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Paperless LCs.

Paper makes the world go round, especially in banking -- where original documents and copies -- stapled, stamped, redacted and re-edited swirl around our desks in a chaotic ballet between bank, exporter and freight forwarder. Technology magazines and MIS departments are paving the way for finance and credit professionals to begin to enjoy the benefits of the Internet revolution. Until very recently, exporters could only send e-mail and look up limited credit reports as part of their due diligence to clear a path to faster payment from overseas customers. The next year will bring about the first generation of paperless methodologies designed to supply transaction parties with data -- not paper!

Currently, bank examiners look at transport bills for consistency with the LC itself, taking the "on board date or flight-date at face value. Never is there a call to the forwarder to confirm the actual transport of the goods. Cargo shipments miss flight and departure dates routinely. When transport documents are to be rescinded and new 'originals' issued, more times than not, the incorrect originals make it to the bank for examination. (This is one of the causes of discrepancies.)

Why hasn't the banking establishment been more forceful or inventive in trying to solve the inherent delays and problems associated with LC document presentation? Even with the advent of word processors and the flood of LC seminars, (a marketing gimmick rather than a true attempt at lower-the-discrepancy-ratio), error rates still hover around 60-70 percent. The fact is: bankers and exporters have come to accept the problems associated with international paperwork as status quo, or the "cost of doing business". Exporters need to demand from their banks that programs and services be provided to take advantage of current technology and security techniques.

LCs have been a viable financial transaction for over 400 hundred years, yet there has not been a major initiative to benefit the exporters. (Many LCs still require that drafts come in duplicate: this is a practice left over from when clipper ships were used to move cargo!) Banks have the ability, through their secure SWIFT network, to issue and receive LC advices and amendments electronically. Yet there has been no attempt, until very recently, to allow beneficiaries to supply documents over that secure pipeline back to the issuing bank. No doubt that one reason for the lack of action is cost. SWIFT membership and the addition of new services and capabilities for banks have a high set-up and maintenance cost. Unless there are many, many transactions to spread the costs, each transaction can be prohibitively expensive. One other reason is the banks like it this way: they tell you that they would prefer clean transactions and that they only assess discrepancy fees as a last resort; however, common sense dictat es that once a discrepancy is found and not cured, then the 'obligation to pay' is voided. Yet, LC bank fees, plus penalties still apply. This is a strong revenue-stream for banks!

Before the masses rise up against the bank establishment, exporters must be willing to make themselves available to benefit from the possibility of a paperless transaction. The exporter's computer systems must be flexible to send commercial invoice data in multiple formats. A huge challenge for bankers and freight forwarders as well as third parties (inspection, insurance and legalization) is how to send, receive and verify data sets. There are various shades of EDI, and the new XML standard is going through constant revisions. Even with these shifting standards, exporters must be willing to commit IT resources so their systems can talk with other trading partners and services.

The acceptance and implementation of Digital ID's (or "electronic identifiers") is close at hand. Legislation needs to be drawn up and passed to allow for the ink alternatives. With this technology, an authenticated audit-trail is produced to confirm who and when a document (or data set) was issued. The concern over security often arises in conjunction with web transactions: someone could hack in and view or steal the information sent. How do you know who really sent the information? Turning that argument on its side: how difficult is it to steal a courier package? Do you really know when a paper document was signed? Backdating is a common practice. Unless one has a signature card for everyone, how does an examiner in Taipei really know if an authorized person in San Jose signed the Commercial Invoice?

The concept of Prima Facia (Face Value) is the primary tenet banks employ when reviewing documents. Should we really be so comfortable with this weak standard, given that the bank goes through many rounds of authentication verification to ensure that the electronically issued and sent LC is covering a real transaction and obligation? Shouldn't exporters try to gather and disseminate information with similar rigorous security standards?

Let's consider the positive results of creating a paperless LC system.

The Speed and Cost Savings of E-mail Delivery

1. The advising and receiving of the LC could be done as a secure e-mail. The "original LC" could be printed at the exporter's location, while all other prints would be copies. (QLC uses this technology today.) Confirmation of receipt and read would be available. Audit trails of amendments would be easier to manage and maintain. There would be an elimination of courier fees ($20-$45 per credit) and a probable reduction of advising fees ($75-125).

The Speed and Cost Savings

2. Receiving the LC parameters in a consistent, structured fashion. Currently, LCs come in cable form, paper form and SWIFT form. While all of them have been workable, they all have major drawbacks. Cable is expensive; paper is unreliable, and subject to much interpretation. (Does an X on an Indian LC mean include or exclude?) A SWIFT LC does not come with a key to help interpret the field codes. The beneficiary is paying an advice fee but does not receive a key to unlock the secret code. If you misinterpret the secret code, you get penalized twice: fees and cashflow loss.

This structured data can be conformed to create the documents needed for LC presentation. Granted, it is initially very expensive, but the results are a marked decrease in typographical errors, quicker presentation and elimination of most discrepancy fees.

The structured approach also reduces the applicant's ability to request odd documents or certificates with beneficiary statements that can be interpreted many ways, leaving the exporter exposed to interpretation rather than a yes/no fill-in-the-blank answer.

3. Presentation of documents to the examining bank would be instantaneous. No more courier fees! Instead, an electronic receipt to insure delivery, thus eliminating late presentation arguments. Examination of documents would yield more consistent interpretations.

Banks would benefit because their examiners would be more productive in reviewing document sets.

Corrections would be a matter of email exchange, instead of expensive courier use.

4. Documents can be forwarded overseas in seconds--not days. Documents can be generated, reviewed and delivered to the paying bank overseas in less than 36 hours: start-to-finish.

To make this a reality, consensus among bankers, freight forwarders and exporters regarding data structure, data movement, security and identification needs to begin.

Will paperless LCs become the norm? Sure--someday but not anytime soon: changes are coming, and a complete transition to electronic data is imperative to the continued use of the Letter of Credit transaction. But the reality is that any conversion will be expensive in terms of hardware, software coding and--most importantly--culture. Historically, LCs have been paper-based, creating a culture here and abroad that accepts stamps, ink and watermarked paper as the only representatives of truth. The acceptance of electronic originals needs to be pushed by business people looking to weed out the inefficiencies of the trade finance marketplace, by building upon the methodology instituted by banks, which can use state-of-the art technology to confirm identities of the parties and accuracy of the data.

The ultimate responsibility lies with the exporter to push for these changes. There are some banks getting ready to embrace the paperless transaction, but the overwhelming majority will wait until the business (fee streams) dry up because a better mouse-trap is being used by other vendors. Reduction in man-hours to handle these documents will become minimal, and overall banking fees should be reduced and payment times shortened: all equating to a measurable decrease in cashflow loss. Encourage banks to receive your documents electronically; either through an in-bank delivery system or via secure e-mail. Develop a database that links with your invoicing system, so the final commercial invoice and packing list are compliant. Make sure that the freight forwarder is versed in LCs, or use a document outsource service that is dedicated to all these things, and securing your payment as well!

David W.Clements is President of Quality Letters of Credit Inc. Mr. Clenents is a 1981 University of Massacbussetts at Amherst graduate and speaks frequently on Letter of Credit topics nationwide.
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Title Annotation:Letters of credit
Author:Clements, David
Publication:Business Credit
Geographic Code:1USA
Date:Nov 1, 2000
Words:1484
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