International payment methods
Determining the best payment method for international trade transactions is critical for both importers and exporters in effectively managing cash flow and risk, and staying competitive in the global marketplace. In this video, Elizabeth Johnston provides an overview of the four core international payment methods and their implications for importers and exporters. Elizabeth also reviews the key considerations in determining the best method of payment for international trade transactions.
Lori Crever: Hi. I'm Lori Crever, and today, I'm joined by Elizabeth Johnston, relationship manager with Wells Fargo International Trade Services to talk about international payment methods. Welcome, Elizabeth. Thanks for coming by.
Elizabeth Johnston: Thanks for having me.
Lori Crever: Tell us about your role in the Wells Fargo International Group.
Elizabeth Johnston: My role is really to understand how Wells Fargo's customers transact globally. In particular, how their import/export flows might impact them from an overall cash flow and risk perspective and then to structure solutions in a couple of key areas, risk mitigation, working capital optimization and really helping them to compete effectively in global markets to expand their sales.
Lori Crever: What are the key methods of international payments?
Elizabeth Johnston: There are four main methods of payment in international trade. They are cash in advance, letters of credit, documentary collections and open account. Cash in advance is really just as it sounds. A customer waits to receive payment from a buyer overseas before shipping product to them. A letter of credit is an irrevocable promise of payment issued by a bank. So, for example, from a seller's point of view, if their buyer's bank issues a letter of credit in their favor they have an irrevocable promise of payment from that bank to pay them for their goods as long as they can present documentary evidence of their export shipment to that buyer. A documentary collection is a process in which a bank can facilitate collection on behalf of an exporter of their shipment. By presenting that exporter's shipping documents to their buyer's bank overseas along with instructions for that buyer's bank to release the documents to the buyer upon collecting funds from that buyer. So, the bank really is sort of a channel for transmitting the documents to a buyer overseas and collecting payment from that buyer. However, there's no guarantee on the part of any bank to make payment under a documentary collection. And finally, with open account, a seller would ship goods overseas and wait to collect payment until the goods are delivered and collected at a future point in time. So it's a much more flexible payment method but does have additional risks.
Lori Crever: All right. So tell us, what are some of the factors that go into determining which of the methods is best and what are some risks associated with each one?
Elizabeth Johnston: Sure. So there are really several considerations that play when determining the best method of payment in an international trade transaction.
They include things such as, what is the amount of the sale, is it a particularly large sale for that company, what is the extent of the relationship with that buyer? Is it a long-standing relationship, or is it a new relationship? Are there any concerns about the overall economic stability of the country in which the buyer's located or political stability, what kinds of terms are competitors are offering, and is it necessary to offer those terms in order to make the sale and finally, what is the cost of that method of payment?
Lori Crever: Do you have an example of a situation where one payment method was clearly shown to be the most beneficial amongst all options?
Elizabeth Johnston: Sure. There's one situation in particular that comes up quite often with our customers and that is a situation in which a buyer overseas is requesting extended payment terms. It might be terms that are longer than the company is willing to entertain from an overall risk perspective or perhaps just doesn't want to carry the receivable on their books for that period of time. In that kind of a situation, a letter of credit is really optimal. That is because the letter of credit offers assurance of payment, so there's no concern about not getting paid for the sale and it also offers an exporter an ability to accommodate extended payment terms to be able to offer those to their buyer without necessarily having to hold the receivable themselves on their balance sheet. There are certain letter of credit structures that allow a buyer to enjoy extended payment terms and at the same time make payment to the exporter immediately post-shipment.
Lori Crever: I think what you've really been talking about with us is how does a company doing international trade optimize the payment opportunity? What are some specific benefits to working with Wells Fargo as you partner on this?
Elizabeth Johnston: Sure. Wells Fargo has more than 4,000 people in 44 offices around the globe dedicated to helping our customers succeed financially in global markets. Not only that, we have one of the broadest networks of international correspondent bank relationships which are really critical to structuring and facilitating all of the methods of payment that we've discussed.
Lori Crever: That stagecoach is everywhere.
Elizabeth Johnston: It sure is.
Lori Crever: Elizabeth, this has been great. Thank you so much for coming by.
Elizabeth Johnston: My pleasure.
Lori Crever: If you'd like to learn more about how to position your company for success in the global marketplace, talk to a Wells Fargo International Trade Services relationship manager.