Global trade is built on trust! We used to think that when trust is lacking between trade partners, we need to rely on a trusted third party, usually a bank, to facilitate transactions.
One highly effective tool that banks provide is Documentary Credit, aka a Letter of Credit (LC). This method once dominated global trade. However, in recent times, its use has dwindled to a mere fraction of global trade.
Has the decreasing use of LCs happened because we now trust our trade partners more?
Not really. The decline in the use of LCs can be attributed to various factors such as cost, efficiency, and external expenses (e.g., courier fees, goods storage until document arrival, etc.). Interestingly, one of the contributing factors to this decrease is the fact that 40% of global trade now occurs between adjacent countries, resulting in savings on cross-border transportation costs.
Nevertheless, trade documentation still moves through various courier exchange points, especially during short voyages, which results in higher inefficiencies. Delays in document arrivals lead to additional storage expenses since the goods, quite likely, already arrived prior to the related trade documents. As a result, banks find it challenging to remain competitive in such an environment.
Just imagine a world where trade documents can be sent within minutes!
When a bank adopts digital trade documents, their customers can swiftly expand the scope and coverage of their LCs to also include short voyages.
Embracing this digital approach can make the entire LC process fast and efficient. It will significantly benefit all parties involved and bring a huge competitive advantage to the bank itself.
What will be next? Is the LC as a tool rise from its ashes? Stay tuned to read the next chapter.
An article written by Ofer Ein Bar, VP Business Development