A collecting bank is the name of the importer's bank in an international sales transaction based on documentary credits. It refers to the bank's function as a transaction facilitator on behalf of the importer. Comparatively, another bank facilitates on the side of the exporter and is called a remitting bank.
A documentary credit transaction uses letters of credit, delivery documents and intermediaries to remove the risk associated with selling goods across international borders. The intermediaries are banks on both sides of the transaction that provide a type of escrow service to ensure payment and goods are exchanged simultaneously, so neither party has to absorb more of a risk of non-performance than the other. Basically, a collecting bank collects payment from the importer, or buyer. The bank only releases the payment to the exporter's remitting bank once the importer has received delivery documents, such as a bill of lading, that entitles the importer to claim the purchased goods from a a delivery point.
The role of the collecting bank is critical to stable trade relations between countries. International trade drives a country's economy as businesses are able to expand their markets beyond national borders, manufacturing more goods that put more people to work. Collecting banks act as an unimpeachable agent for the importer, ensuring the exporter that the money is available to make payment upon delivery of goods. These types of transactions cannot be canceled or changed at the whim of either party. Once the collecting bank and remitting bank are engaged, the only way to complete the transaction is by strict compliance with the terms of the documents outlining the agreement.
Documentary transactions are not limited to international trade, however. A bank can act as a collecting bank in any transaction where it serves as an intermediary to collect payment from the buyer and remit payment to the seller under terms of an agreement. The important part is that the document, letter or agreement specifies the exact circumstances which will allow the collecting bank to release the money. For example, if a person receives an invoice or draft that says it is payable through a bank and does not say it is payable to the order of a person named, as in the case of a check, the transaction is documentary and the bank is a collecting bank. The collecting bank holds an additional document that specifies when it should pay out the money it has received.