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A Nordic Tour of LC Business
In general
The LC in an
integrated - but not dominant - instrument in the Nordic countries. The
choice of payment instrument is almost determined by history. The LC is
thereby dominant on what you may call the "Emerging Markets"; i.e. middle
east, Asia, Middle and South America - and some countries is the eastern
part of Europe. This is of course a very "rough" picture and all kinds of
variations do of course occur.
It is very
rare that the LC is used for intra Nordic trade. This is almost limited to
transferable credits (e.g. shipment from China to Norway - through a
middleman in Denmark). The same goes for trade with EU. Here the vast
majority of transactions is done on open account basis - often guaranteed by
a credit insurance company.
For
developing countries it is another story. Here the LC is often used - even
if there is a strong and long relationship between the commercial parties.
There may be many reasons for that. One can be governmental requirements in
the developing countries - other can be to diminish political risk.
It seems in
those regions of the world there is a strong faith in the LC instrument, for
what reason the LC - in itself - may be a door opener for trading relation
ships between the Nordic countries and developing countries.
For Africa it
is another story. The trade with Africa is almost limited to aid projects
with government support.
World trade
is dominated by open account - which amounts to more than 80% - while LC
trade only accounts for a little more than 10%[ii].
It is evaluated that this picture is also valid for the Nordic countries.
Financial supply chain
In the Nordic
countries - just as in many other developed countries - companies are
focusing on the financial supply chain. In that respect it goes without
saying, that the LC is in focus:
-
It is
considered relatively expensive
-
The
document phase / process is manual
-
The
"guarantee" that it provides depend highly on level of knowledge that the
parties have; or saying it another way: Many exporters have problems
complying with the terms and conditions of the LC.
As a
consequence of the above there is a swift from the LC to other payment
instruments - e.g. open account. There are examples of this showing
companies going from a "full guarantee" (e.g. confirmed LC) to no risk
coverage at all.
In general
the trend is that the volumes are slightly increasing - while the number of
transactions are decreasing[iii],
so you can say that this points at Less bank involvement and
Greater corporate risk.
It is however
still so that for new relations e.g. between a Nordic company and a company
in a developing country, the LC is still considered the best starting point.
Competition -
Nordic Competitive
The LC
competition scenario is very different in the four Nordic countries.
-
Finland
is (in market share) dominated by Nordea. Foreign banks like Danske Bank
and SEB are, however, very active on the market.
-
In
Norway, the largest bank is DnB followed by Nordea. Also here there
is foreign presence, increasing competition.
-
Sweden
is characterized by a number of very strong banks - so the competition is
very hard on the market. In the northern part of Sweden (Stockholm area)
you will find some of the very large corporations doing project based
export - while further south (Gothenburg area) you will find the trading
houses doing many relatively small transactions requiring speed and
extremely sharp pricing.
-
The market
in Denmark is characterized by Danske Bank and Nordea. There are, however,
a handful of smaller banks also doing LC business - some very strong in
the local area.
(See ViewPoint interview with Rolf Felber: The Danish DC-Club on
www.lcviews.com)
Electronic - Nordic Electronic
By tradition
the Nordic countries are well advanced on the electronic side. As far back
as the mid 80's some of the banks offered systems allowing the customers to
transmit the LC application in electronic format (See ViewPoint interview
with Reinhard Längerich: Looking back to look ahead at
www.lcviews.com).
Since then, these systems have been sophisticated - and today basically all
of them are based on a web browser providing two-way communication -
comprising of both LC's, collections and international guarantees. Other
systems like Bolero, @Global trade and TradeCard have not (yet) experienced
any "break through" in the Nordic Region. This goes - strangely enough -
also for some of the features they offer - like document preparation. There
are however "pilot systems" in all of the countries trying to find a
suitable/workable model for the market.
Interpretations - Diversity
amidst Unity
For people
outside the Nordic region, it will probably seem like a very unified region
- culturally. But actually there are many cultural differences - and also
language differences. Similarly, there are some interesting differences in
LC interpretations in the Nordic Region. Here are a few examples:
-
Silent confirmations
Some
countries perceive silent confirmations as 98% alike a "normal"
confirmation; the basic "checks" are the same: Is the LC ok? Is the bank a
part of the credit (nominated), country/bank risk, customer relation ship
etc? Only difference is the issue of amendments - where a separate
agreement must be made with the beneficiary. Others ,on the other
hand, perceive as something completely different (outside the UCP 500) -
that will require the beneficiary to sign a contract e.g. transferring his
rights under the LC - and pricing it higher than that of a "normal"
confirmation.
-
Negotiation
-
Another
difference is negotiation where in some countries there is no distinction
between a credit available by payment by and one available by negotiation.
In others, there is a very distinct difference, e.g. when the beneficiary
is paid and whether this is with or without recourse.
-
LC availability
-
There are
also national differences between how an LC is issued. Is it (only)
available with the issuing bank, or is there a nominated bank? Do the LC
provide access to the funds (eg. via a reimbursing bank) or will the bank
transfer once the credit compliant documents are received?
To
sum up, in LC matters Nordic is competitive, electronic, and diversified
REFERENCES
[i] Source: Nordea Economic
outlook April/may 2006 - avaibale via this link:
http://www.nordea.com/sitemod/default/widecarea.aspx?pid=825802
[ii] Source: Global Business Intelligence Corp report
commissioned by Misys
[iii] This also seems to be one conclusion from the
"2005 DC-PRO - LC Market Intelligence Survey"; link:
http://www.dcprofessional.com /
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