Payment & Remittance Explained: What It Is, How to Send & Receive Funds

Remittance plays a key role in the current financial system. It covers a very wide range, and all transactions involving the transfer of funds from one party to another can be called remittance. However, in most cases, remittance usually refers to personal remittances, where overseas workers send money to relatives and friends in their home country, or business-related remittances, where companies send money to domestic or foreign suppliers.

What is Payment Remittance?

Typically, payment remittance refers to funds sent by a business when conducting international business.

With the continuous development of economic globalization, the demand for cross-border business has increased rapidly, and the use of payment remittance is expected to rise further. In addition, current electronic transfer systems can complete transactions within ten minutes, making cross-border remittances extremely convenient for businesses.

Personal remittances can also be classified as payment remittances. In some developing countries, personal remittances account for a significant portion of the local Gross Domestic Product (GDP). Governments also welcome this form of capital inflow and have implemented a series of related incentive measures.

What is the Difference Between Remittance and Payment?

Remittance and payment may seem similar in definition, but they have significant differences in a business context.

First, any form of capital transfer may involve a payment, as long as it involves the sale of goods or services. Remittance, on the other hand, refers to a specific type of payment made to meet a particular need, usually associated with a corresponding purchase order for services. Additionally, remittances typically involve larger amounts of capital. In simple terms, a transaction of one dollar or even five cents can be considered a payment, while a transaction for thousands of dollars worth of goods or services would be classified as a remittance.

What is a Remittance Advice?

A remittance advice is usually a document sent from Party A to Party B to inform them that an invoice has been paid. Additionally, if Party A settles a debt by check, the remittance advice can serve as proof of the check.

Legally, the remitter is not required to send a remittance advice. However, in business operations, sending a remittance advice is generally considered part of business etiquette because it plays an important role in helping the supplier’s accounts receivable department confirm the source of funds, which helps simplify account management. Sending a remittance advice signifies close communication between both parties, which helps maintain their business partnership. It is important to note that the remittance advice should clearly state the invoice number, payment details, and details of the goods and services.

With the development of information technology, more and more industries are starting to digitize their remittance processes and payment management, and there is a trend for remittance advice to become obsolete. However, in certain vertical sectors, remittance advice still holds an important position, especially in industries that still use checks for payment.

What are the Forms of Remittance Advice?

Remittance advice typically comes in the following forms:

Paper Remittance Advice

A paper remittance advice can be handwritten or computer-generated and printed. Regardless of the form, the key is that it must contain information such as the invoice number and payment amount.

Email Remittance Advice

This type of remittance advice is usually sent by Party A via email. The payer can attach a file with the payment details or explain the remittance details in the body of the email.

EDI Remittance Advice

EDI (Electronic Data Interchange) is an electronic exchange method for financial transactions between businesses, used for securely transmitting payment-related information such as invoices, purchase orders, and remittance advice. Businesses can use EDI to streamline their financial payment processes. EDI remittance advice is common in large enterprises, which use an alphanumeric EDI 820 document to notify suppliers that the corresponding invoice has been paid.

Web-Based Remittance Advice

For retail giants like Walmart and Amazon, web-based remittance advice has become mainstream. The finance teams of these groups upload the relevant remittance advice through their accounts payable portals. Suppliers can log into the portal to check the payment status and download the corresponding remittance advice.

Are Businesses Obligated to Send Remittance Advice?

Generally, businesses are not obligated to send remittance advice. However, if a business proactively sends a remittance advice after completing a payment, it demonstrates adherence to business etiquette and helps maintain good relationships with business partners. For the recipient, remittance advice is beneficial for better account management. Specifically, it helps the recipient’s finance department quickly match the received funds with customer details, thus processing financial procedures more efficiently.

Generating a remittance advice is usually not complicated. With the development of internet technology, many companies have launched Software as a Service (SaaS) solutions that enable businesses to create their own remittance advice templates in minutes.

What is the Importance of Remittance Advice for Businesses?

Although sending a remittance advice is not legally mandatory, its importance for businesses is reflected in the following aspects:

• Remittance advice helps suppliers with their financial records by clearly managing customers’ paid amounts. For long-term clients with multiple installment payments, remittance advice is even more crucial, as suppliers can manage the payment process and progress through the received advice documents for each installment.

• Remittance advice helps suppliers quickly and accurately match received payments with issued invoices, thereby simplifying and improving the efficiency of financial processing.

How to Make a Payment Remittance?

Businesses can make payment remittances through various methods, such as:

Check Payment

In B2C transactions, check payments are gradually being phased out, but in B2B transactions, they are still a common payment method because checks serve as clear paper trails, making it easier for businesses to track the entire payment process.

Despite this, check payments have some drawbacks. For example, they are prone to human error during writing, requiring a new check to be issued. Additionally, checks may be rejected due to insufficient funds or being post-dated, preventing the payee from successfully cashing them. Furthermore, the process of check payment involves multiple third parties, which may increase indirect costs, and the strict settlement procedures for checks can lead to longer remittance times. These factors may deter businesses from choosing check payments when selecting a remittance method.

Credit Card Payment

Credit card payment is a popular method because it is very secure, basically ensuring that the remittance arrives safely and smoothly in the recipient’s account. However, its disadvantage is also very clear: when the payment amount exceeds the credit card’s limit, the issuing institution will charge high transaction fees. For businesses, excessively high transaction costs are not conducive to B2B operations.

Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) is an emerging method of transferring funds. It does not involve cash transactions; instead, electronic funds are transferred directly from one bank account to another through an Automated Clearing House (ACH) or wire transfer. Since the EFT payment process is fully digitized, its cost is generally lower and its speed is relatively faster compared to ACH or wire transfers, resulting in higher transfer efficiency.

As the demand for automated payment solutions from businesses increases, EFT remittance is expected to become a popular trend in the future.

ACH Transfer

In simple terms, an ACH transfer can be seen as an electronic form of check payment. A financial institution withdraws funds from the remitter’s bank account and transfers them to the recipient’s bank account. ACH payments are particularly suitable for long-term transaction partners because the remitter can authorize recurring fund transfers, achieving automatic periodic payments through the ACH system and improving payment efficiency.

Additionally, ACH payments can also be made as a one-time transaction. Businesses can choose to make a single payment or follow an agreed-upon payment schedule for recurring payments based on their business transaction needs.

Wire Transfer

A wire transfer is a payment method that transfers funds from one bank account to another through a network managed by global transfer service agencies and banks. The advantage of a wire transfer is its extremely high security, but achieving this high level of security requires passing various reviews by financial institutions. Another advantage of wire transfers is that there is no upper limit on the transfer amount.

What Should a Remittance Advice Include?

A remittance advice should first include the company letterhead. Secondly, it should list the contact information of the person responsible for the remittance transaction and the following information:

• Issue date of the remittance advice

• Full company name and address of the remitter

• Full company name and address of the payee

• Associated invoice number

• Details of the products or services involved in the remittance transaction

• Specific amounts of the payable and paid funds

• Applicable discounts (if any)

• Payment method

• Transaction identification code

• Estimated time of arrival for the remittance

How to Generate a Remittance Advice?

There are many application software programs available that can generate remittance advice. Both individuals and companies can use these programs to create them. Alternatively, remitters can choose to use software like Microsoft Word or Excel, or templates available on Google Sheets or Docs to generate their own remittance advice.

Basic Remittance Fees

Almost all types of remittances incur some fees. Therefore, before making a payment remittance, it is best to ensure you understand all associated costs. In most cases, fees related to remittance will include the following:

Fixed Fees for Payment Remittance

This fee is a fixed charge that the remittance service provider will collect from the remitter before the transaction begins. The amount is usually fixed and is not affected by the specific transfer amount or the recipient’s country.

Alternatively, some remittance service providers may charge a fee as a percentage of the remittance amount.

Fees Associated with Receiving the Remittance

In addition to the fees incurred when making the payment remittance, the remitter may also need to pay fees related to receiving the remittance, which are processing fees charged by the receiving bank or financial institution. This fee may be a fixed amount or a percentage of the remittance amount. Typically, service fees for remittances within the same bank are relatively low, while fees for inter-bank transfers may be higher.

Are Remittances Taxable?

In some countries, remittances may be subject to taxation. The specific tax rules and taxable amounts vary from country to country. Whether it is a business or an individual, it is best to understand the current tax regulations of both the remitting and receiving countries before making a payment remittance.