The law of diminishing returns

The law of diminishing returns

February 2023
Why is change so difficult?

In our previous analyses, we established that banks are not optimally set-up to deal with the settlement of international trade, in particular, when goods are transported internationally. We have given an overview of the typical issues that often arise when working with LoCs. We even received feedback from many companies reflecting that if a LoC is required, they will decline the business. Having observed this behaviour it became quite easy to build a case for an escrow service as an alternative, being much more efficient, transparent and secure.

One would then wonder: if the LoC as an instrument is cumbersome to use and expensive to administer, why is its usage still so widespread? Well, ingrained habits (such as smoking, to use a metaphor) are difficult to quit. Take for example the bank cheque. In some countries, it took a decade to switch to electronic banking. The plain truth is that most people are not very open to change, even if change were to yield some serious benefits.

Another driver blocking change is the number of parties that have to be engaged and committed to effect any change. The higher this number the more difficult it becomes to achieve change. When switching from a LoC to an escrow service to enhance secure settlement in trade, both the seller and buyer need to be convinced. Both will have operational departments dealing with the processing of LoCs. The introduction and implementation of a new process obviously takes time. If you were to take a manufacturer of chemicals as an example, you will find that this company would even be employing dedicated ‘Letter of Credit Officers’. You can image there will be a lot of resistance to change.

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