Will the Advising Bank survive the Internet revolution? Some say no pointing to the following reasons:
The paper advice of a letter of credit to the beneficiary can be substituted by secure electronic delivery. With Internet access, an authorized party could retrieve the credit instrument from any place in the world at anytime.
Technology available today is able to replace traditional authenticator, test keys and signature directories in a more efficient and cost effective way. It can also ensure that the right beneficiary is receiving the letter of credit and the beneficiary is the only entity that can view the advice if so selected.
To achieve the desired result the issuance and advising functions have to be combined into one. The traditional documentary credit system allows for this to happen but the industry standard banking practice is entrenched in an issuing, advising, confirming 2/3-bank system.
Can the Internet improve the standard banking practice? The quick answer is No. The Internet alone can not improve the standard banking practice without a system surrounding the information delivery process that fulfills the same needs as the traditional system and more.
What are these needs? The advising bank today has the following functions:
In many cases the advising bank does not engage itself in the credit transaction, and advises the credit ‘without any responsibility on our part’ except in cases where it has been asked to act also as the confirming bank, the transfering bank, or the payment bank. In such majority of cases where the role of the advising bank is strictly advising it is not obligated to make payment to the beneficiary. Payment liabilities remain with the issuing bank.
In such multitude of cases, can the advising bank’s role be viewed as a glorified mailbox with redundant functions?
Wait, there is one more function that the advising bank has.
The advising bank is viewed by the seller as ‘my bank,’ ‘the bank that I trust.’ The seller, on the other hand, in today’s trading environment, views the issuing bank as the ‘buyer’s bank.’ Supposing that the issuing bank function is outsourced to a trusted third party that simultaneously acts as an advising bank, backed by an iron clad irrevocable guarantee of payment subject to the UCP rules, will the beneficiary form a different opinion?
Consider an independant Documentary Clearance Center acting on behalf of various financial institutions around the world solely focused on processing letters of credit allowing various parties connected to a particular trade transaction to upload respective documents using the Internet. It will perform not only the issuing/advising function but also a consultative role authenticating the origin of the credit and allowing the seller to get paid quicker through submission of electronic documents without the need to integrate new software or learn new computer systems.
So what will the role of the advising bank be tomorrow?
Jacob Katsman is the Managing Editor of the L/C Monitor and author of “The Art of Transferable Letters of Credit and Assignments of Proceeds”, www.cceweb.com/book. He is also the founder of the International Trade & Banking Institute, www.itbi.net.