A whitepaper published last month by American Express FX International Payments, argues that while letters of credit (L/Cs) still play an important role in international payment systems, a decline in documentary credit usage should be anticipated.

The paper suggests the primary forces pressuring the L/C market are new technologies and market demands for faster payment systems.

L/C decline

According to American Express, L/Cs made up 41 per cent of export trade finance products handled by financial institutions in 2013, down from 44 per cent three years earlier.

Import trade finance has seen an even more drastic decline, with an 8 per cent decline in the handling of L/Cs between 2011 and 2013 according to the whitepaper.

Gamechangers

ePayment service providers are changing the game for both buyers and suppliers according to American Express, which points to falling foreign exchange currency transfer transaction costs due to electronic systems.

According to the whitepaper, these systems especially benefit medium-sized companies, although smaller companies will be burdened with proportionately larger foreign exchange maintenance and set up fees.

The use of such systems means businesses will decreasingly depend on L/Cs according to American Express.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.