Chapter 9 Remittance and Collection

9.1 Remittance

9.1.1 Definition of Remittance

Remittance refers to the transfer of funds from one party to another among different countries, that is, a bank（the remitting bank）, at the request of its customers（the remitter）, transfers a certain sum of money to its overseas branch or correspondent bank（the paying bank）instructing them to pay to a named person or corporation（the payee or beneficiary） domiciled in that country.

In international trade, this is the simplest way. The seller delivers the goods directly to the buyer, and the buyer remits money to the seller through the bank.

9.1.2 Parties Related to a Remittance

（1）Remitter

A remitter is the person who requests his bank to remit funds to a beneficiary in a foreign country. He is also called the payer.

（2）Payee or Beneficiary

A person who is addressed to receive the remittance is called the payee or beneficiary.

（3）Remitting Bank

A remitting bank is the bank transferring funds at the request of a remitter to its correspondent or its branch in another and instructing the latter to pay a certain amount of money to a beneficiary.

（4）Paying Bank

A paying bank is the bank entrusted to by the remitting bank to pay a certain amount of

money to a beneficiary named by in the remittance advice.

9.1.3 Types of Remittance

There are three basic ways for a bank to transfer funds for its client from home country to abroad, namely, remittance by airmail, remittance by cable and remittance by demand draft.

（1）Remittance by Airmail（M/T）

Remittance by airmail is more generally known as mail transfer, i.e. M/T. A mail transfer is to transfer funds by means of a payment order or a mail advice, or sometimes a debit advice issued by a remitting bank, at the request of the remitter. A payment order, mail advice or debit advice is an authenticated order in writing addressed by one bank to another instructing the latter to pay a sum certain in money to a specified person or a beneficiary named thereon. Procedure for M/T or T/T:

1）The remitter and beneficiary apree in contract on payment by remittance.

2）The remitter makes out the necessary application form instructing its bank to issue an M/T or T/T.

3）The remitting bank debits its customer's account with the amount to be remitted together with its commissions and expenses if any.

4）The remitting bank issues a payment order to its branch or correspondent in the place where the beneficiary is domiciled. The payment order must be authenticated with the authorized signature of the remitting bank.

5）Upon receipt of the payment order, the paying bank verifies the authorized signatures （for M/T）or test keys（for T/T）, notifies the beneficiary and pays the stated amount minus expenses charged by itself.

6）The paying bank claims reimbursement from the remitting bank in accordance with the latter's instructions.

（2）Remittance by Cable/Telex/SWIFT（T/T）

Remittance by cable/telex/SWIFT is commonly referred to as cable transfer, telegraphic transfer or electronic transfer, except that instead of by airmail, instructions from the remitting bank to the paying bank are transmitted by wire or through the SWIFT system（the Society for Worldwide Interbank Financial Telecommunication）

（3）Remittance by Bank's Demand Draft（D/D）

Remittance by bank's demand draft is generally referred to as D/D. Here a banker's demand draft drawn by a bank on its overseas bank is used as an instrument for effecting transfer of money. The difficulty with this method is that the draft must be physically transferred to the payee, and the payee must then present the draft for payment.

Generally speaking, a large number of international remittances are carried out by T/T. M/T is less used than T/T or D/D nowadays, except for small amount remittance made by individuals for family maintenance, cash gift, etc. T/T is favorable to the payee in that he can get money at an early date, speed up the turnover of funds, increase the income of interests and avoid the risk of fluctuation in the exchange rate.

Procedure for D/D:

1）The remitter and payee apree in the contract on payment by D/D.

2）The remitter make a written request to issue a bank's demand draft

3）The remitting bank debits its customer's account with the amount of the draft plus bank commission if any and issues a bank's demand draft to the remitter.

4）The remitting bank sends an advice（a special letter of advice or a non-negotiable copy of the draft）by airmail to the drawee's bank, namely its overseas branch or its correspondent bank abroad, instructing the latter to pay it on the presentation of the original bank's demand draft.

5）The remitter forwards the draft to the payee.

6）The payee presents the draft to the paying bank for payment.

7）The paying bank verifies the signatures, pays the draft and claims reimbursement from the remitting bank.

8）The paying bank sends the debit advice to the remitting bank.

9.1.4 Application of Remittance

Remittance is mostly applied in the settlement of open account sales and payment in advance sales.

（1）Open Account Sales

In open account sales, the buyer is trusted to pay the seller after receipt of goods. This method is commonly used when the seller and the buyer are related entities or where there is a history of transactions between the parties, as a result of which the seller is satisfied that the buyer can be relied on to pay for the goods. The seller assumes great risks.

（2）Payment in Advance Sales

The converse of the open account sales is payment in advance sales, in which the seller will not ship the goods until the buyer has remitted payment to him. This may be acceptable if the seller is a reputable international supplier with whom the buyer has long-standing trading relationship. It places the buyer at risk if there is any likelihood that the seller will not perform.

In both open account and payment in advance transaction, all shipping documents, including title documents are handled directly between the trading partners. The role of banks is to effect a clean payment to the seller as required.

9.2 Collection

9.2.1 Definition of Collection

Collection is a payment arrangement whereby a bank acts on behalf of a seller for collecting and remitting payment for a shipment. The seller presents the shipping and collection documents to his bank（in domiciled country）who sends them to its correspondent bank in the buyer's domiciled country. This foreign bank hands over shipping documents to the buyer in exchange for payment or a firm commitment to pay at a fixed date.

The banks involved in the collection act only as a fiduciary capacity to collect the payment but make no guarantees. They are liable only for correctly carrying out the seller's collection instruction and may, if so instructed, sue the non-paying or non-accepting buyer on behalf of the seller.

9.2.2 Parties to a Collection

（1）Drawer or principal: The party who entrusts the collection items to his bank. In the context of international trade, it is usually the seller.

（2）Drawee: The party to whom the collection items are to be presented for acceptance or payment. In the context of international trade, it is usually the buyer.

（3）Remitting Bank: The bank to which the drawer entrusts the collection items. Upon receipt of the collection items from the seller, the remitting bank forwards them to the collecting bank in full compliance with the collection instructions given by the principal.

（4）Collecting Bank: The bank entrusted by the remitting bank to present the collection items to the drawee. The collection bank is generally a branch, a correspondent or an agent of the remitting bank.

（5）Customer's representative in case of need: Sometimes, in case of non-acceptance and/or non-payment, there may be another party and that is the case of need. It is a representative appointed by the principal as case of need in the event of non-acceptance and/or nonpayment, whose power should be clearly and fully stated in the collection.

9.2.3 Types of Collection

Basically, there are two types of collection: clean collection and documentary collection.

（1）Clean collection: It means collection on financial instruments without being accompanied by commercial documents, such as invoice, bill of lading, insurance policy, etc.

Under clean collection, only the draft, if necessary, and an instruction letter are sent out for collection. The documents are sent directly by the seller to the buyer or the seller's foreign agent. The seller is, in fact, shipping on open account terms. Clean collection may be used when the goods are shipped to overseas agent on consignment. A clean collection may represent an underlying trade transaction or a purely financial transaction involving no movement of merchandise and, therefore, no documents.

（2）Documentary collection is named because documents play an important role in the collection process. The seller requests the remitting bank to forward commercial documents（or both the commercial documents and financial documents）relating to the transaction to the buyer via collecting bank. In terms of release of documents, documentary collection can be subdivided into two categories: documents against payment（D/P）and documents against acceptance（D/A）.

1）Documents against payment（D/P）: In this case, upon presentation the Buyers shall pay against documentary draft drawn by the Sellers at sight. The shipping documents are to be released against payment only. According to payment period, D/P can be effected by two ways: D/P at sight and D/P after sight.

（a）D/P at sight: By this payment, draft issued is demand draft. When the collecting bank makes presentation to the drawee（the buyer）, drawee should make payment upon presentation. The collecting bank will then release the documents to him.

（b）D/P after sight: Term draft is used by this payment. When the collecting bank makes presentation, the buyer shall firstly make acceptance after checking the documents, and will make payment by the due date.

2）Documents against acceptance（D/A）: In this case, documents are released to the buyer only against acceptance of a draft. Payment can later be demanded.

9.2.4 Procedure for Payment by D/P at Sight

9.2.4.1 The Difference of D/P & D/A in Procedure

The types of payments have the similar procedure except following three aspects:

Firstly, under both D/P after sight and D/A, a term draft rather a sight draft is utilized.

Secondly, under D/P after sight, the drawee（buyer）should firstly accept the draft and then make payment before getting documents.

Finally, under D/A, the buyer gets the documents on acceptance and makes payment on due date.

9.2.4.2 Procedure for D/P at Sight

（1）The seller ships the goods to the buyer as agreed in the sales contract.

（2）The seller submits to his bank, the remitting bank, documents, a sight draft drawn on the buyer, and collection order.

（3）The remitting bank sends documents, drafts and collection order to the collection bank in the buyer's country.

（4）The buyer pays the face amount of the draft plus any charges the buyer is responsible for, as stated in the collection order.

（5）The collecting bank releases the documents to the buyer.

（6）The collecting bank deducts its fee and sends the buyer's payment to the remitting bank.

（7）The remitting bank credits the seller's account for the face value minus any fees and charges for which the seller is responsible.

9.2.5 Risk Management

Under payment by collection, the major risks that the seller faces are as follows:

9.2.5.1 Non-acceptance Risk

One common danger is that the buyer may refuse good reception based on the refusal on some small, inadvertent infraction of the sales contract. The real reason for the non-acceptance of the goods is that price has had a significant drop in the market between the dates of the order placed and draft received. Once that happens, the seller is trapped by the goods locked in a foreign port, even probably takes a burden of the heavy storage charges and loses due to sharp price fall.

9.2.5.2 Non-payment of Trade Acceptance Draft Risk

Payment by collection infers that the seller finances the buyer relied on credibility of buyer's payment on schedule. The Seller thus has the risk that the banks at both ends who only act as collection agents are not obliged to pay, if the draft isn't honored when it's due. The Seller takes full risk. Generally, D/A is riskier than D/P after sight, since, in the case of the latter, the seller still can hold the goods at least even if non-payment by buyer. In the case of payment by D/A, however, the buyer has the control of goods to prevent seller from reselling.

Therefore, the seller should take measures to manage risks:

Firstly, seller must verify financial situation and credibility of buyer. The buyer who has unsatisfied credit standing is probable to refuse goods receiving on some pretext after its arrival and consequently force the seller to reduce the price.

Secondly, seller must take in account the environmental situation, such as economic and political conditions in the importing country.

Finally, the amount of transaction should be moderate.