Payment Methods in International Trade: From Letters of Credit to Blockchain

International Trade Payments: Balancing Security and Speed

Choosing the right payment method in international trade is one of the most critical decisions in any commercial relationship. The right payment method protects the interests of both buyer and seller while ensuring the smooth flow of trade. The wrong choice can lead to payment delays, contractual disputes, fraud risks, and the deterioration of business relationships.

Global trade volume is expected to exceed $32 trillion in 2026. Within this massive volume, payment security and speed form the lifeblood of commerce. Alongside traditional letters of credit and documentary collection methods, digital payment solutions and blockchain technology are bringing revolutionary changes to trade finance.

According to the International Chamber of Commerce (ICC), 80 percent of world trade is supported by trade finance instruments. Choosing the right financing tool can affect trade costs by 5–15 percent.

1. Letter of Credit (L/C)

Definition and Process

A letter of credit is a bank undertaking in which the buyer's bank (issuing bank) guarantees payment to the seller upon fulfillment of specified conditions. It is governed by UCP 600 (Uniform Customs and Practice for Documentary Credits).

Letter of credit process step by step:

1. The buyer requests their bank to open a letter of credit in favor of the seller
2. The issuing bank issues the L/C and transmits it to the seller's bank (advising bank)
3. The advising bank notifies the seller of the L/C
4. The seller ships the goods and presents the required documents to their bank
5. Documents are checked for compliance with L/C terms
6. Payment is made against compliant documents

Types of Letters of Credit

Irrevocable L/C:

• Cannot be amended or canceled without the consent of all parties
• The most common and secure type of L/C
• Provides the highest level of assurance to the seller

Confirmed L/C:

• The advising bank also provides a payment guarantee
• Double bank security
• Preferred for countries with high political and economic risk
• Additional cost: Confirmation commission (0.5–2%)

Revolving L/C:

• For recurring shipments within a specified period
• Automatically renewed after each utilization
• Ideal for parties engaged in regular trade

Transferable L/C:

• Allows the seller to share the credit with another party
• Suitable for intermediary trading companies
• Useful in complex supply chains

Stand-by L/C:

• Functions as a payment guarantee
• Only activated if the buyer fails to fulfill their obligation
• An alternative to bank guarantee letters

Advantages and Disadvantages of Letters of Credit

Advantages:

• Provides high assurance to both parties
• Bank guarantee minimizes payment risk
• Governed by internationally recognized rules (UCP 600)
• Facilitates access to trade finance

Disadvantages:

• High bank commissions and fees (1–3%)
• Complex document requirements
• Long processing time (5–10 business days)
• Document discrepancies can cause delays

Practical tip: When opening a letter of credit, keep document requirements as simple as possible. Complex conditions increase the risk of discrepancies. According to ICC data, discrepancies are found in 60–70 percent of first-presented documents.

2. Documentary Collection

D/P (Documents against Payment)

The seller's bank sends the shipping documents to the buyer's bank. Documents are released only upon the buyer's payment.

Advantages:

• Lower cost than letters of credit
• Simple procedure
• A certain level of security for the seller

Disadvantages:

• No bank payment guarantee
• The buyer may refuse to pay
• Goods may remain at customs

D/A (Documents against Acceptance)

Documents are released upon the buyer's acceptance of a time draft. Payment is made at the specified maturity date.

Advantages:

• Grants the buyer a payment term
• The exporter can discount the draft
• More flexible than D/P

Disadvantages:

• Higher risk for the seller
• The buyer may fail to pay at maturity
• Collection process may be prolonged

3. Cash in Advance (Prepayment)

The buyer pays fully or partially before the goods are shipped.

Application Methods

• Full prepayment: Full payment at the time of order
• Partial prepayment: 30–50% at order, balance before/after shipment
• Advance payment: Covering raw material costs before production begins

When is it appropriate?

• First-time suppliers
• Trade with high-risk countries
• Custom-made orders
• Small-volume orders

For the seller: The safest method, zero payment risk For the buyer: The riskiest method, no delivery guarantee

4. Open Account

Goods are shipped, documents are sent directly to the buyer, and payment is made at the agreed term (typically 30, 60, or 90 days).

Advantages:

• The most convenient method for the buyer
• Simple and fast processing
• Low transaction costs

Disadvantages:

• The riskiest method for the seller
• Payment delays may occur
• Risk of buyer non-payment

When is it appropriate?

• Long-standing and trustworthy trade relationships
• Buyers with strong creditworthiness
• Competitive market conditions (buyer has strong bargaining power)
• Intra-group trade

Risk mitigation: When working on open account terms, you can minimize payment risk by taking out trade credit insurance (Euler Hermes, Coface, Atradius). This insurance covers 80–95 percent of the receivable in case of buyer insolvency or non-payment.

5. Consignment

Goods are sent to the buyer, but ownership remains with the seller. Payment is made after the buyer sells the goods to third parties. Unsold goods can be returned.

Advantages:

• Zero risk for the buyer
• A strategy for entering new markets
• Transfers inventory holding costs to the buyer

Disadvantages:

• Highest risk for the seller
• Long cash cycle
• Inventory tracking and management challenges

6. Digital Payment Solutions

Online Payment Platforms

International payments are also becoming digital with the growth of digital commerce:

PayPal Business:

• For small and medium-sized transactions
• Accepted in 200+ countries
• Buyer protection available
• Commission: 2.5–4.5% + fixed fee

Wise (TransferWise) Business:

• Low-commission bank transfers
• Real exchange rates
• 70+ countries and currencies
• Commission: 0.5–1.5%

Payoneer:

• International B2B payments
• Multi-currency accounts
• Marketplace integrations
• Commission: 1–3%

SWIFT and Bank Transfers

International bank transfer (T/T — Telegraphic Transfer) remains the most common payment method:

• SWIFT network: 11,000+ banks in 200+ countries
• Processing time: 1–5 business days
• Cost: $20–50/transaction (plus intermediary bank commissions)
• IBAN system: Standard in Europe and Turkey

7. Blockchain and Cryptocurrency-Based Solutions

Smart Contracts

Blockchain-based smart contracts have the potential to revolutionize payment processes in international trade:

How does it work?

• Trade conditions are encoded into a digital contract
• When conditions are met (e.g., confirmation of goods receipt), payment is automatically triggered
• Need for intermediary institutions is reduced
• Processing time drops to minutes

Current applications:

• Contour: Digital letter of credit platform (backed by HSBC, Citi, Standard Chartered)
• Marco Polo: Blockchain-based trade finance network
• we.trade: European banks consortium platform
• TradeLens: Maersk and IBM's logistics blockchain platform

Stablecoin Payments

Dollar-pegged stablecoins such as USDT and USDC are beginning to be used as alternative payment instruments in international trade:

Advantages:

• Instant transfer (within minutes)
• Low commissions (0.1–0.5%)
• Works on weekends and holidays
• Currency exchange risk is minimized

Risks and challenges:

• Regulatory uncertainty
• Tax and accounting compliance
• Volatility risk (for non-stablecoins)
• Counterparty trust

2026 trend: SWIFT's SWIFT gpi (Global Payments Innovation) system is a next-generation payment infrastructure capable of completing international transfers within minutes while offering full traceability. This system combines the speed advantage of blockchain with the security of traditional banking.

8. Trade Finance Instruments

Factoring

Obtaining immediate cash by assigning the exporter's receivables to a factoring company:

• Export factoring: Converting the exporter's term receivables into cash
• Import factoring: Early payment to the importer's supplier
• Cost: 3–8% annually (based on risk premium)
• Advantage: Removing receivables from the balance sheet, credit risk transfer

Forfaiting

The discounted sale of term trade receivables, bank-guaranteed notes, or letters of credit:

• Medium and long term (180 days–7 years)
• Suitable for large-value transactions
• Without recourse
• Cost: LIBOR/SOFR + risk premium

Supply Chain Finance

A financing model that uses the buyer's creditworthiness to offer early payment to suppliers:

• The buyer approves invoices and publishes them on the platform
• The supplier can convert the invoice to cash before maturity at a discount
• The buyer pays at the original maturity
• Advantageous for both parties

Payment Method Selection Matrix

Factors to consider when choosing the right payment method:

Decision Tree

1. First-time supplier? → Letter of credit or prepayment
2. High-risk country? → Confirmed letter of credit
3. Reliable long-term relationship? → Open account + trade insurance
4. Large-value transaction? → Letter of credit or forfaiting
5. Regular recurring orders? → Revolving L/C or open account

Turkey-Specific Considerations

Turkish Lira and Currency Management

• Payments in trade from Turkey are generally denominated in USD or EUR
• Payment in Turkish Lira can provide exchange rate advantages but carries currency risk
• Currency risk can be managed with forward exchange contracts
• Monitoring Central Bank foreign exchange regulations is important

Eximbank Guarantee Programs

Guarantee programs offered by Turkish Eximbank to exporters and importers:

• Export credit insurance
• Overseas contracting services insurance
• Political risk insurance
• Short-term export receivables insurance

Conclusion: Choosing the Right Payment Method

Payment method selection in international trade should be determined based on trade volume, the level of trust between parties, country risk, and sector norms. Traditional methods maintain their reliability, while digital solutions offer speed and cost advantages.

Key recommendations:

1. Start with a letter of credit in new relationships, transitioning to more flexible methods as trust builds
2. Trade credit insurance should be evaluated in all circumstances
3. Always manage currency risk with hedging instruments
4. Test digital payment solutions starting with smaller transactions
5. Monitor blockchain solutions — early adopters will gain an advantage

At Toko Trading, we provide consulting on selecting the safest and most cost-effective methods for your international trade payments. We offer professional support throughout the entire process, from L/C arrangements to digital payment integration.