1. Two Obstacles to Payment
    In virtually all international sales, even cash-in-advance and open-account sales, sellers in one country face two obstacles in obtaining payment from buyers in another country. A European buyer that has purchased goods from a Chinese seller must get the money from the buyer’s bank in Europe to the seller’s bank in Asia and, somewhere along the line, the buyer’s euros must be converted into the seller’s yuan. Fortunately, the international banking system has developed systems for responding to these challenges that are quick, virtually error-free and inexpensive.
  2. SWIFT
    While details of the methods that banks use to transfer and convert currencies need not detain us now, it is helpful to know that banks maintain accounts with each other for these purposes. Money transfers are then effected by banks sending each other either credit advices or debit authorizations accompanied by instructions for where to send the money. Nowadays, most payment instructions are sent electronically between banks, thereby garnering the name “wire transfers”. International wire transfers are most often accomplished via a closed telecommunications system owned by international banks through a cooperative based in Brussels. The cooperative, the Society for Worldwide Interbank Financial Telecommunication (SWIFT), employs its own regime of codes, algorithms and other technical features of a private (closed) wire-transfer system, which is used to transmit instructions for banks to move trillions of dollars quickly with almost no errors. By using electronic data interchange (EDI) formats, moreover, SWIFT communication provides for “straight-through processing” with little or no human intervention, making transaction processing both low-cost and almost instantaneous. Direct access to the system is open only to banks, and in order to access it the commercial parties, the seller and the buyer, must go through their banks. Their entry point to SWIFT is the remitting bank. Illustration 3-1 diagrams a SWIFT payment transaction.


  1. Clearing Banks
    Not every bank in the world has accounts with every other bank, and not every bank is a member of SWIFT. In order to access the international payments system, smaller banks maintain accounts with larger banks that do maintain foreign currency accounts. Banks that offer account services to smaller banks are known as “clearing banks”. In the past, and to some extent today, though with diminishing frequency, banks use telex equipment to send debit authorizations with payment instructions to their clearing banks. Although slower and less reliable than SWIFT, the telex system uses a simple system of “test keys” that identify the remitting banks to the clearing banks, thereby permitting correspondents to debit and credit accounts in a way that moves funds and exchanges currencies. More commonly today, a clearing bank will provide its “downstream correspondents” with secure access to a web site that they can use to input and receive payment orders.
    In order to receive a foreign currency payment, a seller must maintain an account with a bank that, in turn, maintains a foreign account in the payment currency with its own clearing bank, usually a bank located in the country where the currency is local (see Illustration 3-2). The buyer’s bank and the seller’s bank may use the same clearing bank, but, if not, the two clearing banks will use the local clearing system (often run by the country’s central bank) to get the local-currency payment from the buyer’s clearing bank to the seller’s clearing bank. Thus, a long chain of banks is often involved in an international wire transfer (see Illustration 3-2). At the end of the chain, the seller’s bank will notify the seller that it has received a foreign currency payment and that it will convert the foreign currency into the equivalent value of the seller’s currency at an agreed rate of exchange, unless the seller prefers to hold foreign currency.


If the seller contracts to receive payment in its own currency, the chain of banks will look very similar, but the two clearing banks and the central bank will be in the seller’s country and the buyer’s bank will convert the currency at the front end (possibly adding a third clearing bank to the chain if the buyer’s bank has no foreign account of its own in the seller’s currency).

  1. Drafts and Demands for Payment
    In addition to paying money on behalf of buyers, banks also collect money on behalf of sellers. There are two ways in which a seller traditionally orders its bank to collect funds:
    • Trade drafts
      The first is the draft, also known as the “bill of exchange”, a much misunderstood commercial device. A draft is simply an order to pay involving three parties. The drawer orders the drawee to pay to a specified payee money owed by the drawee to the drawer. Usually, it takes a special form to render a draft negotiable. That form varies only slightly from country to country and nearly always requires the draft to recite that it is “payable to the order of [someone]” or “payable to bearer”. (For further discussion of drafts, see chapter XIV, section 3.) In international collections, the seller can take its draft to a local bank, usually the place where it banks, and enter the draft for collection. The seller must identify the party that is to pay the draft, i.e. the buyer, and there may be documents that accompany the draft (see chapter VI). In any event, when the collecting bank takes the draft, it will forward it to the buyer’s bank with directions to present the draft for honour, i.e. to show the draft to the buyer and ask the buyer to honour it. There are two ways in which the buyer can honour a draft. The buyer can accept the draft if it is a draft payable some time after presentment, say 30 or 60 days. Such a draft is a time draft, and once the buyer or its bank accepts it the buyer is obliged to pay it when it matures, i.e. 30 or 60 days later. If, instead, the draft indicates that it is payable “at sight”, meaning immediately upon presentation, the buyer honours it by paying it.
    • Demands for payment
      Sometimes the seller simply submits invoices and other documents for collection without drafts. A demand for payment is less formal than the negotiable draft, but it has the same effect as the draft to the extent that it asks the buyer to honour the demand by transferring funds to the seller or by agreeing to transfer funds at a later date, say, 30 or 60 days after the buyer receives the demand for payment. For further discussion of these demands, see chapter X, section 3(e).

  1. International Collection Departments
    A bank involved in international business will have a collections department staffed by bankers who are familiar with drafts and demands for payment. Their systems often permit sellers with high international sales volumes to access the international collections department on-line. In fact, using electronic data interchange (EDI), high-volume sellers provide most of the data that the collecting bank needs to generate cover letters that can be printed by the sellers for the purpose of mailing the drafts and documents directly to the buyers’ banks for collection.
  2. Push and Pull Orders
    Most often, for example, when the sale is on cash-in-advance or open-account terms, it is the buyer that initiates the international payment. The buyer’s payment order is a push order that pushes the funds from the buyer’s account into the seller’s account, while the seller’s draft and demand for payment are pull orders that pull the buyer’s funds into the seller’s account. Push orders are usually electronic. The buyer sends its bank, the paying bank, an order to transfer the funds to the seller’s account at the seller’s bank. The giro, a payment device common in the European Union, is a push order. Drafts and checks, which are a kind of draft, are pull orders.