Comparison of Escrow, L/C, D/A, D/A, and Other Payment Methods

What are the Ways to Make International Payments?

The first international trade routes go back to 2 BCE with Western Asia, the Mediterranean, China, and India engaging in trade. Around 3 BCE, shipping routes were developed, and trade evolved with Egypt and Rome. Humans have always had a fascination with importing and exporting – a fascination that continues today.

The routes, methods, and good have changed over the years, but one thing has not – the need to find an equivalent way to pay for goods. When one country uses dollars and another uses yen, one nation's currency is euros and the other's pounds; both vendors must have a simple, fair way to exchange goods for currency.

These days we are far from carrying bags of gold, salt, and spices to pay international merchants. Thanks to the digital revolution the world is more connected than ever, and that means payments can be moved across countries and currencies with ease.

However, some payment methods are better and safer than others.

In this article, we will take a detailed look at the most popular international trade payment methods and discuss the pros and cons of each one. Then we will crown a "winner" that takes into account its safety, ease of use, and costs.

International payment methods.

Rankings based on payment safety, cost, and ease of processing

Safer Modes of Payment


Very safe. For transactions of any size. Ideal for both – goods and services.

Cost Varies depends on escrow service provider.

Minimal Paperwork. Buyers and sellers need to set up an account online with escrow service provider.

Letter of Credit(L/C)

Very safe – if the most appropriate type of L/C is used for the transaction.

Cost Varies, but is higher than other methods.

Very intensive Paperwork. In addition to paperwork passing between the buyer and seller, up to two banks and another intermediary can be involved.


Very safe. Ideal for small transactions and freelancing.

Low. Up to $35/mo for a business account, plus about 2.9% +$0.30 per transaction.

Very minimal Paperwork. This method is paperless.

Documents Against Payment (D/P)

Safe – if the exporter and buyer are honest and have good business practices.

Cost Varies.

Intensive Paperwork. Paperwork passes among the seller, the remitting bank, the presenting bank, and the buyer.

Riskier Modes of Payment

Documents Against Acceptance (D/A)

Caution – the buyer takes possession of the goods before payment is made and the bank issuing the time draft does not guarantee the payment.

Cost Varies.

Intensive Paperwork. Paperwork passes among the seller, the buyer, and both of their banks.

Telegraph Transfer (T/T)

Caution – if banks using an automatic clearing house, not independent transfer terminals such as Western Union.

Low, typically under $100 per transaction.

Minimal Paperwork. This method is practically paperless.

Demand Draft (D/D)

Caution – high levels of fraud, including from unscrupulous bank employees.

Cost Varies.

Minimal Paperwork. The bank handles the paperwork.


Caution – high levels of fraud or "bouncing" occur with checks. Almost never used in international transactions.

Cost Varies.

Minimal Paperwork. The seller must physically issue the check (document) and account for it in the company"™s books.

Western Union or MoneyGram

Alert. Not ideal for business transactions due to high levels of fraud and the need for customs and clearing when it comes to some forms of international trade.

Cost Varies.

Minimal Paperwork. The seller must physically issue the check (document) and account for it in the company"™s books.


Escrow is used when two parties must complete a transaction, but there is some concern that one party will not fulfill its obligation. A neutral third party steps in to take the money from one vendor, hold it until the transaction is complete, and then release the money to the second vendor.

Escrow Example: Company A in America wants to sell fabric to Company B in Canada. Company B puts the funds in escrow. Once Company A knows the funds are in escrow, they ship the goods. Company B inspects the goods and is happy the order arrived and is high quality. Company B instructs the agent to release the funds to Company A.

Pros: Escrow is a show of good faith. The seller has no obligation to ship the goods until they are notified of funds in the escrow account, and the buyer can refuse to release the funds if the product did not arrive or is different from what was promised.

Cons: This method is dependent on the buyer to honestly say the product was received in good order. The buyer must also request the release of the funds in a timely matter. If the buyer is not honest or procrastinates, the seller can enter mediation or take legal action, and this slows down the process of getting paid. Escrow is also not the fastest method – it can take up to a month or more to get paid.

Fees: Escrow service fees vary widely. For example, popular freelance aggregator site UpWork starts at 2.75% of the seller's fee and goes up from there, while's fees vary by item and payment method.

Letter of Credit

A letter of credit, or L/C, is commonly used in international trade as it guarantees that the buyer will receive payment from the seller on time, and for the amount stipulated. If the buyer defaults, the bank remits the payment to the seller. An L/C can also be transferable, offering a great deal of flexibility if the buyer or seller's circumstances change (such as a company buyout) before the transaction is complete.

There are several types of L/Cs.

  • Commercial: direct payment between the bank and the buyers.
  • Revolving: similar to a line of credit where several draws can be made during a specific timeframe.
  • Confirmed: involves the L/C being guaranteed not by the issuing bank, but by a secondary bank. In most cases the second bank is the seller's own bank, which makes the transaction even more secure.
  • Revocable: the bank can change or outright cancel the L/C for any reason.
  • Irrevocable: the L/C cannot be changed or canceled without the consent of both parties.
  • Standby: not really an L/C – a document issued from the bank stating the buyer's ability to pay.

L/C example: Timely Corp in Nigeria would like to sell goods to a small country in the Middle East that happens to have an unstable economy. Using an L/C from an international bank, the Middle Eastern company can guarantee that the seller will receive payment. Both companies can conduct business with confidence.

Pros: This method is fast – L/Cs can be issued within two business days. Risk is very low as the payment is guaranteed by the bank. L/Cs are very useful for countries with unstable economic or political environments.

Cons: L/Cs usually attract hefty service fees from the banks involved, in addition to plenty of paperwork and a slow-moving transaction.

Fees: Banks collect a fee on each L/C, and if the L/C is renewable annually, the commission renews as well. Fees vary from bank to bank and take into account the risk that the buyer will default. Bank fees from 0.25 to 4 percent of the total amount and most import/export financial advisors agree that while very safe, an L/C is one of the most expensive payment methods.

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PayPal is an online service that connects buyers and sellers without either party having to reveal their financial information to each other. PayPal account holders can make payments from their bank accounts or through a credit card. Buyers receive the funds into a bank account. More than 179 million people use PayPal in over 200 countries.

PayPal Example: An American bridal shop has noticed that a Canadian crafter on Etsy makes very beautiful steampunk veils. They order 100 veils. The crafter sends an invoice from PayPal, and the bridal shop can pay it using a credit card if they do not have a PayPal account, or has a choice of making a payment from their credit card or bank account if they do have a PayPal account. PayPal records the transactions for the seller's financial records and converts the currency. The seller collects the payment in Canadian dollars.

Pros: Very safe, very well-established company, very convenient, and PayPal documents transactions for bookkeeping and accounting. Dispute resolution services are available.

Cons: It takes several days for the payment to be deposited into the seller's bank account. The seller must account for exchange rates when creating the invoice, and must stipulate the currency they wish to be paid in. Fraudsters use fake PayPal emails in phishing scams.

Fees: PayPal"™s business services are standard ($0/mo) or pro ($35/mo). Standard does not have a monthly cost and includes: payment via credit cards and PayPal, payment on eBay, sending invoices online and taking payments from mobile devices. Pro includes: everything from standard in addition to control of the entire payment experience using credit cards, phone, fax, or mail orders. Both levels have a fee of 2.9% +$0.30 per transaction.

Documents Against Payment (D/P)

Documents against payment (D/P) is also known as cash against documents or a sight draft.

When a D/P is used, the exporter retains the paperwork that proves they retain ownership of the goods. Once the buyer has paid for the goods, the exporter releases, or instructs the clearing bank to release, the documents to the buyer.

D/P Example: MegaCorp in Australia sends a shipment of goods by air cargo to Canada, and the documents proving the rights to own the goods to the clearing bank. Once the buyer in Canada pays for the goods, the bank hands the buyer the documents of ownership, and the transaction is complete.

Pros: This method is very safe and effective, as the exporter can resell the goods if the buyer refuses to pay. The buyer cannot obtain the goods without payment.

Cons: As the D/P method is commonly used for goods shipped by air or sea, it is cost-prohibitive for the exporter to ship the goods back home if the buyer refuses them. This system relies heavily on both parties having good business practices, shipping goods that have the quality the buyer expects, and trusting the buyer will claim the shipment. D/P also means that the goods are held in a clearing location, not shipped directly to the buyer.

Fees: Expect fees and/or surcharges from the remitting bank and/or the presenting bank. Fees will vary among institutions. However, be sure to use an international bank that is used to dealing with D/P transactions. Smaller, regional banks may not have the experience or resources to handle these transactions.

Documents Against Acceptance (D/A)

Documents against acceptance, or D/A, is not the same as D/P. With a D/A, the importer is extended credit via a time draft (which is issued by a bank). A time draft is a note of credit that the buyer does not have to pay until the buyer or importer accepts the goods. Once the goods arrive, the importer has a set amount of time to pay the time draft. The bank contacts the importer for the payment.

D/A Example: Giant Corp in Canada sells goods to ABC Corp in China. Giant Crop asks International Bank to issue ABC Corp a time draft that demands payment within 15 days of accepting the goods. Giant Corp receives, inspects, and accepts the shipment. Giant Corp is then obligated to pay the time draft to the issuing bank within the 15 days.

Pros: The presence of banks lends a great deal of legitimacy to the transaction, and D/As are less costly than traditional lines of credit.

Cons: The bank does not guarantee payment. If the importer defaults, the onus is on the exporter to track down and collect the fees. This makes the D/A method a risky maneuver since the importer has possession of the goods before payment is made.

Fees: As with the D/P method, expect fees and/or surcharges from the remitting bank and/or the presenting bank. Fees will vary among institutions. Again, be sure to use an international bank that deals with document collection transactions.

D/A Vs D/P:

D/A = Payment based on acceptance of goods.

D/P = Payment based on acceptance of documents to claim goods.

Telegraph or Wire Transfer (T/T)

Thanks to the wonders of the digital age, a telegraph transfer, also known as T/T, wire transfer, or electronic fund transfer, can move money around the world without any currency or coins changing hands. The transaction takes place entirely in the digital sphere.

T/T Example: Lucky for John Smith, his Canadian innovative bolt design caught the attention of Big Toy Company in America. They want to buy 10,000 bolts for an upcoming project. John Smith asks Big Toy Company to pay him with a wire transfer. The Big Toy accountant instructs their banker to transfer funds to John Smith's account. John Smith receives the funds in his account in about two days.

Pros: T/Ts are fast, inexpensive, secure, do not have much paperwork.

Cons: Real T/Ts of any kind must be cleared by an automatic clearing house. If the proper method of sending an electronic transfer is not used (for example through a retail transfer station like a Western Union in a shopping complex instead of transferring from bank to bank), the sender can allow you to see notification that the transfer is initiated, then reverse the transaction and abscond with your goods. T/Ts are safe if they are non-reversible, properly cleared, and a high level of trust exists between the buyer and the seller.

Fees: Wire transfers are relatively inexpensive, with fees around $25 per transfer for a domestic transaction, and $30+ for an international one. Fees vary among banks, and some banks may even include transfer services as part of the monthly service charge.

Demand Draft (D/D)

A D/D is not to be confused with a check. While a check is drawn in good faith on a bank account, a D/D is issued directly from the bank itself. The D/D transfers money from one bank to another. No signatures are required. This payment method isn't popular in international trading of goods.

Demand Draft Example: Investopedia has a great example of when a D/D could be used, citing July 2016 when the Sovereign Gold Bond Series in India allowed open investment for its bonds. D/Ds were one method of acceptable payment.

Pros: Since a D/D is issued from a bank to a bank, there is no danger of insufficient funds, as with checks.

Cons: Unscrupulous bank employees can – and have – easily tampered with D/Ds, taking the money for themselves and covering their tracks. Since the D/D typically involved an international money transfer, this type of fraud can take months to uncover. Cases also exist where the D/D document is faked.

Fees: D/D fees vary among banks. For example, Royal Bank charges a flat fee of CAD$7.50 for a draft in any currency, unless drafts are part of the account holder's banking package. In India, fees range from INR1.5 to 4 per thousand, and can also be subject to additional service fees.


A check (American spelling) or cheque (British spelling) is a document that instructs a bank to take funds from the buyer's account and transfer the money to the seller's account. This is the least popular or almost-never-used payment method in international trade.

Check Example: Global Corp in India would like to purchase paper stock lots from a paper merchant in America. Global Corp couriers a check to the seller.

Pros: There is a level of confidence since the check is drawn on a bank account and usually from a well-known financial institution.

Cons: Checks are easy to fake, and since it takes a great deal of time for the check to travel to its destination, the seller has time to empty the account and bounce the payment. Unscrupulous buyers are willing to pay an NSF fee, or simply close the account, as this can cost them less than honoring the payment. If the check is bad, the seller has very little recourse. If the check gets "lost in the mail," the seller's financial information is at risk. Additionally, the entire process of shipping a check is very slow, and the bank usually holds the international check or funds for days (for verification) before releasing payment to the buyer.

Fees: Money is exchanged through the banks at whatever the international rate is that day. The seller and buyer must account for the international exchange in order to complete a fair transaction. Some banks charge an additional fee to process international checks.

Western Union/MoneyGram

Western Union and MoneyGram are types of T/Ts, but the payments are not run through a bank. Instead, the money goes from one Western Union or MoneyGram terminal to another. This is true of most kiosks or app-style money transfer stations.

Western Union/MoneyGram Example: Umbrella Corp in Asia would like a service provider in America to make a logo for their company. The payment is sent by Western Union and the seller presents identification at their nearest Western Union kiosk to collect the payment.

Pros: Fast and easy.

Cons: Fraudsters rely heavily on this method and have a tendency to abscond with the funds while never delivering the product.

Fees: Western Union and MoneyGram can be used via an app, online, or in person. The fees are based on the amount you are sending. For example, sending CAD$ 800 to India incurs a CAD$ 16 fee on Western Union. Sending payments through MoneyGram incur different charges for sending money from a bank account, credit card, or cash at a kiosk.

Each international payment method has its pros and cons, and no method is 100 percent safe from fraudsters. That being said, some methods are much safer than others.

For large international shipments of goods where customs, duties, tariffs, and clearing are required, avoid online methods and work with escrow providers or international banks. Despite having higher fees and being very paperwork intensive, a letter of credit (when the right kind is selected) is among the safest way for buyers and sellers to trade in physical goods.

For international transactions that move digital goods or small batch orders (logos, blogs, small amounts of goods such as t-shirts, graphic designs, etc.), PayPal is the safest method.

Avoid MoneyGram and Western Union for business transactions. Those methods are much safer for sending money to friends and family. Unfortunately, the high instances of advance fee fraud make these methods very risky for business owners.

No matter which international payment method you choose, you must do your due diligence. For smaller transactions, collect a deposit. This shows that the buyer is much more willing to pay when the goods arrive. For larger transactions and physical shipment of goods, involve an intermediary (escrow, bank, etc.) that prevents the buyer from absconding with the goods without paying, and prevents the seller from collecting payment for damaged or misrepresented goods.

More Resources:

Safe Trading Guidelines