With the advent of globalization, international trade has become a key component of the global economy. Global trade and investment activities have become one of the key ways for countries to develop economies. The development of international trade payment methods has gradually transformed from traditional cash payment to intangible asset payment, and then to today’s popular digital payment. With the rapid development of Internet and mobile payment technology, digital payment plays an increasingly important role in international trade payments. It is a payment method based on the Internet or mobile payment platform, including credit cards, electronic payments, virtual currency, etc. In the transaction, the buyer and the seller have different perspectives. When negotiating product prices and payment methods, both parties want to choose a method that is beneficial to them. This is a big test for both parties, because it may directly affect the order. Whether a transaction can be concluded also directly affects one’s own profits and risk control. How to choose a payment method? Which way is safer and more convenient? Today we will discuss the pros and cons of several major payment methods in international trade!
LC
L/C, the full name is Letter of Credit, it is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is not able to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Generally, large customers will adopt this payment method, and some countries only require a letter of credit, such as Bangladesh.
Advantages:
It provides a high level of security and reduces trust issues between buyers and sellers. A letter of credit is issued by a bank, and the bank acts as the guarantor of the letter of credit. Only when the performance of the contract fully complies with the conditions stipulated in the letter of credit can the payment be obtained. This avoids paying too early or too late.
Disadvantages:
Although letters of credit are safe and reliable, the procedures are cumbersome, expensive, and take a long time. At the same time, letters of credit also have problems such as difficulty in operation and difficulty in risk control. The document review process involves at least four roles: L/C applicant, issuing bank, advising bank, and L/C beneficiary. If the bank’s credit is not good, or the country has strict foreign exchange controls, such as India, the risk of a letter of credit is very high.
Credit Card
Advantages:
1) Credit cards are safer than carrying cash.
2) Credit cards can build credit ratings.
3) Purchase goods and services online.
4) Customers who are not satisfied with the product or service can request a refund if they use a credit card to purchase.
5) Credit cards can be used in any currency. Some credit cards waive fees for international purchases, although currency conversion fees are often charged.
6) Credit cards provide emergency lines of credit.
Disadvantages:
1)You have to pay high interest rates.
2) Credit card fraud. There are a range of fraud schemes targeting credit cards. Although users can receive compensation through complaints of illegal transactions on their accounts, dealing with credit card fraud can still be a time-consuming and stressful experience.
3) The cost is high. Credit card fees include cash advance fees and interest rates, annual fees, credit card surcharges, and more. Cash advances using a credit card will incur a cash advance fee of approximately 3% of the total transaction amount.
Western Union
Western Union, is the world’s leading express money transfer company with a history of 150 years. It has the world’s largest and most advanced electronic remittance financial network, with agent outlets in nearly 200 countries and regions around the world.
Advantages: Western Union transfer procedure is simple. It uses the world’s most advanced electronic technology and a unique global electronic financial network to process remittances in nearly 200 countries and regions in the world. The recipient can receive the entire transfer within minutes.
Disadvantages: Remittance fees are charged per transaction, and fees are higher for small collections compared to other remittance methods.
T/T
Telegraphic Transfer, which is known as “T/T” for short. The operation process is roughly divided into the following steps: the remitter deposits the money to the bank, and then the remittance bank transfers the money to the remittance in the form of a telegram or telex bank, and then the payee withdraws a certain amount of money from the remitting bank.
Advantages:
1) Fast timeliness: Compared with other trade settlement methods, wire transfer is faster. It usually only takes a few hours or days to receive payment, which greatly shortens the transaction cycle.
2) High security: Transactions through banks can ensure the security of transactions and avoid trust issues.
3) Good traceability: Wire transfers can provide detailed transaction records and bills to facilitate verification by both parties and also facilitate supervision and investigation by regulatory agencies.
Disadvantages:
1) High handling fees: Each wire transfer requires a certain handling fee, which will increase transaction costs.
2) Exchange rate risk: Due to unpredictable exchange rate fluctuations, both parties may bear losses due to exchange rate changes.
3) Cumbersome operation: The operation of wire transfer is relatively cumbersome and requires filling in some necessary documents and forms, which increases the time and cost of the transaction.
Paypal
PayPal is a global online payment services company headquartered in the United States. It provides a safe, convenient, and fast way to conduct e-commerce transactions and transfers by connecting a user’s bank account, credit card, or debit card with their PayPal account. PayPal is an online payment service tool that allows users to send and receive money through email addresses.
Advantages:
1) The brand effect of user base expansion is obvious. There are more than 220 million users in 190 countries and regions around the world.
2) Fast capital turnover. Unique feature of instant payment and timely arrival, enabling real-time collection.
3) Complete fraud prevention experience. The lowest risk loss rate in the industry is only 0.27%.
4) Micropayments have great advantages. No annual fee and a low registration fee.
Disadvantages:
1) Large transaction fees are higher
2) The risk of being defrauded by customers is high. Customers who receive unsatisfactory products can appeal for a refund, and it is easy to lose money and goods.
3) Sellers’ funds are easily frozen, and PayPal prefers to protect the interests of buyers.
4) The server is in the United States, and login is unstable during peak periods.
Alibaba Trade Assurance
Alibaba is the world’s professional international foreign trade export and overseas B2B cross-border trade platform. It has more than 150 million registered members and publishes 300,000 cross-border purchasing requirements on the platform every day. As the world’s largest B2B cross-border e-commerce platform, the integrity guarantee service (Chengbao Service) is a service commitment made by Alibaba sellers to buyers to ensure transaction security and after-sales quality. Alibaba Credit Insurance orders currently have 7 payment methods for buyers to choose from. Buyers can choose one of the most suitable methods to pay, which provides buyers with great payment convenience. They are Visa, MasterCard, T/T, PAYPAL, APPLE_PAY, GOOGLE_PAY, GC_REAL_TIME_BANK_TRANSFER. Different payment methods have different arrival times and handling fees. The payment page will display instructions on the handling fees. Orders placed on the Alibaba platform remain high every year!
Advantages:
1) Alibaba International Station credit insurance orders can provide credit multiples for sellers, guarantee transaction safety, and quickly facilitate transactions.
2) Alibaba International Station credit insurance orders can guarantee the delivery time and quality of the goods for buyers, and the interests of both buyers and sellers can be well protected to avoid unnecessary losses. If the buyer finds that the goods are incorrect or damaged, they can apply for a refund at any time.
Disadvantages:
For sellers, if the customer’s credit card limit exceeds or the customer fails to repay the payment within the agreed time, they will face payment failure. Foreign customers may lodge complaints, which will affect the store’s reputation. In addition, foreign customers may refuse to accept the goods, which will result in your goods not reaching the customer in time.
Agency payment
Agency payment refers to individuals, or other enterprises, entrusting other organizations to pay their own expenses on their behalf. Agent payments can involve any transaction but generally refer to cleared transactions, including checks and electronic transfers, as well as bank transfers and card payments. Businesses can pay through agent payments safely and quickly without spending a lot of time and effort contacting the accounts payable acceptor directly. Businesses can also use agency payments to pay other companies, such as a fiduciary agent when issuing notes, to enable payments through different payment networks.
Advantages: This method is suitable for individual SOHOs or small, medium, and micro enterprises without import and export rights. This payment method can avoid risks, and not only improve the ability to receive orders but also maximize profits.
Disadvantages: It should be noted that you need to be cautious when looking for an agency, and you must find a reliable and trustworthy company.
The above 7 methods are common payment methods in international trade. It should be noted that different international trade payment methods have their own advantages and disadvantages. Investors need to understand the actual situation of the company and their own risk tolerance before choosing the payment method that best suits them. For example, when making payments, you need to pay attention to the timeliness of payment and possible losses caused by exchange rate fluctuations. You need to use professional financial institutions to carry out exchange rate management and risk hedging measures to avoid potential risks. Based on your own situation, choose a payment term that suits you and the other party. Cooperation is a matter for both parties. If everyone can reach a consensus, things will be smoother and more convenient, and there will be no business that cannot be done in the world! If you like our articles, you can give us a like, click on our avatar, follow us, and leave us a message about what questions you have about payment methods and what you want to know in the next article!
