Hugo Verschoren is a highly experienced Trade Finance practitioner, trainer and conference speaker. He has spent the majority of his career with ING (formerly Banque Bruxelles Lambert) and has been involved in a number of International Chamber of Commerce activities as a member of the Dutch and Belgian National Committees, Technical Advisor to the ICC Banking Commission and member of the ICC Trade Register, Regulatory and Financial Crime Risk and Policy Groups. Hugo is currently delivering a number of courses on Trade Finance in Egypt and Zimbabwe for our sister company, GBRW Learning.
Letters of Credit: Wastepaper or Digital Dump?
A bit of history…
Letters of Credit have been around in one way or another since the Middle Ages. Since then, continents of woods have been cut down to produce paper documents and millions of tons of paper have been dragged around the globe.
Why? Well, for centuries there has been that document called a Marine Bill of Lading that gives title to the goods. You need that stupid sheet of paper to be able to collect the goods at the port of destination. But there is more. The fact that this document gives title also offers risk mitigation for banks or other parties involved by allowing them control over the flow of goods.
In Letters of Credit, besides Bills of Lading many other paper documents are used, such as invoices, certificates of origin, inspection certificates, packing lists, to name a few… Apart from Letters of Credit (also known as Documentary Credits) other payment systems such as Documentary Collections also use piles of paper.
Around the early 2000s, dotcom was a hot topic and everyone was convinced that this old paper hogging instrument was to vanish within the next few years. Not so. The old-fashioned vehicle is still chugging along.
But is there no change at all then? Let’s have a look at some of the evolutions.
The International Chamber of Commerce (ICC)
The ICC publishes frameworks governing international trade on a more-or-less regular basis.
For Letters of Credit, this consists of the Uniform Customs and Practice for Documentary Credits (UCP). The first version (UCP82) was published in 1933 - the current version, UCP600 was published in 2007.
In the meantime, ICC drafted the eUCP, “Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation”. The first version, eUCP 1.0, was published in 2002 as a supplement to UCP500.Last year ICC published a fully reviewed version, the eUCP 2.0.
Until now, these eRules were not very successful.
Come on - this should be a piece of cake. A child can easily turn an invoice or a bill of lading or any other document into an electronic version such as a Word or pdf-document. If only that were true…
As we mentioned above, a Bill of Lading is a document of title. Anyone holding the original can collect the goods. So, with a pdf-version, everyone having a copy of this pdf-document would be able to print it, go to the port of destination and collect the goods. And that is not the idea behind it…
So, besides being able to produce a document in electronic format, a system of electronic Bills of Lading also has to be able to transfer the title in an electronic way. It must be one hundred percent secure and watertight as well.
Over the last decade, a few applications were developed that were recognized in the market and started having some success. The best known, Bolero and essDOCS, are nowadays well used by the community of large commodity traders. They play a very important role in the evolution towards an electronic world and have an influence on shipping companies, banks and other players to move them from the obsolete paper world. The amounts of their transactions are substantial, so gaining time by sending around data instead of paper means big money for them.
However, there is still a long way to go with smaller businesses. Small and medium sized enterprises usually have smaller tickets in their business- for example, a container of clothing imported from Asia for 20,000 USD.
And in this business, it is all or nothing. All parties in a transaction should be using the electronic documents platform. Buyer, seller, their banks, shipping companies, forwarders, surveyors, customs agencies, they all should have access to the same platform to be able to handle a transaction in an electronic way. And we are not there yet.
Regulators also have a say
Also, from a regulatory aspect there are still some impediments. In some regions, local exchange authorities still require banks to see the original paper documents before making a payment. Likewise, the risk mitigating character of an electronic Bill of Lading is not recognised everywhere. Paper Bills of Lading, which have been around for several centuries, are well recognised and banks can reduce their Risk Weighted Assets if they are using such a document to mitigate their risk in a trade transaction.
In the EU (and UK) it took three years, until end 2018, for the EU bank regulator to recognise that an electronic Bill of Lading had the same value as its paper equivalent. Needless to say, it will take many years more before regulators world-wide are on the same page.
These systems are also not for free. There are fees to be paid and investments to be made. In some emerging countries, these fees and investments may be substantially higher than the salaries of employees currently operating paper-based systems, which means thats there is no direct incentive for banks or corporates to change.
When will it happen?
In the end, the large commodity traders will have a strong influence on all the other parties involved, but that will take some time, persuasion and, above all, money.
Many thought that the whole chain of documents could be turned into electronic data in the very near future. It will, in the end. But it will take more time than expected…