CHAPTER 1
OVERVIEW
OF INTERNATIONAL PAYMENT
Le Phan Thi Dieu Thao et al (2013) Ch 1
Hinkelman (2003) Ch 1
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Chapter 1: Overview of International Payment
Objectives:
Upon completion of this chapter, the leaners are expected to
be able to:
• explain what international payment is and its roles
• know sources of laws and practices regulating
international payment activities
• understand what correspondent banking is
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Chapter 1: Overview of International Payment
Agenda
1. Definition of international payment, its features and roles
2. Legal frameworks
3. Correspondent banking
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1. Definition of international payment, its features
and roles
• Definition:
o International Payment is a process of transferring
money from a person, a corporate, a government of a
country to those of another country through banking
system.
o The transfer of money arises from economic and
non-economic transactions
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1. Definition of international payment, its features
and roles
• Features of international payment:
o Participants from different countries.
o Regulated by international laws and practices.
o Conducted through banking system.
o Using means of international payment.
o Popular used language is English.
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1. Definition of international payment, its features
and roles
o Features of international payment: participants
Exporters
Importers
Government,
Banks Trade
organizations
International
payment
Carriers Insurance
Companies
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1. Definition of international payment, its features
and roles
• Roles of international payment:
o To economies: promoting international trade
activities, international investment activities and
various exchange activities (culture, education,
health, sport…), thus contributing to economic
growth and to the process of economic integration
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1. The concept of international payment and its
roles
• Roles of international payment
o To commercial banks:
sources of generating incomes with low level of
risk
contributing to the promotion of activities such as:
foreign exchange trading, international trade
finance, guarantee, investment…
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2. Legal framework
• International laws and practice
o Uniform Customs and Practices for Documentary Credit
Issued by the International Chamber of Commerce (ICC)
Different versions: UCP 82 (1933), UCP 151 (1951), UCP 222
(1962), UCP 290 (1974), UCP 400 (1983) UCP (500) 1993,
UCP 600 (2007)
UCP 600: 39 articles; accepted and used by most countries in
the world
This is not a law, but just uniform customs and practices for
the use of documentary credit in international payment
Some supporting documents: Uniform Customs and
Practices for Documentary Credits for Electronic
Presentation (eUCP), International Standard Banking
Practice for the Examination of Documents under
Documentary Credits (ISBP). 9
2. Legal framework
• International laws and practice
o Uniform Rules for Collection (URC)
Issued by ICC
Helping exporters, importers and banks in handling the
international payment process under documentary collection
Newest version: URC 522 effective from January 1996; 25
articles
o Uniform Rule for Reimbursement under Documentary
Credit(URR)
Issued by ICC
Guidance for banks in handling reimbursement to foreign
banks.
Versions: URR 525(1996), URR 725 (October 2008)
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2. Legal framework
• International laws and practice
o Uniform Laws for Bills of Exchange and Promissory Notes
(ULB)
Provided by Geneva Convention in 1930
22 member countries
Based on ULB, member countries promulgated their laws
on bills of exchange.
o Great Britain: Bill of Exchange Act - BEA (1882)
o USA: Uniform Commercial Code - UCC (1952)
o Uniform Law for Cheques (ULC)
Provided by Geneva Convention in 1931
30 members countries
Based on ULC, members countries promulgated their
laws on cheques 11
2. Legal framework
• National laws and practice
o Law No. 49/2005/QH11 on negotiable instruments; effective
since July 2006
Consisting of 83 articles regulating activities relating to
bills of exchange and cheques: issuance, circulation,
payment
Replacing the Ordinance No.17/1999/PL-UBTVQH10 on
commercial bills (1999)
o Ordinance of foreign exchange No. 28/2005/PL-UBTVQH11
promulgated in 2005, effective since June 2006
Consisting of 46 articles
Stipulating regulations on foreign exchange
Some amendments made in 2013
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3. Correspondent Banking
• Concept of correspondent banking
• Setting up correspondent banking relationship
• Services provided in correspondent banking
• Communication among correspondent banks
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3. Correspondent Banking
• Concept of correspondent banking:
o Correspondent banking refers to banking activities in which a
commercial bank provides services on behalf of another,
equal or unequal, commercial bank.
o Such a commercial bank is called a correspondent bank.
o A correspondent bank acts as an agent abroad for a
commercial bank.
o Through the network of correspondent banks, a commercial
banks can provide a variety of services for their clients.
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3. Correspondent Banking
• Setting up correspondent banking relationship:
o To expand business activities, commercial banks need to set up
corresponding banking relationship with many other
international banks all over the world.
o Before setting a corresponding banking relationship with a bank
abroad, it is necessary to evaluate the bank with respect to its
financial ability, operational ability, credit rating, brand…
o Exchange of information:
Authority’s signature sample, test-key, SWIFT code
Services to be provided and the ways of providing services
Limits for overdraft, granted credit line
Financial statements, income statements
List of correspondent banks in third countries
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3. Correspondent Banking
• Setting up correspondent banking relationship:
o Correspondent banks open account at each other for clearing
payment transactions in international payment:
Nostro account: refers to an account that a bank holds in a
foreign currency in another bank. Nostros, a term derived
from the Latin word for "ours” – “our account with you"
Vostro account: refers to an account in local currency
maintained by a local bank for a foreign (correspondent)
bank – “your account with us"
Loro account: ”their account with us/with you"
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3. Correspondent Banking
• Services provided in correspondent banking
o Clearing services
o Trade finance
o Syndicated loan
o Treasury services
o Advisory services
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3. Correspondent Banking
No. of correspondent
Bank No. of countries
Banks (2012)
Vietcombank 1200 85
BIDV 125
1600
Eximbank 869 84
VietinBank 900 90
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3. Correspondent Banking
• Communication systems among correspondent banks
o The Society for Worldwide Interbank Financial
Telecommunications – SWIFT
o Clearing House Interbank Payment System - CHIPS
o Clearing House Automated Payment System - CHAP
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3. Correspondent Banking
SWIFT
o a member-owned cooperative through which the financial world
conducts its business operations with speed, certainty and
confidence.
o Over 8,300 banking organisations, securities institutions and
corporate customers in more than 208 countries trust SWIFT every
day to exchange millions of standardised financial messages.
o SWIFT has its headquarters in Belgium and has offices in the
world's major financial centres and developing markets.
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3. Correspondent Banking
SWIFT
o Provides the proprietary communications platform, products and
services that allow customers to connect and exchange financial
information securely and reliably.
o Enables its customers to automate and standardise financial
transactions, thereby lowering costs, reducing operational risk and
eliminating inefficiencies from their operations.
o Is solely a carrier of messages. It does not hold funds nor does it
manage accounts on behalf of customers, nor does it store financial
information on an on-going basis. As a data carrier, SWIFT
transports messages between two financial institutions.
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3. Correspondent Banking
SWIFT
o Swift code: is an international bank code that identifies particular
banks worldwide. A swift code consists of 8 or 11 characters.
Bank Country Area Branch
code code code code
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3. Correspondent Banking
SWIFT
o Swift message:
9 groups of message types
Each message type is used for a specific type of international
banking transaction.
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3. Correspondent Banking
SWIFT
Category Transaction
1 Customer Payments and Cheques
2 Financial Institution Transfers
3 Foreign Exchange, Money Markets and Derivatives
4 Collections and Cash Letters
5 Securities Markets
6 Commodities, Syndications and Reference Data
7 Documentary Credits and Guarantees
8 Travellers Cheques
9 Cash Management and Customer Status
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