The developing world and its booming Trade activities still remain very keen on traditional instruments such as the
Letter of Credit (LC) and will most likely be for years to come. Even in the US, arguably one of the most prominent countries in the world in terms of their use of open account business, a recent survey by Bank of America of US manufacturers and their
CFOs has reported that the banking products used most frequently by CFOs include cash management and letters of credit, both at 66%.
Need more proof?
At a recent event in London, a prominent trade services bank reported on a piece of internal research they had conducted. Their results showed a CAGR of 11% for the value of global transactions processed on an open account basis, while the value processed with
LCs was showing a healthy growth of 7% for the same period - Not exactly dead! Certainly stable or slightly declining in terms of volumes but used with deals of increasing values.
As a supplier of trade services solutions to banks, what is the first product we are still today asked to provide in our solutions, including in the most recent RFI/RFP we have received? The LC.
And it has new rules too with the arrival of the UCP 600 going live on July 1st, 2007. Less rules, simpler jargon for the rest of us, non-native English speakers, some much needed clarification (negotiation, anyone?), etc. All in all, a lot of good things
to make it easier to do business with LCs.
With all this in mind, a friendly advice to any startup thinking about conquering the world of financial supply chain services with pure open account-based solutions: think twice and don't forget to provide strong support for Letters of Credit in your grand
It is clear that Letters of Credit appear to be less required when the economy is good and when no global crisis is looming. But LCs are still the most secured way to trade, so just like the Mini, Apple and Britney Spears, they can always make a comeback!