“If security is required we simply decline the business!“
Having had experience with the LoC process in a number of different contexts we have had a disproportional number of problems with these documents considering the small volume of business we conducted with counterparties requiring LoCs. The problem has been that as soon as something changes that is not foreseen in the schedule the existence of the LoC leads to delays in settling the transaction. In some occasions entangling a transaction that was put on hold due to discrepancies in the documentation required too much time and effort and as a consequence often made these transactions unprofitable.
Having had this experience we decided to decline all business where clients asked for LoCs, or where we felt we needed security. This involved keeping our customer-base tight and only trade with our longstanding relationships or through solid referrals. This obviously put a constraint on business development, but it meant less of a distraction for a company of our size (we don’t have a large department with people that are dealing with banks).
Following a recent off-site and some discussions with our agents it seemed that our stance led to some friction internally with our sales people. To meet growth and production targets they felt they should have more lee-way to produce new client relationships. The opportunity for sales to create revenue growth and hence their opportunity within the company to make money for themselves became more restricted. We have had some resignations over the past year and it became more of a problem to hire new sales people as well as to motivate the current work force.
So, the question we needed to solve was how to speed up the expansion of our client universe without having to set up a larger infrastructure to deal with LoCs. Trading with new clients, obtained without solid referrals from partners in the industry and without security is really too risky.
We were lucky that some clever people from the industry had been thinking about the same problem. A thought ‘out of the box’ led to the creation of an entire alternative process, not merely the digitisation of the LoC; the latter being a document that has been in existence for the best part of 200 years, and, like the cheque, should really be consigned to history.
The alternative, provided by ‘Mercurion Trade Services’ was based on the principle behind an exchange: ‘settlement against delivery’. Effectively an escrow service conducted through a user-friendly cloud-based platform; easily accessible for everyone, globally. Any funds to settle a transaction prior to delivery are held by Baltic Exchange, an institution that has been involved in the business of trade for over 300 years with offices around the world. Being part of Singapore Exchange their security is very solid. The group has a first class record in providing security and settling transactions.
Having discovered Mercurion we were able to ‘open the floodgates’ a bit more and empower our sales force. All in all the implementation of Mercurion’s offering solved some organisational behaviour problems in tandem with our more straight-forward objective to increase profitability. A risk management tool without the complications of the LoC, which is embedded in a state-of-the-art platform providing a very clear and user-friendly interface, really is a no-brainer!