SHOULD A FINANCE COMPANY BE ACCEPTED AS A COLLECTING BANK IN A DOCUMENTARY COLLECTION TRANSACTION?

QUESTION

Dear Mr. Old Man,

I have an exporter client who wishes to proceed with a documentary collection (D/P – Documents against Payment) transaction. However, the buyer only maintains an account with a finance company—not a bank.

I’m unsure whether a finance company can legally or practically act as a collecting bank under URC 522. If it can, on what basis?

I’d greatly appreciate your advice on this case.

Best regards,

TC

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ANSWER

Hi TC,

Regarding your question, I would advise both the exporter and your bank to proceed with extreme caution in this transaction. Several important considerations should be kept in mind:

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1. Legal status of finance companies

A non-bank financial company (NBFC) is not a bank. In certain countries, NBFCs may provide limited banking-like services, such as lending, but they are generally not permitted to accept deposits from the public or offer payment services through customer accounts. In Vietnam, for example, Article 4 of the Law on Credit Institutions explicitly prohibits NBFCs from accepting deposits and offering payment services.

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2. URC 522 only refers to “banks”

URC 522 uses specific terminology: “Remitting Bank,” “Presenting Bank,” and “Collecting Bank.” It does not refer to “non-bank financial institutions” in any of these roles. That alone should raise a red flag for any party seeking to assign such a function to a finance company.

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3. ICC practice distinguishes between banks and finance companies

In the context of letters of credit, ICC has acknowledged that NBFCs may issue LCs using SWIFT MT710. However, there is no ICC document or official guidance suggesting that NBFCs can act as collecting banks under URC 522. Over the course of my 30-year career in international banking, I have never seen or processed a documentary collection involving a finance company as the collecting bank.

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4. Collection terms are risky for non-established buyers

Documentary collection is typically suitable only for low-value shipments with long-standing, trusted buyers who have demonstrated good payment behavior under other methods, such as advance payment or LCs.

In your case, the buyer appears to be a new counterparty, has no banking relationship, and insists on using a finance company to receive collection documents. This setup is highly unusual and raises major red flags.

In practice, importers must maintain a bank account for operational and regulatory reasons. The buyer’s insistence on routing documents through a finance company rather than a bank strongly suggests the potential for fraudulent activity.

Remember the case in March 2022, where several Vietnamese cashew exporters lost nearly 100 containers worth over USD 20 million in shipments to Italy due to a similar documentary trap. I wrote an article on this case for the Financial Market and Monetary Magazine (Issue 22, 2022) and LC Monitor, which you can read here: BÀI HỌC KINH NGHIỆM TỪ THƯƠNG VỤ XUẤT KHẨU HẠT ĐIỀU – Mr. Old Man

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5. Lack of legal recourse and liability protection

In the event of non-payment or document mishandling, exporters typically rely on the collecting bank’s adherence to URC 522 and internationally recognized banking practices. A finance company, not being subject to the same regulatory standards, may not offer any meaningful recourse or liability coverage. This creates significant legal and financial exposure for the exporter.

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6. Compliance and reputational concerns for your bank

Allowing a finance company to act as collecting bank could potentially breach internal compliance policies or violate cross-border regulatory expectations, particularly around AML (Anti-Money Laundering) and KYC (Know Your Customer) requirements. Engaging in such unconventional transactions could also damage your bank’s reputation, especially if the outcome leads to financial loss or fraud.

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7. No SWIFT relationship

Most commercial banks—including yours—do not maintain a SWIFT Relationship Management Application (RMA) with NBFCs. This means your bank cannot authenticate the SWIFT messages or settlement instructions received from a finance company, which further compromises the integrity and security of the transaction.

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CONCLUSION

Given the above considerations, my strong advice is:

DO NOT PROCEED WITH THIS BUYER.

The risk far outweighs any potential commercial benefit. Advise your exporter client to either request the buyer to use a proper commercial bank—or walk away.

Best regards,

Mr. Old Man