Collecting bank

From CEOpedia | Management online
Revision as of 16:04, 17 November 2023 by Sw (talk | contribs) (Infobox5 upgrade)

The term "collecting bank" should be understood as a form of non-cash settlements, which consists in the fact that the supplier orders his bank to collect receivables from the recipient under certain conditions (Anzolin 2009, pp.1-4). This conditional form of payment takes into account two parties - the collecting institution, usually a bank acting on behalf of the payer, and the collector of the object of collection (Anzolin 2009, pp.1-4).

The form of collection

The form of collection is most often used by entities that have long cooperation with their business partners and have full confidence in them. They are not afraid that the partner will refuse to collect the goods or pay a certain amount to pay for them. Within the framework of collection, non-cash money fulfils the function of a means of payment. The bank does not bear any responsibility for a given transaction during the collection process (Musigcha 2008, pp. 3-12).

Object of collection

Financial documents or documents as such may be the subject of collection. In the case of undocumented collection it will be (Musigcha 2008, pp. 3-12):

  • bills of exchange, including drafts (collection of a bill of exchange),
  • cheques,
  • depository receipts,
  • banknotes,
  • shares,
  • bonds.

In the case of documentary collection, also known as commercial collection, the subject of the operation may be (Musigcha 2008, pp. 3-12):

  • invoices,
  • ransport documentation,
  • certificates of origin,
  • documents evidencing an existing title,
  • insurance documents.

Types of collection

There are many types of collection, distinguished according to its subject matter, due to the intermediary that settles the collection and the payment term (Watkins, West Maurya; Yusra 2012, pp.5-7):

  • credit collection - not to be confused with collection
  • credit documentary collection - the subject of collection are documents, it consists mainly in debt collection in exchange for documents,
  • undocumented collection - financial collection, the subject of which may only be financial documents,
  • cash collection - collection a vista, consisting of payment for goods (not necessarily cash) in order to own them,
  • acceptance collection - also referred to as
  • term collection - consists in the payment of payments within a specified period of time by the payer,
  • guaranteed collection - the counterparty demands a guarantee from the payer's bank if the latter refuses to pay,
  • immediate collection - consists in immediate payment after the submission of documents,
  • automatic collection - two banks authorize themselves to charge the other party to the agreement and to pay the amount due automatically,
  • goods collection - consists in handing over the goods to a third party by a bank, if the recipient performs the service indicated by the ordering party.

Implemented collection in practice

The first stage of collection is the shipment of goods by the payer to the payer and submission of documents to the bank, confirming the shipment of goods and authorizing its receipt. The podcasting bank then sends the relevant documents to the intermediary bank, while the collection bank confirms receipt of the documents to the podcasting bank. At this point in time, it may already send the payer a call to buy out the collection together with a copy of the document (Fabijan 2002 pp. 32-35). When they arrive at the collection institution, the payer will receive further instructions from the bank. After their fulfillment, the remitter will receive the documents that are the subject of collection (Fabijan 2002 pp. 32-35). Their receipt is preceded by payment or acceptance of a bill of exchange. When such an obligation is fulfilled, the payer may freely dispose of the goods. It is not for the collecting bank to check the authenticity of documents or to make payments from its own funds (Watkins, West Maurya; Yusra 2012, pp.5-7).

Examples of Collecting bank

  • Banks: In order for a bank to act as a collecting bank, it must have a correspondent relationship with the supplier's bank. The collecting bank will then receive the payment from the recipient and deposit it into the supplier's account (Anzolin 2009, pp.1-4).
  • Payments Processors: Payments processors, such as PayPal and Stripe, also act as collecting banks, as they receive payments from the recipient and deposit them into the supplier's account. The main difference between banks and payments processors is that payments processors generally provide an online platform for making payments, whereas banks are primarily brick-and-mortar institutions (Anzolin 2009, pp.1-4).
  • Credit Card Companies: Credit card companies, such as Visa and MasterCard, also act as collecting banks. The credit card company will receive the payment from the recipient and deposit it into the supplier's account. The main difference between credit card companies and banks is that credit card companies generally offer rewards and other incentives to encourage customers to use their services (Anzolin 2009, pp.1-4).

Advantages of Collecting bank

Collecting bank provides a flexible and secure way in which to transfer funds and settle payments between two parties. The advantages of this form of payment are many, including:

  • Reduced Risk: Collecting bank reduces the risk of non-payment on the part of the recipient, as the payment is guaranteed by the collecting bank. This form of payment also eliminates the need for the supplier to trust the recipient, as the bank is responsible for the collection and safekeeping of funds.
  • Reduced Costs: Collecting bank also reduces costs for both parties, as the collection process is handled by the bank, who charges a nominal fee for their services. This in turn also reduces the risk of fraud and other costly errors.
  • Improved Cash Flow: Collecting bank helps to improve cash flow, as it is a swift and reliable way to ensure payments are received on time. It also eliminates the need for the supplier to wait for payment of invoices, as the payment is guaranteed by the collecting bank.
  • Greater Transparency: Collecting bank provides greater transparency and control to both parties, as all details of the transaction are available to both the supplier and the recipient. This helps to ensure that both parties are aware of the payment details and have a clear understanding of any discrepancies.

Limitations of Collecting bank

The collecting bank is a useful tool for non-cash settlements, however it is subject to certain limitations. These include:

  • Limitations of the law: In many countries, the use of collecting banks has been restricted by certain regulations or laws. For example, certain countries may require a collecting bank to obtain special licenses in order to operate legally.
  • Limitations of credit risk: Collecting banks are exposed to credit risks if the buyer or the seller fails to pay on time. For this reason, collecting banks may require additional security or collateral from the parties involved in the transaction.
  • Limitations of cost: Collecting banks often charge fees for their services, which may be passed on to the parties involved in the transaction.
  • Limitations of time: Collecting banks require some time to process the transaction, which may delay the payment process.
  • Limitations of geography: Collecting banks may only be available in certain locations, and may not be accessible to all parties involved in the transaction.

Other approaches related to Collecting bank

The Collecting Bank approach is just one of many approaches to non-cash settlements. Other approaches include:

  • Cash Payments - Cash payments are the most common form of non-cash settlement, and involve the direct exchange of money between two parties.
  • Letter of Credit - A letter of credit is a document issued by a bank in favor of the seller, guaranteeing payment to the seller up to a specified amount, provided the seller meets certain conditions.
  • Electronic Funds Transfer (EFT) - EFT is a method of non-cash settlement in which funds are electronically transferred between two parties.
  • Automated Clearing House (ACH) - An ACH is an electronic network for the transfer of funds between financial institutions, often used for large-value payments.

In conclusion, the Collecting Bank approach is just one of several approaches to non-cash settlements. Other approaches include cash payments, letter of credit, electronic funds transfer and automated clearing house.


Collecting bank — recommended articles
Shipping guarantee — Back-To-Back Letters Of Credit — Documents against acceptance — Transferable letter of credit — Reimbursing bank — Acquiring bank — Debit Note — Advising bank — Revolving letter of credit

References

Author: Natalia Jaskot

Retrieved from "https://ceopedia.org/index.php?title=Collecting_bank&oldid=88937"