|
Logistics: Paperless Trade?
Letters of Credit Get Badly Needed Update
By Ken Mark
Letters of credit (LCs), the payment method of choice for settling international transactions since the days of sailing ships, are being dragged kicking and screaming into the twenty-first century. The introduction of modern business methods and technology are starting to shape up the paper-based system that involves at least four different parties the buyer and seller and their respective banks.
Traditional LCs are cumbersome, time-consuming and expensive. According to a 2002 Gartner G2 report, the cost of processing trade documentation accounts for five per cent of total annual world trade. The cost of processing a simple transaction can cost up to US$400. Some transactions require as many as 24 forms. And an estimated 50 per cent of all LC transactions are rejected because of incorrect data from either the buyer or seller.
In their heyday, LCs lubricated cross-ocean trade by guaranteeing payment between buyers and sellers as well as banks unknown to each other and located in places familiar only to stamp collectors. But the paper pushing they required is less welcome in todays just-in-time world. The Internet can deliver equally secure solutions faster. Increasingly, when both sides are well known to each other, they are conducting business by open account or direct payment.
Operational, processing and financial savings are benefits that purchasing professionals can gain from automating underlying LC procedures. By reducing or eliminating the cost and hassle of preparing and reconciling complex documentation and having payment funds tied up unnecessarily, they will receive imported goods faster, with less effort and at lower landed cost.
Nevertheless, LCs are here to stay. Many emerging economies, especially those with import or export controls, have laws in place requiring the use of LCs, says John OBrien, president of Mississauga freight forwarder Team World Ltd.
Even with modernization, LCs will live on since global traders are comfortable with their format, language and terms. Although data is increasingly being transmitted electronically, processing is still manual, says OBrien. Paying banks still face significant financial risks. A US$20-million payment is not likely to go through seamlessly. Someone needs to take a closer look at the documentation before authorizing payment.
New Tools
In 1994, the worlds major banks set up Bolero to facilitate the electronic payment of LCs similar to the existing SWIFT system that handles global interbank transactions. But some banks are creating their tool kits as well. For example, RBC Financial Group is currently developing a new electronic LC client interface. It will enable firms to issue and receive documents over the Web, and become more efficient by simplifying their preparation, says Azim Walli, senior manager RBC Global Services. Our goal is to significantly improve efficiencies and turnaround times as well as to shorten payment times to seven days or less from the current level of 10 to 14 days.
Other service suppliers have similar plans. One of the most ambitious is New York-based TradeCard Inc. that offers a seamless, Web-based payment system that is further enhanced by a range of comprehensive trade-related services including event management, document management and visibility. Our goal is to automate the financial supply chain, in the same way others have automated the physical supply chain by taking out the paper, says TradeCards chairman & CEO, Kurt Cavano.
For example, TradeCard combines the purchase order and credit function on the same electronic document thereby saving time since people can track two elements at once. And TradeCard can replace the buyers and sellers banks with an insurance company.
As a hosted service, TradeCard claims that as long as its users have an Internet browser, thats enough technology to play in the same league with multi-national corporations.
The increased efficiency lowers processing costs. Between buyer and seller, the cost of an LC is about one per cent of the total transactions value, says Cavano. We can reduce that to as low as 1/3 of one per cent. For $1 billion in purchases, companies can save $5 million to $10 million annually, net of our fees.
TradeCard, although not a bank, can also help optimize the cash flow of both buyers and sellers. Such financial services include pre-production loans for exporters based on a confirmed purchase order with a known buyer. And it also offers factoring and forfaiting to convert receivables into ready cash.
Such features can offer purchasing practitioners increased savings and convenience when dealing with overseas suppliers. b2b
Ken Mark is a freelance business writer based in Toronto.
|
