Letters of credit (LC) are an age-old way of doing business. While they were necessary for transactions for many years, they are now becoming obsolete. Today, there are alternatives to LCs that are frequently used to transact.
Businesses have moved away from traditional methods of transferring funds and have turned to using modernized alternatives. Although letters of credit are still commonly used, electronic payment service providers are changing how the process works for both suppliers and buyers.
Digital payment providers
Due to financial operations offering foreign currency (FX) payments digitally, businesses can eliminate transfer fees charged by banks. Often, these fees reduce savings that suppliers could 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 dramatic growth in global trade. In the past, these markets were not accessible due to the difficulty of establishing a relationship with a local bank, let alone maintaining multiple overseas accounts with foreign currency funds.
Letters of credit in the digital age
Credit professionals have many tools at their disposal. This is the case in Asia, where two banks are innovating in cross-border transactionsaccording to a National Association of Credit Management (NACM) webinar.
from Bangladesh city bank announced this year that it has become the first bank in the country to execute a cross-border LC under Shariah-based financing, via blockchain. The transaction between a Bangladeshi apparel company and a Hong Kong-based exporter was made on Contour’s network – a consortium of banks, corporates and trading partners working together to revolutionize the trade finance industry. Formed by a group of leading commercial banks, it is shaping a new global standard for trade by removing barriers and transforming trade finance products, starting with LCs.
The LC, from project initiation to issuance and notification, took 38 minutes, 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 business partners and service providers. This results in transaction transparency, reducing the risk of counterfeiting and fraud.
Meanwhile, HD Bank announced that 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 transaction processing. It also minimizes common mistakes with paperwork and saves time. The use of a distributed ledger allows the storage of huge databases of statistics, management data, and transaction history between customers.
But the technology is not without complications and challenges. In many ways, scanning and securing documents with encryptions is the easier part compared to navigating international regulations. The product can cross all kinds of borders; it may be in three or four countries during the expedition, which raises questions of jurisdiction.
There is 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 laws on digital documents, and some do not.
There are also issues related to hacking and fraud. Digital solution providers have also developed responses to these challenges. For instance, traydstream provides an automatic document verification solution.
Read more: Deutsche Bank uses Traydstream for automated document verification
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