Institute of Supply and Materials Management

(Incorporated by Act of Parliament No. 3 of 1981)

COURSE : Graduate Diploma in Purchasing and Supply

Chain Management (GDPSM)

SUBJECT : International Methods of Payments

1. Introduction :
The import and export of goods and services in any country, is defined as Buying and Selling in
simplest terms. Nevertheless, this involves the buyer and seller of two different countries, hence the
transaction is defined by the term “International Trade”. The trading of goods and services involves a
binding contract between the Buyer and the Seller. Such contracts invariably define the relevant
method of payment in the event of settlement. The settlement of payment for export and import
must be carried out through a commercial bank. However, commercial banks execute the payment
terms defined in the contract of trading either in import or export in accordance with the terms that
have been pre agreed between the buyer and the seller in line with International Banking Practices.
It should be emphasized that in this connection, commercial banks are also abide by the country
rules and regulations imposed by the relevant Central Banks and import export rules of that country.

2. Methods of Payment :
There are four methods of payment in International Trade. These methods of payment are
facilitated by the commercial banks. The following are the four methods of payments.

(i) Open Account:

Importer makes payment to the exporter after receipt of goods. In this method, the importer enjoys
the maximum advantage over the exporter. In practical situation, this type of arrangement is
reached when there is complete trust prevails between the exporter and the importer for a long
time.
80% of the International Trade in the globe at present (value wise) is taken place under this method
of payment. In Sri Lanka this has been introduced recently i.e. in 2012.

(ii) Advance Account :

In a situation where importer is not known to the exporter and not involved in business transaction
in the past where the risk of trading is pronounced then the exporter (seller) would insist the
payment by the importer (buyer) in advance. This payment should be made at the request of the
exporter by the importer supported by a profoma invoice. Nevertheless, it should be emphasized
when remitting funds to the supplier on account of advance payment should be within the limits
imposed by the local authorities of the country of the importer.

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 (iii) Documentary Collection :
This method of payment is normally entered into between the importer and exporter provided the
importer is a longstanding client of the exporter similar to the situation up to some extent that of
Open Account.

The bank being the mediator of this Method of Payment handles two types of collections as
mentioned below.

(a) Documentary Collection Against Payment

(b) Documentary Collection Against Acceptance

Once the shipment is effected, the documents pertaining to the shipment along with the Bills of
Exchange will be dispatched to the importer’s bank through the exporter’s bank. In case of DP terms,
the documents will be released to the importer by the importer’s bank on payment by the importer
whereas in case of DA terms,the documents will be released on acceptance of the relevant Bill of
Exchange by the importer agreeing to settle the payment on a specific future date.

(iv) Letters of Credit :

At present, this is the most acceptable Method of Payment in the International Trade especially in
Asian Region of the globe. Still, this method is capable to eliminate some of the risks that are
experienced in the other three methods for both importer and exporter.

The Letter of Credit(LC) is a conditional undertaking issued by the Issuing Bank on behalf of the
importer to pay the invoice value to the exporter only on presentation of stipulated documents in
the LC and also in line with the terms and conditions of the LC.

There are mainly two types of LCs as mentioned below.

(a) Sight LCs

(b) Usance/Diferred LCS

Under the Sight LC, the payment will be made immediately by the Issuing Bank on presentation of
stipulated documents in the LC whereas in case Usance/Diferrred LC, the payment will be made by
the Issuing Bank on an agreed future date.

3. Conclusion :
In the context of globalization, it is utmost important to have a fair knowledge of all four methods of
payment for establishment of effective supply chain management. The objective is to understand
the methods of payment available for international transactions and the risks to buyers and sellers
for each method of payment. At the end, the students should be able to;

a) Understand the methods of payment available for international transactions.

b) Understand the risks to a buyer associated with each method of payment.
c) Understand the risks to a seller associated with each method of payment
d) Select most economical and appropriate method of payment for any given transaction.

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(Compiled by Mr. Jayantha Newunhella, Former DGM-International Banking of People’s Bank.)