Payment for paperless trade: Are the viable alternatives to the documentary credit?

Law and Policy in International Business, Fall 2001 by Laryea, Emmanuel T

Unlike paper documents, electronic documents are quick to issue and transmit.103 An electronic bill of lading may be transmitted to, and instantly reach, an exporter shortly after goods are loaded on board a vessel. The exporter can instantly transmit the documents to the importer or the importer's agent and demand payment, which the importer may effect by an international credit transfer.

International electronic funds transfer is also quickly executed.104 If the importer fails to pay after he has received the shipping documents, the exporter may be able to stop the goods in transit before the vessel departs from the loading port or, if the vessel has departed, before it gets too far. 115 In effect, paperless documentation may reduce the delays of paper documentation that compel exporters to demand the payment assurance afforded by credits.

However, an exporter will dispense with the payment assurance and rely on the importer's promise to pay only if he has confidence in the importer's willingness and capacity to pay. The speed of electronic document processes and the ability to repossess the documents and stop goods in transit may minimize, but not eliminate, losses likely to result in case of default. The exporter will have incurred costs by the time its exports are loaded on board a vessel, and these costs may not be recoverable in full by repossessing or re-routing the goods. The exporter may be unable to resell the goods at the price he obtained them, and may need to incur further costs to unload the goods or transport them back to his country. Additionally, the exporter may also have to claim its losses from the foreign buyer, possibly litigating abroad at high costs. Exporters may wish to avoid these problems and demand an additional assurance of payment before they ship goods.

Moreover, if paperlessness is to reduce the need for documentary credit security, such reduction will occur in developed countries where paperless trade is functional. Electronic documentation is generally not available in some developing countries.los The possible reduction in payment assurances by paperless documentation will elude parties in such countries.

Meanwhile, transactions that most require payment assurances are those involving parties in developing countries.'07 Even if paperless documents are workable in developing countries, the question remains whether exporters would be content with ordinary payment undertakings by all importers in developing countries. Exporters are likely to demand further security, such as that afforded by trade credits. If trade credits are to become redundant, alternative means of providing such security will need to be found.

B. Liquidity and Paperless Documentation

Patterns of trade financing have changed in developed countries.los Liquidity demands of trade parties have also changed as a result of the change in patterns of trade financing.los Exporters in developed countries now have ready access to long-term credit facilities that enable them to place less reliance on financing through bills of exchange and pledges of bills of lading.110 The cost of funds has driven banks to place greater reliance on the use of electronic means of effecting international payment, as international electronic transfer systems reduce the cost of floats-that is, the loss of use of the funds during the transfer process."' Information technology has transformed paper-based payment systems of international trade from tangible to intangible systems of value.112 Payment of money no longer involves physical delivery of tangible property but communication of data and movement of messages,13 reducing payment value to symbolic form.' 14 Payments are, in effect, reduced to no more than figures and notations in the books of banks, which reduces the need for cash and liquidity hitherto provided by trade credits! 15