This outcome tests whether you understand a bank transfer as a payment method and can say who carries the risk under it. The examiner likes it because the tempting wrong answers give the bank a role it does not have.
The rule
A bank transfer is an unconditional instruction from the buyer to its bank to pay the seller's account. The banks only carry out that instruction. No bank promises payment to the seller and no bank checks that the goods were shipped. So risk depends on when payment is made. If the buyer pays in advance, the buyer carries the risk that the seller does not ship or ships non-conforming goods. On open account, the seller ships first and carries the risk of non-payment. A letter of credit differs because the issuing bank gives its own undertaking to pay against complying documents.
Worked example
Delta Ltd (buyer) and Sorel Co (seller) agree a price of $100,000.
Contract 1: payment in advance by bank transfer.
Delta pays $100,000 on day 0. Sorel ships on day 10. If Sorel never ships, Delta has lost $100,000 and its only remedy is to sue Sorel. Risk: Delta (buyer).
Contract 2: open account, transfer 60 days after delivery.
Sorel delivers on day 10. Delta should pay by day 70. If Delta never gives its bank the instruction, no bank owes Sorel anything. Sorel must sue Delta. Risk: Sorel (seller).
In both cases the transfer itself works perfectly. The risk comes from the timing of payment, not from the banks.
Remember: a bank transfer is only a payment instruction, so it never guarantees performance and the party who performs first carries the risk.
Where candidates lose marks
Saying the seller bears the risk when the buyer pays in advance, which reverses the position because the seller already has the money.
Treating a bank transfer as if the bank undertakes to pay the seller, as it does under a letter of credit.
Thinking banks hold the funds until delivery or release them against shipping documents, so that risk is shared equally.
Try it: 4 questions
FitCore Ltd, a fitness club chain, buys gym equipment from two overseas suppliers. The first contract requires full payment by bank transfer before shipment. The second contract is on open account, with payment by bank transfer 60 days after delivery. Which TWO of the following statements correctly allocate the non-performance risk?
Select the two that apply (each shows on its own).
Answer: A, C. Bank transfer is only a payment method, and risk follows the timing of payment relative to performance. With advance payment, the buyer has paid first and so depends on the seller to ship and to ship conforming goods. The buyer carries the non-performance risk. With open account, the seller delivers first and depends on the buyer to pay later. The seller carries the non-payment risk. Why the other options are wrong: B reverses the advance payment position, since the seller has the money before it ships. D reverses the open account position, since the buyer has the goods and the seller is unpaid. E is wrong because a bank transfer does not guarantee performance of the underlying contract. The banks only carry out the payment instruction.
Ostrava Roasters Co, a coffee roaster, agrees to sell beans to a new overseas customer, Lisboa Cafe Co. Ostrava Roasters Co insists that Lisboa Cafe Co pays the full price by bank transfer before the beans are shipped. Which of the following statements best describes the position of the parties under this arrangement?
Answer: B. Rule: a bank transfer is an unconditional payment instruction from the payer to its bank. The banks simply move the money to the beneficiary's account. When it is made matters, because the timing of payment decides which party carries the commercial risk. With payment in advance, the seller is paid before it ships, so the buyer carries the risk. The buyer may not receive the goods, or may receive goods that do not match the contract. On open account the position is reversed and the seller carries the risk of non-payment. B is correct: Lisboa Cafe Co has already paid. It depends on Ostrava Roasters Co performing, and if the seller does not perform, its only remedy is to sue the seller. A is wrong: it applies the open account risk to a payment in advance. Ostrava Roasters Co already holds the money before it ships, so non-payment is not its risk, even though no bank has undertaken to pay. C is wrong: it confuses a bank transfer with a documentary collection or a letter of credit. In those methods, payment or acceptance is linked to the presentation of documents. A bank transfer carries no such condition. D is wrong: it treats the banks as escrow agents. In a bank transfer the funds are credited to the seller's account and are not held back pending delivery.
Kestrel Coaches Co, a bus operator, agrees to sell a fleet of used buses to Dunmore Transport Ltd, an overseas buyer. Kestrel can be paid either by an ordinary bank transfer after shipment, or by a documentary letter of credit. Which of the following best compares Kestrel's security under the two methods?
Answer: B. A bank transfer (credit transfer) is a payment mechanism. The buyer instructs its bank to pay, and the banks carry out that instruction. No bank gives the seller an independent promise to pay, so if the buyer never gives the instruction, the seller has no claim against any bank. A documentary letter of credit is different. The issuing bank gives its own undertaking to pay the seller, independent of the sale contract, if the seller presents complying documents. This is the extra security the seller gets. Why the other options are wrong: A wrongly treats the bank transfer as carrying the same bank undertaking as a letter of credit. This is the tempting error. C reverses the two methods. A seller's bank does not guarantee a transfer, and a letter of credit does not rely on the buyer's goodwill once it has been issued. D is wrong because a letter of credit is specifically a bank undertaking to pay against documents.
Valley Dairy Co-operative (country B) sold cheese to Northmark Foods Co (country A). Northmark instructed its bank, Aldin Bank, to pay the price to Valley's account. Aldin Bank sent a payment order to Crossway Bank, an intermediary. Crossway Bank sent an order to Bexton Bank, which holds Valley's account. Applying the usual credit transfer terminology (as in the UNCITRAL Model Law on International Credit Transfers), which of the following correctly identifies the roles?
Answer: B. Under the credit transfer model, the originator is the party that issues the first payment order (Northmark, the buyer). The beneficiary is the person named in the order to receive the funds (Valley, the seller). A receiving bank is any bank that receives a payment order, so Aldin Bank (the originator's bank), Crossway Bank (intermediary) and Bexton Bank (beneficiary's bank) are all receiving banks. Option A wrongly makes a bank the originator; Aldin Bank only receives and acts on Northmark's order. Option C wrongly treats the seller's bank as the beneficiary. The bank holds the account, but the beneficiary is the seller, and it also ignores Aldin Bank and Bexton Bank as receiving banks. Option D wrongly treats the intermediary as the originator's agent and not a receiving bank. Crossway Bank receives a payment order in its own right, and Aldin Bank is also a receiving bank.
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Who bears the risk when payment is made by bank transfer in advance?
The buyer does. It has paid before receiving the goods and must rely on the seller to ship goods that match the contract. If the seller fails, the buyer's remedy is to sue the seller.
Who bears the risk on open account payment by bank transfer?
The seller does. It delivers first and depends on the buyer to give the transfer instruction later. No bank has promised to pay the seller, so the seller's only claim is against the buyer.
What is the difference in security between a bank transfer and a letter of credit?
Under a bank transfer no bank gives the seller an undertaking to pay. Under a documentary letter of credit the issuing bank undertakes to pay against complying documents, independently of the sale contract, so the seller has extra security.