The Online Documentary Credit Process in Germany
Although documentary credits have traditionally been done manually, involving a laborious paper-based checking process, the Internet is now catching up with trade finance. It was one of the last areas of corporate banking to remain unautomated, but there are now a range of new services from banks and software companies that are helping corporates to open letters of credit (LCs) online and enable subsequent documentary checking to be done automatically.
As commercial banks are the main players in the documentary credit market, they have been the first to introduce electronic formats to their LC, payments and collections services. This has led to an increase in efficiency that is much needed at a time when the documentary credit business has stabilised and companies are moving their trade business onto open account.
The corporate portal is an integrated application that has several international components, such as a payments application, a trade finance platform, a cash management solution, an FX dealing module and a special stock option plan system. The trade finance part of the platform has two major functions. The corporate is able to see all the export LCs that are opened on its behalf by the bank. It can view all the details online and can manage them online. The corporate can also apply online for new import LCs, which means they can enter in all the necessary data online, which is transferred to the bank and opens the LCs on the corporate’s behalf. You do have to input all the data that is needed to open an LC, for example the recipient, the shipment and the details of the document.
This is not a new way of doing LC business but at the moment it is general practice to provide all these details in paper format to your bank. One advantage is that you can also make changes to LCs at a later date through the system and you can basically manage your LC business with this system completely online. There is no difference in the way you input the data online to how you would normally do it in the manual process through your bank. You can see what you have applied for onscreen as well as make changes in the run of a normal LC, such as the amount, the due date or the duration.
Fraud and security is a big issue for the online processing of documentary credits. Most banks use various tools to manage online security. Some banks use a process whereby the corporate user must enter a personal identification number into the system in order to access the LC application. Another method is to use a system where the data that is entered into the LC application must be checked and digitally signed by two or three designated people within the company. Banks are also using various validation functions for their online trade finance products, which will alert the customer if an invalid amount or currency has been entered.
Once the data to initiate the LC is entered into the bank system by the corporate, it is then managed in a straight-through manner, and is transferred electronically to the back-end system of the corporate’s bank where the processing takes place. Crucially, the data is not printed out and punched in again, as would happen without the bank’s online trade finance system. From the front-end it goes straight into the back-end systems of the bank and from there directly all over the world where we have to open these LCs.
The use of documentary credits is no longer growing in line with the growth in world trade – the volume of LCs has been stable at about 20 per cent of total trade finance for several years. This is particularly true in Europe, where you rarely have to open an LC in favour of a Swiss or French company anymore. However, Commerzbank still sees a lot of documentary credit business with Asia and South America – markets that are not as familiar to European customers. This follows the trend of the global economic situation.