Find the Right Online Payment Services

In an interconnected world of sourcing and outsourcing, online payment services become increasingly critical. Be it payment for manufacturing services, China wholesale products or freelancing services, everyone needs to send money online and know the best payment services.

Payments for manufacturing services
For large transactions to include businesses placing significant orders with overseas factories, payment is generally made with a commercial letter of credit. While letters of credit will require more fees that other methods of payment, they offer guarantees to both buyers and sellers of goods that make international commerce easier and have long been in use.

Larger payments that do not require the guarantees of a commercial letter of credit are generally made by international money transfers.  These ACH transfers are efficient for sending payment from one bank account to another, be it for domestic or international payments. One’s regular bank is usually the best place to go when in need of either of the above transactions.

Online payment services
For quick, easy and secure online payments, there are a number of online payment services and methods. These services are usually the best way to go for commercial payments that are not too large or when sending money to individuals. However, there are a few things to keep in mind:

  • Money left in accounts at these services is generally not covered by deposit insurance as it is when deposited at banks.
  • Most are not regulated by the same financial rules that banks must follow.
  • There will be limits as to the size of the transactions that can be carried out.
  • Online payment services have been known to suddenly freeze or cancel the accounts of those they suspect of fraud. Recovering the funds in these cases can take time.
  • There will be limits as to what countries it is possible to send or receive money from.
  • It is important to carefully protect one’s login information or the account could be drained by thieves.

On the positive side, online payment services:

  • Are cheaper alternatives to sending money by bank transfer.
  • Make it very easy to send money to another person or business online and often do not require more than a few clicks of a mouse.
  • Often offer escrow and other services that can be used to protect both the buyer and seller.
  • Scheduled payments and other services that may not be offered at a local bank are also available.
  • They sometimes offer merchant accounts and ways to accept payment that can be used by those doing business online.

The largest online payment services include:
PayPal: Being the biggest online payment service, it offers a lot but has its detractors. Everything from sending money to a friend to receiving online payments through for an ecommerce site can be done with PayPal. It offers easy ways to accept credit card and e-check payments, and money can be added from a bank account for free. There are various fees depending on the type of account and payment.  Generally, services that require fees start at about a .30 cent fixed fee plus a percentage on the total amount of around 2.9%, depending on the transaction. Bad customer service has always been a major complaint with PayPal.

MoneyBookers: MoneyBookers offers an email payment service similar to PayPal with comparable fees. Based and regulated in the UK, it requires registration and verification when creating an account (although the recipient does not require an account). It has a lot of users and can be used to send payments to many countries.

AlertPay: Another service that allows money to be sent via email, it is new in the field but growing fast. It has three levels of membership: personal accounts, premium accounts and secured accounts. While some transactions are free, the fees rise with the account level. It allows money to be sent to non-members if they register (this is free).

Obopay: This service is geared for mobile phones and works on most mobile platforms. Customers with accounts can add money with credit or debit cards as well as bank transfers. Based in California, it also has operations in India.

iKobo: Since it allows people to send and receive money in 170 countries around the world, this service is very international. A first-time receiver is sent a prepaid Visa card by FedEx that can be used at their network of over one million ATMS around the world. After that, the sender can transmit money from debt or credit card to the receiver’s Visa card at anytime. There are various fees for using the service and daily limits on what can be spent or withdrawn on the Visa cards.

Western Uniion and MoneyGram: These services work in similar ways and are not the same as ETF transfers done between financial institutions (see international money transfers). If the sender wants to use them as an online payment service, they must first set up an account and transfer money to it. The sender will then choose a payment option. The receiver will be notified of the transfer and must go to the nearest agent (both services have agents internationally), show some identification and pick up the funds.

Xoom Money Transfer: Another relatively new service, it has gained in popularity because of its flexibility and reasonable rates. Xoom accounts can be funded by bank transfer, PayPal or credit card. Money can be sent to an email address, and the receivers can have the funds deposited directly into their bank accounts or opt for cash pickup and even home delivery in some places. The service is international but limited as to the countries one can send to.

Understanding International Money Transfers

When sourcing overseas, the need to send money abroad is obviously going to arise. More often than not, unless the amount is small, money is sent by an international wire transfer. While it is not the cheapest way to send money, it is the most common and reliable. Those considering overseas outsourcing need to understand the process.

How they work
International wire transfers start with the sending parting initiating the process with their bank. Once the bank receives the instructions to make the transfer from this party, it will send a message through a secure system such as SWIFT (see end of article) to the bank that will receive the money. This message will include all instructions. Within hours or days, payment will be made to a reciprocal account the banks have with each or through a correspondent bank that does. Following that, the money will eventually be credited to the receiver’s account.

The time they take
Since the message to wire money is sent electronically, it is sent within hours or days. However, banks are in no rush to credit the account of the recipient since they will make interest on the money while the recipient waits. However, in most cases, the recipient will have the money within a couple of days although banks may wait up to a week. If it takes longer than that, the bank should be contacted to see if something is wrong.

The costs involved
International wire transfers always cost more than domestic ones, and there can be various costs. The cheapest way to send is usually with the bank one already has an account with. Generally, the cost of sending an international wire transfer is from $30 to $50 dollars.

However, there are often added costs. The receiving bank frequently subtracts a smaller fee (usually under $20) for accepting an inward transfer (this is totally separate from anything the sending bank charges). If the sender wants to make sure the receiver gets the total amount the transfer is for, the sender will have to permit the bank to charge any receiving fees to their account.

When a bank does not have an international department of its own, the money will go through an intermediary bank. This bank accepts transfers on behalf of the recipient’s bank, which has an account there. Intermediary banks may charge a receiving fee.

Foreign currency exchange
Currency exchange rates the biggest variable when sending wire internationally. In all international wire transfers where the sender and recipient do not use the same currency or pricing has not been set on a common currency the way some trade is in US dollars, there will have to be foreign currency exchange. In times of volatility, daily fluctuations in the currency exchange markets can have a huge effect on the amount the sender with have to transfer from their account. There is also the spread on the rate between what it costs to sell and buy the delivering currency that will further influence the total amount of the wire transfer.International Money Transfers

Because of the costs and risks involved in currency fluctuations, business will often negotiate as to which currency will be used. The party that must convert the currency may receive a discount for the risk it is taking.

Procedures and requirements
International wire transfers require a fair amount of information to carry out. The minimum requirements usually include:

  • The complete address of sender and receiver with phone numbers
  • The name and address of the receiving bank
  • The beneficiary’s account number
  • The sender’s account number if the money will be transferred from their account.
  • The reason for sending the money
  • The beneficiary bank code. This will be the American Banking Association (ABA) number for American banks and the IBAN for European and many other nations.

Note that international money transfers are executed through SWIFT (Society for Worldwide Interbank Financial Telecommunication) in most causes. SWIFT is a worldwide network through which messages for different financial transactions are exchanged between banks. Therefore, the bank’s SWIFT code may also be required.

International wire transfers are considered the safest way to send money across national boundaries, but they are not foolproof. All documentation should be saved, and it is advisable to follow up to ensure that the money reaches the recipient in a timely manner.

Commercial Letter of Credit

Payment is almost always made with a commercial letter of credit, except for various small orders. Letters of credit allow a bank to act as an uninterested party between the buyer and seller. They have been used for centuries and are becoming a vital, ever-increasing instrument of international trade. They aid both parties by enabling the buyer to prove they can make payment and by reassuring the seller that payment will be received. Before placing an order, it is important to understand how letters of credit operate.

There are four major parties involved when issuing a commercial letter of credit in international trade:

  1. Applicant: Purchaser of the goods
  2. Beneficiary: Producer of the goods
  3. Issuing bank: Bank where the purchaser (applicant) draws the letter of credit
  4. Advising bank: Bank where the manufacturer (beneficiary) maintains an account

A typical transaction involving a letter of credit works as follows:

  1. An applicant (purchaser) in the US agrees to purchase a product from a beneficiary (e.g. a factory in China). Both parties agree a balance of $75,000 will be paid upon shipment.
  2. The applicant goes to the bank where they normally do business and draws up a $75,000 letter of credit for the beneficiary.
  3. The issuing bank goes through an underwriting process to ensure the applicant has the credit or collateral for the letter of credit.
  4. Once the process is complete, the issuing bank sends a copy of the letter of credit to the advising bank in China. The advising bank notifies the beneficiary the payment is ready.
  5. When the issuing bank is satisfied all the conditions in the letter of credit have been met, the money will be released to the advising bank, and the beneficiary will be paid. For example, if the payment is to be made upon shipment, the beneficiary will be paid when they receive the proper documentation (such as an official bill of lading) proving the goods have been shipped.

Issuing fees usually range from 1.5% to 8% of the value of the letter of credit.Commercial Letter of Credit

When using letters of credit, be aware of the following:

  • A letter of credit is about documents and not goods. It is not an insurance policy for the quality of goods.
  • It is important to understand all required documents before signing and it is also important to be sure all stipulated conditions can be met.
  • The inability to meet time schedules is the number one reason letters of credit fail, so ensure time frames can be met.
  • The failure to produce the required documentation on time can nullify the letter of credit.
  • Even minor errors in documentation can render a letter of credit invalid, so it is critical to be careful with the documentation.

A letter of credit is not an absolute guarantee the beneficiary will receive payment. The issuing bank is obligated to pay under the letter of credit only when the stipulated documents are presented, and the bank is satisfied all the terms and conditions of the letter of credit have been met.

Common types of letters of credit include the following:

  • Revocable letter of credit: A letter of credit that can be revoked by the bank without agreement from the beneficiary.
  • Irrevocable letter of credit: A letter of credit that cannot be revoked unless all parties agree. Most letters of credit are this type.
  • Revolving letter of credit: This is used when there are many repeat shipments between the two parties. It eliminates the need for a new letter of credit for each shipment.
  • Standby letter of credit: The bank pays the beneficiary only when the applicant is unable to pay. While neither side intends to use it, this type of letter of credit serves as a secondary payment mechanism to ensure the beneficiary will receive payment in the event the applicant is unable to make payment.