Letters of Credit Face Extinction From Digital Cross-Border Trade Tools

Letters of credit (LCs) are an age-old way of conducting business. While they were necessary for transactions for many years, they are now becoming outdated. Today, there are alternatives to LCs that are frequently being used to complete transactions.

Businesses have moved away from the traditional methods of transferring funds and toward the use of modernized alternatives. While LCs are still commonly used, providers of ePayment services are changing how the process works for both suppliers and buyers.

Digital Payment Providers

Because of financial operations offering foreign exchange (FX) payments digitally, businesses can eliminate the transfer fees charged by banks. Often, those fees reduce the savings that suppliers might use to offer buyers discounts for early payments.

Using these services can connect buyers to suppliers in emerging markets. The Asia-Pacific (APAC) region in particular is experiencing some dramatic growth in global trade. In the past, these markets weren’t attainable because of the difficulty of establishing a relationship with a local bank, not to mention maintaining multiple accounts abroad with funds in foreign currencies.

Letters of Credit in a Digital Age

Credit professionals have many tools at their disposal. Such is the case in Asia, where two banks are breaking ground in cross-border transactions, according to a National Association of Credit Management (NACM) webinar.

Bangladesh’s City Bank announced this year that it became the first bank in the country to execute a cross-border LC under Shariah-based financing, via blockchain. The transaction between a Bangladeshi garments business and a Hong Kong-based exporter was conducted on Contour’s network — a consortium of banks, corporations and trade partners working together to revolutionize the trade finance industry. Formed by a group of leading trade banks, it is building a new global standard for trade by removing barriers and transforming trade finance products, starting with LCs.

The LC, from draft initiation to issuance and advising, took 38 minutes, as compared to the typical three days for regular cross-border LCs. Blockchain technology allows parties to manage their own data while transacting and viewing shared information seamlessly and securely with their trading partners and service providers. This results in transparency in transactions, reducing the scope for forgery and fraud.

Meanwhile, HDBank announced it became the first Vietnamese bank to conduct such a transaction — between a fiber importer and a Taiwanese yarn manufacturer.

The use of blockchain in LC transactions is increasing. It offers better security and faster processing of transactions. It also minimizes errors that are common with paperwork and saves time. The use of a distributed ledger allows the storage of huge databases of statistics, management data, and historical transactions between customers.

But the technology isn’t without its complications and challenges. In many ways, digitizing and securitizing the documents with encryptions is the easy part compared to the navigation of international regulations. The product can be crossing all kinds of borders; it can be in three or four countries over the course of the shipment, raising jurisdictional questions.

There has been an electronic uniform customs and practices (eUCP) process governed by the International Chamber of Commerce (ICC) for several years, yet each sovereignty has its own digital document laws, and some don’t have any.

There are also issues relating to hacking and fraud. Digital solution providers have developed responses to these challenges, as well. For example, Traydstream provides an automatic document checking solution.

Read more: Deutsche Bank Taps Traydstream for Automated Document Checking

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