3 new use cases to grow your Letter of Credit business

The electronic Uniform Customs & Practice for Documentary Credits (eUCP) is an important framework for the digital Letter of Credit, and there is untapped potential for growth. Our Chief Product Officer, Joshua Kroeker, unveils three new use cases and sheds light on how the industry should be thinking about the future of trade financing. 

The consensus is clear – the Letter of Credit (LC) is not going to disappear. But not disappearing is a relatively low target to achieve. I am more interested in a future of growth for the LC – and bank intermediated trade in general – but for that future to materialise, the LC must be digital.

Digitisation is critical to improving the existing poor corporate user experience and also to reduce the cost to serve for banks. Through our launch, we at Contour have learned that our digital LC has the potential to reduce costs by 15 to 20 percent and reduce processing time by up to 80 percent, which greatly improves a corporate experience with the product.  

Beyond cost and processing time, there are other user experience improvements, whether its dynamic and real-time status tracking, intuitive workflows, transaction-linked messaging or simply moving away from paper towards electronic submission and validation of documents. 

Even with all of these benefits, wide-scale digitisation has yet to occur in the industry.

“We must go beyond just “digitising” and look at what these frameworks and these new tools can unlock that was not possible before.” 

The state of progress 

Let’s take a step back and understand where we are today. A Letter of Credit in 2023 provides a global standard of trust in international trade through three mechanisms: The International Chamber of Commerce (ICC)’s Uniform Customs and Practices (UCP) introduced in 1933, the Bill of Lading (BL) which was introduced in 1544, and SWIFT’s messaging platform for MT7xx messages, introduced in 1995.  

These three mechanisms provide the rules and recourse rights (UCP), the trusted title transfer from seller to buyer (the Bill of Lading) and secured digital communication between banks (SWIFT).  

This is the overall framework that governs the LC and provides a common global trust standard – but it does not provide a user-friendly solution and it certainly does not provide a digital one.  

In recent decades, attempts to modernise digital versions of these mechanism have included electronic Bills of Lading (eBLs) in 1999, eUCP in 2002, Uniform Rules for Bank Payment Obligations (URBPO) in 2013, SWIFT MT798 for corporates in 2014, blockchain-based trade finance networks like Contour in 2020 and finally Uniform Rules for Digital Trade Transactions (URDTT) in 2022.  

Significant effort has gone into these establishing these digital alternatives, but the adoption for all of these efforts has been dismal.  

Only now are shipping companies starting to make proclamations that by 2030 they will be shifting to use eBLs exclusively – 31 years after they were created. This is to be celebrated, but what else can we achieve by 2030? If this logic holds, that new ideas take time, we can expect wider adoption of the eUCP in the next 10 years.

eUCP allows for a digital presentation under a LC, where a digital document is the same as a paper document and must be read as if it was paper on its “face”. Any stamps or signatures requested can be digital marks and/or signatures, nullifying any notion that a LC requires paper documents to be presented. 

Importantly, eUCP keeps all the benefits of an LC, but removes the paper. It seems like a fantastic place to start, but it needs a technology solution to match its potential. A digital presentation is only as good as its reach, and given SWIFT does not support most corporates, and banks typically do not accept email presentations, eUCP is a framework without an appropriate technology solution. 

The good news is that new solutions now exist. One of the key reasons Contour was built was to support end-to-end digital presentations that can be accessible by both banks and corporates of all sizes. But just moving existing LC transactions from paper to eUCP does not drive growth. We must go beyond just “digitising” and look at what these frameworks and these new tools can unlock that was not possible before.  

Three “new” use cases for digital LCs 

First, Domestic Letters of Credit. Domestic transactions can benefit from a bank obligation to pay at a future date, reducing the risk for corporates and increasing the financing opportunity, but today the only option available is a traditional paper-based LC. By using an eUCP digital workflow, there is a new opportunity to drive end-to-end digital transactions with lower cost for corporates, increase revenue potential for issuing banks and lower operational costs for all.  

Second, the Direct-Advise Letter of Credit. A typical international LC transaction can be simplified by eliminating the advising bank and having the issuing bank issue the LC directly to an exporter and receiving the presentation back from them. This may not work for all transactions, as an exporter might need a local bank to confirm the issuing LC, but this could work in reducing costs or fees involved in having an advising bank in many situations. As the presentation is digital, the issuing bank also does not need to be worried about whether they have a physical branch near the exporter’s location. In addition, by using a decentralised workflow, there is full security and transparency as to what is happening at every stage of the LC process. 

Finally, the Supply Chain Letter of Credit. This is useful for buyers who want a more transaction-based supply chain financing solution to support a select group of suppliers who may need access to low-cost financing. By using a simple LC, the buyer’s bank can issue a digital Letter of Credit with simple terms and simple document requirements directly to an domestic or overseas supplier. Depending on the relationship, the buyer or supplier to take on the LC fees, and the seller can request low-cost early payment finance direct from the issuing bank if they need.  

These are just a few ideas about how a digital framework – combined with an appropriate technology solution – can drive more than just the digitisation of trade, but also the growth of trade.  

If you’re interested in learning more about Contour’s digital Letter of Credit solution and how it can streamline the trade finance process, please reach out to us here. 








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