As part of the “ICC Model International Sale Contract” proposed by the International Chamber of Commerce (ICC) of Paris, the following Payment Conditions are reported:
- Payment on open account
- Open account backed by demand guarantee or standby letter of credit
- Payment in advance
- Payment in advance backed by advance payment guarantee
- Documentary collection (D/P – D/A)
- Irrevocable documentary credit
- Irrevocable Bank Payment Obligation
- Other: (e.g. cheque, bank draft, electronic funds transfer to designated bank account of seller)
Therefore, there are numerous forms of payment that can be activated in an international sale operation. The international payments market has been structured to offer tools and solutions to meet the innumerable needs of a seller and a buyer. In particular, all these forms of payment can perform at most 3 “functions”: settlement, risk mitigation and/or financing. By “settlement” we mean a payment instrument, by “risk mitigation” we mean a payment instrument that allows to mitigate the credit risk for the seller and by “financing” we mean a payment instrument that allows a buyer to make deferred payment but at the same time, the seller receives a sight payment.
This work intends to focus attention on documentary collection (Documentary collection D/P – D/A). As you can see, the documentary collection (or Documentary Collection) basically performs only the settlement function. The risk of counterparty insolvency, in fact, remains with the seller. In compliance with some conditions that we will see below, the instrument can potentially become a risk mitigation or financing instrument.
Documentary Collection: Definition
The best definition of documentary collection can be found in the “rules” that govern the settlement instrument: the URC (Uniform Rules for Collections) 522 ICC. Art. 2 of URC 522 ICC reports the following:
“Collection” means the handling by banks of documents as defined in sub-Article 2(b), in accordance with instructions received, in order to:
1) obtain payment and/or acceptance, or
2) deliver documents against payment and/or against acceptance, or
3) deliver documents on other terms and conditions.
Il sub-Article 2(b), riporta la definizione di “documents”:
“Documents” means financial documents and/or commercial documents:
- “Financial document” means bills of exchange, promissory notes, cheques, or other similar instruments used for obtaining the payment of money;
- “Commercial document” means invoices, transport documents, documents of title or other similar documents, or any other documents whatsoever, not being financial documents.
Therefore, documentary collection can be defined as the “treatment” by banks of commercial and/or financial documents to obtain payment or acceptance of drafts (Bill of Exchanges) or to deliver documents against payment (D/P: Documents against Payment for payment at sight) or the acceptance of drafts (Bill of Exchanges) (D/A: Documents against Acceptance for payment at sight with a “demand draft” or expiring with a “usance draft”) or deliver documents under other terms and conditions.
The URC 522 ICC regulation also defines the meaning of “Clean” and “Documentary Collection”:
“Clean collection” means collection of financial documents not accompanied by commercial documents.
“Documentary collection” means collection of:
- Financial documents accompanied by commercial documents;
- Commercial documents not accompanied by financial documents.
The so-called “Clean Collections” therefore imply the sending of financial documents (“bills of exchange” or “promissory notes“) through the banking system in order to obtain payment from the importer, while commercial documents (invoices, packing list, transport documents, documents of origin, etc.) are sent directly to the importer. This solution implies a high level of trust between commercial counterparties, as the exporter loses physical control of the goods.
Documentary Collection: the parties involved
In the context of a documentary collection operation, there are five parties potentially involved in the operation:
- The “principal” (originator / exporter /drawer) who is the person who entrusts the execution of a collection to a bank;
- The “remitting bank” which is the bank to which the “principal” entrusts the execution of the collection;
- The “collecting bank”, which is any bank, other than the “remitting bank”, involved in the process of managing a collection;
- The “presenting bank” which is the “collecting bank”, which presents the documents to the “drawee”;
- The “drawee” which is the person to whom the presentation of the documents is made, in accordance with the “collection instructions”.
It should be noted that, usually, “presenting bank” and “collecting bank” coincide.
Documentary Collection: the operational functioning
The following are the operational steps of a documentary collection operation:
- Definition of the contractual agreement between the parties who identify, as a form of regulation of the supply price, documentary collection (D/P, more commonly known as CAD – Cash Against Documents or D/A)
- The “principal” (the exporter/drawer) prepares and ships the goods;
- The “principal” sends the commercial and/or financial documents to his “remitting bank”, accompanied by the collection instructions
- The “remitting bank” sends the documents to the “collecting/presenting bank” (or to a collecting bank which, in turn, sends them to a “collecting/presenting bank”), specularly entrusting this bank in line with the instructions received;
- The “collecting/presenting bank” presents the documents to the importer/drawee, delivering them against payment or acceptance;
- The importer/drawee collects the documents (or accepts the draft), with which he obtains the goods, and pays for the supply (at sight or at maturity);
- The “collecting / presenting bank” sends the funds to the “remitting bank” which, in turn, credits them to the “principal”.
Keep in mind that the “presenting / collecting bank” could discount the draft accepted by the drawee on a without-recourse or with-recourse basis and / or aval it in compliance with what is reported in the “collection instruction” and to the extent that this bank is available to perform the required services.
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As part of the “collections”, it is also possible to structure the so-called “Direct collection”, in order to minimize the time for the transit of documents. The “principal” could use the “collection form” of his “remitting bank” as a basis to define the “collection instruction” to send the documents directly to the “collecting / presenting bank”, sending – at the same time – a copy of the “collection form” also to his bank (remitting). In this case, the “collection form” must indicate that the collection is governed by the URC Rules 522 ICC and that the collection operation must be handled by the “collecting bank” as though it was received from the remitting bank.
The collection instruction
An adequate and correct “collection instruction” to the “remitting bank” should contain the following indications:
- Details of the principal including full name, postal address, and if applicable, email, telephone and facsimile numbers;
- Details of the drawee including full name, postal address, or the domicile at which presentation is to be made and if applicable, email, telephone and facsimile numbers;
- Details of the presenting bank, if any, including full name, postal address, and if applicable email, telephone and facsimile numbers;
- Amount(s) and currency(ies) to be collected;
- List of documents enclosed and the numerical count of each document;
- Terms of delivery of documents against (or Terms and conditions upon which payment and/or acceptance is to be obtained):
- payment and/or acceptance
- other terms and conditions
- Charges to be collected, indicating whether they may be waived or not;
- Interest to be collected, if applicable, indicating whether it may be waived or not, including:
- rate of interest
- interest period
- basis of calculation (for example 360 or 365 days in a year) as applicable;
- Method of payment;
- Form of payment advice;
- Instructions in case of non-payment, non-acceptance and/or non-compliance with other instructions, indicating “in the case of need” contact and if he has the full powers for disposal of documents or advisory capacity only;
- Applicable rules: URC 522 ICC (eURC 1.0 in caso di utilizzo di documenti elettronici)
Documents Against Acceptance: the financing facilities
As part of the D/A option (Documents against acceptance .. of a Bill of Exchange), it is possible to structure the so-called “Financing facilities”, using the features of the Bill of Exchange which, we recall, can also be on sight (the Bill of Exchange Act of 1882 provides, in fact, the so-called “demand draft”).
The “financing facilities” that can be activated are shown below:
Foreign Bills for Negotiation (FBNs):
The seller / exporter may be interested in receiving the sale funds immediately by asking the “remitting bank” to purchase, with or without recourse, the Bill of Exchange or documents (to negotiate) not yet accepted by the drawee / importer. This solution can be implemented if the exporter has an active credit line with the “remitting bank”. In this situation, the beneficiary of the Bill of Exchange will be the “remitting bank”. With this solution, the documentary collection performs the function of financing and / or risk mitigation depending on the type of discount implemented by the “remitting bank” (if the discount is with recourse, there is no credit risk coverage).
To guarantee payment, the exporter may request, in the “collection instruction”, the “collecting bank” to add its guarantee (or aval) to the Bill of Exchange accepted by the buyer. With this solution, documentary collection performs, in addition to the settlement function, also the function of risk mitigation.
In a first option, the exporter may request, in the “collection instruction”, that the Bill of Exchange, after acceptance by the drawee / importer, be discounted by the “presenting bank”. Obviously, the presenting bank can decide, independently, whether to make the discount or not and on what basis. Alternatively, the exporter may request that the accepted, perhaps endorsed, route be returned to the “remitting bank” to which the exporter can ask to make the discount without recourse or with recourse. The exporter could, alternatively, also consider discounting the Bill of Exchange on the free market.
It should be noted that, in the documentary collection, the described risk mitigation and financing functions are only potential, in the sense that the seller/exporter needs the availability of his bank (remitting) to discount the Bill of Exchange (or to “buy” documents), and/or the willingness of his customer to accept the Bill of Exchange and the collecting/presenting bank to aval the draft.
When collection is dishonoured..
It may happen that a “collection is dishonoured” with non-payment or non-acceptance of the draft by the importer/drawee. In such cases, the presenting bank should review the collection instruction received in order to identify which actions to take. In these cases, the presenting bank must notify the remitting bank via swift of the non-payment or non-acceptance of the bill and may review the instructions from the principal`s nominated representative. In fact, exporters/principals often indicate, in their “collection instructions” to their “remitting bank”, the references of their representative to contact “in the case of need”. In such cases, it is appropriate, if not necessary, to indicate whether this “representative” has “the full powers for disposal of documents” or only “advisory capacity only”.
In cases of non-payment or non-acceptance, the documents will not be delivered to the importer/drawee, and the transport operators, depending on the type of transport and the relative document used, may not deliver the goods to the importer, with consequent problems relating to “storage” and insurance of the same. It should be noted that, even in the presence of specific instructions contained in the “collection instructions”, banks are under no obligation to undertake actions of any kind on the goods. And in the event that the banks take action to store and/or insure the goods, “they do so without any obligation or liability on their part”. It should also be noted that, even if a transport document indicates the bank as “consignee”, banks are under no obligation to take physical possession of the goods. The goods remain at risk and responsibility “of the party dispatching the goods” (shipper). Finally, it should be noted that it would be advisable to avoid indicating banks as “consignee” in the transport documents unless there is a prior agreement to this effect with the bank.
Incasso Documentario and Incoterms®
An important aspect of the correct management of the instrument is related to the control of the transport of goods and the related document by the seller/exporter. It, therefore, appears appropriate to use an appropriate “delivery term”, avoiding the use of the term EXW, or the terms F (FCA, FAS, and FOB) of the Incoterms®. Controlling the transport and the related document means, in fact, using the terms C (CPT, CIP, CFR, and CIF) or D (DAP, DPU, and DDP) of the Incoterms®, taking into account that the terms C are largely preferred over the terms D since, in these terms, the seller is obliged to deliver to the customer/importer a “proof of delivery” which in terms D can only be a “Freight-paid transport document, signed by the consignee upon arrival” which, obviously, does not reconcile with documentary collections. It is also specified that in terms C the seller delivers on departure (“over the carrier” in the terms CPT and CIP and “on board of the vessel” in the terms CFR and CIF), leaving to the buyer counterpart the risk of transporting the goods.
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Airway Bill: What if the consignee was the bank?
Some operators use documentary collections with air transport, indicating the bank of the buyer-importer as “consignee” in the Airway Bill. This solution, from a technical point of view, appears to be a good solution taking into account that banks have no obligation to take possession of the goods that remain “at the risk and responsibility of the party dispatching the goods”. Please note that it would be advisable to obtain the agreement of the “presenting bank” before indicating this bank as “consignee” in the air transport document.
Le e-collections e le eURC 1.0
Al fine di consentire la presentazione di documenti elettronici nell’ambito delle operazioni di incasso documentario, la ICC ha preparato un nuovo set di rules: le “eURC 1.0 Supplement for Electronic Presentation of URC 522 ICC Uniform Rules for Collections”, andate in vigore lo scorso 01.07.2019. Per ulteriori informazioni in merito, si rimanda alla relativa normativa disponibile, insieme alle URC 522 ICC, sui seguenti links: https://bit.ly/2OfHZOB oppure https://bit.ly/2qDE05p
Since documentary collection is not, in fact, a risk mitigation tool (except for the above), it is appropriate to use this form of payment with caution. In particular and in the opinion of the writer, it is appropriate to use documentary collections in compliance with the following guidelines:
- Few doubts about the customer’s solvency;
- Relatively safe import country with no currency restrictions;
- Transport control;
- Transport by sea (or by air with the presenting bank as consignee);
- Multimodal transport with transport document, taking into account that “a combined transport document may act as a document of title to the goods and may be issued in the negotiable form”;
- Fungibility of the goods;
- Short transit time;
Furthermore, it seems appropriate to advise operators to follow a scientific approach in the management of this payment instrument. As part of my now consolidated professional experience, I note, in fact, a rather empirical approach, with insufficient instructions from the seller to his bank and, at times, atypical, not to say imaginative, conditions for delivering documents to the destination.