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The LC is dead. No, just kidding.

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 plan.

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!
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Comments: (1)

A Finextra member
A Finextra member 18 July, 2007, 18:14Be the first to give this comment the thumbs up 0 likes

Agreed that LCs are not dead, however I believe they're in slow extinction, driven mainly by new technology-based paradigms that lower trade risk.

Several facts that back my assumption: technology has brought closer trade participants through improved and low cost communication channels (email, videoconference, etc). The internet enables easier access to counterparty's information and published opinions. New B2B websites perform risk analysis checking facts for companies that wish to trade abroad - certifying that the counterparty is legit.

I agree that today foreign trade cannot be based on pure open account transactions, however we'll reach a point where the cost of LCs - time consuming and expensive - will surpass the cost of trade risk - declining each day as technology evolves.

 

Olivier Berthier
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Olivier Berthier

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Moneythor

Member since

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This post is from a series of posts in the group:

Financial Supply Chain

In the world of international trade, the process of exchanging payments, information and documents between buyers, sellers, banks, and other involved parties is becoming increasingly important for financial institutions. This community aims at presenting views and innovative ideas related to this financial supply chain space.


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