International Commercial Terms (Incoterms) define the responsibilities of buyers and sellers for the delivery of goods under sale contracts. They are the authoritative rules for determining how costs and risks are allocated to the parties.
The International Chamber of Commerce (ICC) has introduced new rules for the use of domestic and international trade terms, which entered into effect on 1 January 2011.
Source: International Chamber of Commerce
Key Changes of Incoterms 2010
The following are changes embodied in the new Incoterms rules:
- DAT and DAP replace the Incoterms 2000 rules delivered at frontier (DAF), delivered ex ship (DES), delivered ex quay (DEQ) and delivered duty unpaid (DDU). This means that the seller bears all the costs, other than those related to import clearance, and risk involved in bringing the goods to the named place of destination.
- DAT delivery occurs at a named destination, at the buyer’s disposal unloaded from the arriving vehicle. This replaces DEQ in Incoterms 2000.
- DAP is, similarly, at the buyer’s disposal but ready for unloading. It replaces DAF, DES and DDU of Incoterms 2000.
Imapct on Banks’ Trade Finance Systems
Banks need to enhance their systems to populate and receive the new Incoterms added as part of the 2010 revision. Banks can have a two-pronged solution approach:
- A short-term/tactical solution to add the new Incoterms by means of scripting.
- A long-term/strategic solution to make changes to the graphical user interface (GUI), templates, etc.
The banks’ trade finance systems may require the below changes to accommodate the changes in Incoterms. However, the extent and the complexity of changes are mostly system dependent.
Affected Modules/Systems
The following are the possible impact areas for banking systems and applications:
- Letter of credit (LC) issuance module.
- LC advising module.
- Import bills module.
- Export bills module.
In the trade finance system, the following modules/program and programmes require changes:
- LC issuance programmes default some standard clauses such as documentary requirements, special conditions for LCs based on the Incoterm entered. Changes, which may be a combination of code changes and static data changes, will be needed to default suitable clauses for the new Incoterms.
- Inclusion of new terms in dropdowns – most of the systems have the Incoterms included in parameter or static data tables. In such cases, changes will be required to include the new terms in the table.
- Add suitable checks in LC issuance/advice programmes to ensure that the four outgoing Incoterms cannot be used after 1 January 2011. These cannot be deleted from the parameter/static data tables immediately on 1 January as most of the transactions booked until the end of 2010 may have used these.
- SWIFT message generation programs in the trade finance system may not require any such changes.
- Customer access/channel management – banks have integrated channels for customers to initiate payments. These channels need to be enhanced to ensure that the trade initiation requests have the new Incoterms available for selection.
- Some banks use automatic or semi-automatic document validation packages for processing LC documents. In case the package provides the features of a term-based checklist for bill entry and/or auto identification of discrepancies, these programs will need enhancements to incorporate new checklists, screen fields and rules to determine the discrepancies.
- The new Incoterms are ‘mode of transport’ based. So if currently the systems of some of the banks are not capturing the mode of transport, they need to capture this going forward.
The above changes may be required across the trade application landscape of banks, as most banks have separate systems for customer facing trade channels, trade processing and backend systems.
The author would like to thank the TCS banking domain team for their contribution to this article.