Free Online Course in International BusinessKnowledge StatementKnowledge of Methods of Funds Remittance: Checks, Banker's Drafts, SWIFT TransfersGoalThe goal of this material is to introduce you to the methods by which funds are remitted for payment of international transactions.Learning ObjectiveYou will be able to identify funds and remittance methods, their risks and characteristics.IntroductionThe following funds remittance tools are used to move funds between buyers and sellers. They are not methods of payment but can be used in conjunction with various methods of payment.ChecksA check is a negotiable instrument issued against deposited funds to pay a specified amount of money to a specific person/company upon demand. This method of fund remittance is normally utilized for an international transaction when a local country representative will pick up a check or the check is given directly to the international manager by the buyer. Checks can be drawn on banks located in any country depending on where a buyer holds accounts. A check drawn on a bank in a seller's country is less risky since the seller can verify availability of funds. The most risk is found with a company check drawn on a bank outside the seller's country. In order for the seller to receive funds, a check must be deposited/cashed. If the check is deposited in a seller's account and the check is drawn on an overseas bank, the funds will not be available to the seller until the check is sent overseas for clearance and the funds are transferred to the seller's bank. The relationship between the banks involved, the countries involved, and the currency of the check will determine how long it will take and the fees that will be charged.Some examples follow: • Bill of Exchange an order by one person for a second person to pay a third. The tenor is the period of time from issue of the bill of exchange until maturity. • Clean without supporting documentation • Documentary with supporting documentation • Sight on demand, calling for payment as soon as presented to the drawee • Term/time/usance payable at a fixed future date or at a determinable future date • Draft an instrument signed by a drawer to a drawee requesting payment at a future time to a third party, often the drawer. Banker's DraftsThis draft is similar to a check. However, it is a time draft drawn on a bank by a bank; and once accepted by the drawee bank, it becomes an unconditional obligation of the bank to honor at maturity.Electronic Funds TransfersElectronic funds transfers (also commonly known as wire transfers or TT) are a quick and effective method of transferring money between buyers and sellers, in particular when buyer and seller are located in different countries. This term is often misused in international transactions to mean a prepayment, which is not the case, since funds can be electronically transferred at any time during the transaction as agreed by buyer and seller.The process works this way: • A customer/buyer contacts its bank and arranges for the funds transfer. • A seller's bank name, address, ABA number, routing number and account number are identified as the receiving bank and recipient respectively. • The remitting bank issues a payment order to the receiving bank requesting the payment to be credited to the third party beneficiary or the seller. • The remitting bank at the request of its customer, called the by order of party, issues a funds transfer. • The receiving bank must be a correspondent of the remitting bank to the extent that the receiving bank can verify the authenticity of the instructions. • Payment orders are sent by telex or via an inter bank telecommunication system known as SWIFT. Note: The authenticity of these messages is assured through sophisticated data encryption. • The receiving bank will honor requests sent to it by remitting banks only when the receiving bank feels assured that the remitting bank will reimburse it for any outlay of funds, which can be accomplished in any of the following ways: • A remitting bank can assure reimbursement by authorizing the receiving bank to charge its account with them. This rule applies when the remitting bank requests payment to be made in the receiving bank's local currency. • A remitting bank can assure reimbursement by crediting their account with the receiving bank. In the case of American banks remitting US dollars abroad, the credit would be posted to the receiving bank's US dollar account. If foreign banks specify that they have credited the account of a US bank, then the credit would normally be in their local currency. • Money transfers can also be accomplished between remitting and receiving banks even when there are no direct accounts between the two. To do so, the remitting bank transfers the funds into the receiving bank's account via their US correspondent bank. The US correspondent bank, the covering bank, would then advise the receiving bank of the credit. • When payment is to be made in the local currency of the receiving bank and the remitting bank does not maintain an account in that particular currency, payment must be made through a third correspondent bank. This action is usually accomplished by requesting the covering bank to issue a payment order on behalf of the remitting bank. In this case, the true remitting bank would be the third party bank while the original remitting bank would be an additional by order of party to the transfer. No direct payment order would be sent by the original remitting bank to the receiving bank. The original remitting bank would authorize the covering bank either to charge its account or would transfer covering funds by wire transfer to the correspondent bank. An exchange rate would have to be agreed upon between the remitting bank and the correspondent bank.
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