Ask the CFO of any company engaged in cross-border trade what keeps them up at night, and chances are, they’ll mention the inherent risks that global trade involves.
International trade operations have to bear the brunt of market and currency fluctuations, geopolitical issues and crises, and overall uncertainty in the international trade partner.
To add to the CFO’s list of worries, these process-intensive trade operations lock up large amounts of working capital for several weeks.
What can help provide visibility and certainty of payment in this scenario is the digital Letter of Credit.
Letters of Credit (LCs) are vital for companies engaged in import and export. In fact, the documentary credit concept has existed since the ancient Egyptian and Babylonian civilizations, who used a basic form of the LC to ensure smooth payments for trade transactions!
But while LCs have been around for a long time, digitalization is making them even more effective in mitigating risks and speeding up revenue realization.
The Positive Impact of the Digital Letter of Credit
Research by the Boston Consulting Group has highlighted the complexity of LCs. A typical end-to-end journey involves a staggering 5,000 data field interactions across over 20 different players. Add to that frequent errors and amendments, and you have one of the most high-effort and time-consuming processes in Exim management.
Digital LCs make a big impact in the following scenarios:
Reducing transaction time and costs
Digital Letters of Credit use artificial intelligence and machine learning to enable real-time document validation, monitoring, and KYC checks.
Legacy systems and manual operations are making way for modular applications and modern API-based platforms like Trezix, for a connected ecosystem that has helped to reduce the LC turnaround time from two weeks to as low as two days!
Freeing up working capital
Here’s a common scenario: Your goods have arrived at customs but the documentation hasn’t because the LC is stuck for verification somewhere. Obviously, that means stacking up demurrage costs.
With a digital LC, what used to take anywhere from 15 days to a month now happens at the click of a button, unlocking 10-15 days’ worth of working capital.
Customer Story: JSW Steel relies on Trezix to reduce LC amendments and free up working capital.
Given our high trade volumes, our export management workflows were complex and time-consuming. With Trezix, we’ve improved efficiency throughout pre- and post-shipment processes and freed up working capital.
Venkatraman Subramanian,
Sr VP, IT and Digital Solutions
JSW Steel
Entering new markets
A digital Letter of Credit makes engaging with clients and selling to new foreign markets easier because there is a sense of trust due to global financial linkages.
Did You Know: Export LCs fall somewhere between ‘AA’ and ‘AAA’ ratings by Moody’s which is a testament to their low-risk nature.
India currently accepts 21 currencies for trade and a trade partner can provide a digital Letter of Credit in any of these. Removing the LC friction from the process naturally helps companies expand their business across geographies.
Business continuity amidst geopolitical uncertainty
The current global scenario has been giving businesses worldwide a lot to worry about. However, they can’t afford to wait out this turbulence.
With their speed, efficiency, and transparency, digital LCs offer a secure way to conduct international trade, mitigating the risks associated with currency fluctuations and trade disputes.
Also read: The CFO’s Guide to Meeting EPCG Export Obligations
Challenges in Trade Finance & How to Overcome Them With Digitalization
Digitalization is helping businesses solve some of the most common issues associated with trade finance instruments like the LC, such as:
- Resource-heavy, manual processes due to the dynamic nature of global trade
- Involvement of multiple third-party entities such as customs, insurance, banks, logistics, and so on
- Complex and rigorous regulations around due diligence and compliance
- Investment required to incorporate multiple technologies such as OCR, AI, ML, and more
Trezix Tip: Future-ready software like Trezix brings industry expertise, cutting-edge technology, and AI together to resolve these complexities. The Trezix SaaS platform automates your entire LC process including draft LC creation, AI-driven checklist, and amendment handling.
Simplify Your Trade Finance Processes With Trezix
The shift towards digital LCs is increasing operational efficiency and reducing processing times, making global trade operations smoother and more reliable.
By embracing digitalization in their trade practices, companies can enhance their financial stability and competitive edge in the global market.
Find out how Trezix can help digitize your Exim processes for greater efficiency and transparency. Request a demo today.
