•Irrevocable LC
•Confirmed LC
• Sight LC
• Deferred LC
•Local LC
•Foreign LC
•Transferable LC
•Revolving LC
•Red Clause LC
•Green Clause LC
•Govt. LC
•Private LC
•Back to Back LC etc.
 Risk of Buyer and Seller
Methods of Payment Buyer Risk Seller Risk
Advance Payment Extreme No/Very Low

Open Account No/Very Low Extreme

Documentary Collection Low Moderately High due

to Dishonor

Documentary Credit Low Low

 Harmonized System Codes
(HS Codes)

HS Codes or Harmonized System Codes are an industry standard by which

export goods are tagged with. The Harmonized System is a numerical method
that is a standardized way of classifying trade products. As there are a large
number of goods that are traded among the countries, there needs to be a
standard way of marking them. Otherwise, it can create huge confusion and
slow down the trading process.

In terms of export and import, there is a customs duty that needs to be paid. The
HS code helps to identify the product easily and thus helps with the speedy and
accurate calculator of custom fees.
Harmonized System Codes
(HS Codes)
 Harmonized System Codes
(HS Codes)

Mandatory of using H.S. Code-

Use of H.S. Code with at least eight digits corresponding to the
classification of goods as given in the First Schedule of the
Customs Act, 1969 (Act No. IV of 1969) based on the
Harmonized Commodity Description and Coding System shall
be mandatory; Provided that no bank shall issue LC
Authorization Form or open LC if the H.S. Code number for
the item is not mentioned correctly.
 Harmonized System Codes
(HS Codes)

Recording of H.S. Code Number-

At the time of opening LC, commercial banks shall record
appropriate description, HS Code number and reasonable
price of the imported goods. Bangladesh Bank shall
monitor the compliance of the above requirements by the
scheduled banks;
 Domestic Regulations
RECAP
 International Regulations
Advance Payment
Open Account
Documentary Collection
Documentary collection payable on a sight
Documentary collection payable on a usance basis
Documentary Credit
 HS codes