5 international payment methods used in global trade
It’s never been easier and cheaper to make a payment. Whether you’re a business paying an invoice or sending some cash to a distant relative, there’s no shortage of options available to you.
That, ironically, is the problem — you’re spoiled for choice. Navigating the realm of international payments can be a daunting task when there’s a multitude of payment methods to choose from. In this article, we’re going to look at some of the five most common options and consider their pros and cons.
What are International Payment Methods?
First, let’s make sure we’re on the same page.
When we talk about international payment methods in the context of international trade, we’re referring to the processes and procedures commonly adopted by businesses when it comes to how and when payments are made for goods. We’re not concerned with the physical method itself, such as a wire transfer or digital payment gateway.
These methods, as we’ll explore shortly, include cash in advance, documentary collection, and trade finance.
Why a Business Needs Multiple Global Payment Methods
Businesses generally require multiple global payment methods to serve the needs of clients and partners across various markets.
Firstly, different jurisdictions have varying levels of regulation when it comes to international payments. Offering a range of payment methods enables businesses to cater to the specific needs of certain international customers.
Secondly, having multiple payment methods provides flexibility and convenience for customers. Some may prefer paying cash in advance whereas others may opt for trade finance because that suits their cash flow better.
Forms of International Trade Payment
Cash in Advance
This is one of the most common payment methods for international trade. As the name implies, it requires the buyer to pay for goods before they’re shipped, and you’ll most often see this method being used to cover smaller purchases.
Cash in Advance payment terms is favoured by businesses that export a physical product because they receive payment before goods are shipped. On the other hand, importers have to assume the risk of not receiving goods and potentially having no way to recover funds.
|Money changes hands quickly, meaning goods should be shipped quickly.||The business’s cash flow takes an immediate hit. Risk of not receiving goods.|
|Receives payment before shipping, offering security.||Not a particularly competitive payment method; can be a hindrance if alternatives are not available.|
Letter of Credit
A letter of credit is a financial instrument issued by a bank or creditor that serves as a guarantee of payment between a buyer and a seller upon completion of the contract’s agreed terms. It’s commonly used to facilitate secure transactions when there is a lack of trust or familiarity between the parties involved.
It’s very secure because it involves an intermediary and provides a level of assurance to the seller that they will be paid once they meet their obligations, while also offering protection to the buyer. It’s a widely used payment method in international trade, particularly for high-value transactions or when dealing with unfamiliar trading partners or volatile markets.
|Payment is only made after goods are received. Payment terms are wholly customisable as per the contract.||It can be very expensive due to bank fees. It’s time-consuming and there’s a risk of currency fluctuation for long contracts.|
|The sale is secured by the buyer’s bank or creditor.||Currency fluctuation can impact profit margins.|
‘Documentary collection' involves the exchange of commercial documents and payment instructions between the buyer’s and seller’s banks, to facilitate the transfer of goods and funds.
In a documentary collection, the seller forwards the necessary shipping and commercial documents, such as the bill of lading, invoice, and packing list, to their bank. The seller’s bank then sends these documents to the buyer’s bank, along with instructions for payment. The buyer’s bank notifies the buyer of the arrival of the documents and provides options for payment, such as paying upon receipt of documents or accepting a time draft.
Once the buyer’s bank receives the payment, it releases the shipping documents to the buyer, enabling them to take control of the goods.
Documentary collections are less secure when compared to letters of credit since the buyer does not provide a guarantee of payment from their bank.
|Cheaper than a Letter of Credit. Payment made on delivery.||No guarantee of delivery. Payment is made before goods are checked.|
|Retains ownership until payment is received.||No guarantee of payment.|
Open Account Terms
Open account terms refer to a payment arrangement between a buyer and a seller where the goods are shipped and delivered before payment is made.
It is a credit-based payment method in which the buyer is given a specified period, known as the credit period, to settle the invoice after receiving the goods or services, usually in 30, 60, or 90 days.
This is one of the most advantageous options to the importer, but it is a higher-risk option for an exporter.
|Payment is not due until the goods are received.||N/A|
|Makes sellers more attractive to buyers.||No guarantee that payment will be made.|
Consignment and Trade Finance
This is similar to open account terms, but payment is only sent to the seller after goods have been sold by the buyer and distributor to the end customer. Until this happens, the seller retains ownership of the goods.
This is considered the riskiest international payment method since the seller is not guaranteed any payment at all. On the other hand, it does help sellers become more competitive because goods become available for sale more quickly.
|Payment is only made when goods are sold.||Relies on the seller being honest.|
|Helps sellers get goods to market quickly.||Payment may take a long time.|
It’s worth keeping in mind the various options available to you when considering a payment method for international trade. Weigh up the pros and cons of each one against your risk appetite to settle on a course of action that meets both the needs of yourself and your partners — but always put your interests first.
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FAQs About International Payment Methods
What is the Most Common International Payment Method?
‘Cash in Advance' is one of the most common payment methods for international trade. The buyer pays for goods before they are shipped, which provides the seller with some security while also benefitting the buyer with quick processing and shipment.
What Are Examples of International Payment Systems?
There are many examples of international payment systems that facilitate cross-border transactions. Here are some commonly used ones:
· PayPal: PayPal is a global digital payment platform that allows individuals and businesses to send and receive money globally. It supports multiple currencies and provides a convenient way to make international payments using credit cards, bank accounts, or PayPal balances.
· Silverbird: Silverbird offers free multi-currency business accounts primed for international trade. Send, receive and hold money in 20+ currencies all over the world. Enjoy a fee structure tailored to your needs. Sleep easy in the knowledge that 100% of your money is held in Tier-1 UK and EU banks. 100% online. Send money with the click of a button.
What is the Safest International Payment Method?
Determining the safest international payment method can depend on various factors, including the specific context, preferences, and risk tolerance of the parties involved.
Ultimately, the choice of the safest international payment method depends on factors such as convenience, availability, transaction size, and the level of security desired by both the buyer and the seller. And be mindful that even the most secure payment method can be let down when users don’t adhere to best security practices.
What is an International Payment Gateway?
A service that enables businesses to accept and process payments from customers located in different countries. It acts as an intermediary between the merchant (seller) and the acquiring bank (the bank that processes the payment) to facilitate secure and efficient transactions across borders. Silverbird, Monzo, Stripe and PayPal are all international payment gateways.