A surprising report in a Hong Kong newspaper that letter of credit (L/C) usage has fallen by more than 80 per cent in recent years will most likely raise questions in certain quarters of the trade finance community.

The claim of such a large drop in L/C usage is attributed to a representative of Atradius, the world's second-largest credit insurer, when it announced the launch in Hong Kong of a new online credit insurance product.

Open account preference

The Standard newspaper reports an Atradius representative saying that with recent trends towards more open account trading, the risks for non-payment are becoming larger, thus exporters and trading companies faced with buyers' apparent preference for open-account trading could lower their non-payment risks by obtaining credit insurance on the Internet through its new service.

Tradecover as the new Atradius product is known, is basically a web-based credit insurance product that claims to provide access for companies and banks to speedy insurance cover, bypassing the often lengthy delays associated with obtaining traditional credit insurance services.

Market opportunity

Credit insurers perceive a market opportunity in the apparent preference of buyers and sellers for open account trading, coupled with fears on the part of the seller that it will not be paid for goods or services.

"Credit insurance is a particularly topical issue in Europe now, with the collapse of some big corporations in recent years, such as Parmalat and Swiss Air, resulting in many payment defaults," according to a general manager at Atradius, Guy Clemens.

Demise

Insurers are also saying that an apparent demise in L/C business is widening their market scope, although it is not clear on what evidence their claims of some apparently enormous drops in L/C business are made.

"Until two years ago, L/Cs were the dominant payment method for companies, used in over 80 per cent of transactions, but has now dropped to about 15 per cent. Open account trading is now over 80 per cent," Atradius' marketing communication manager Henri de Bellefroid is quoted in The Standard as saying.

US influence

One of the reasons given by insurers for the claimed fall off in L/C business is the preference of US firms for open account trading.

"There may be even more open account trading in Hong Kong because we do so much business with US firms. US firms have been driving the trend towards open account trading in recent years," claims Clive Mok, underwriting manager at insurers Gerling Allgemeine Versicherungs, Atradius' local partner in Hong Kong.

Meanwhile, letter of credit experts discounted the Atradius' claims, saying they were greatly exaggerated. "We have heard this story before and can only report that L/C business has remained strong in all the markets we deal with," said one.

The views in this article are those of the author and not necessarily those of ICC or the other partners in DC-PRO.