Selling LCs Short … and Wrong

Misrepresentation of how letters of credit are used has sadly plagued the industry for decades. We are all too familiar with marketing pitches littering the Internet that promote the sale, lease, or renting of letters of credit. While these types of ploys have largely been filtered out of our attention, a next generation of irritants has emerged and could prove an even more insidious threat to reputable trade finance.    

A recent surge of unfortunate posts on letters of credit has surfaced on LinkedIn. Many of them recycling ill-conceived, AI-generated images to present a simplistic, inaccurate and incorrect portrayal of the letter of credit process, said Tat Yeen Yap of Maybank, who has taken to LinkedIn of late to dispel the grossest of mistruths and set the record straight. A sampling of Tat Yeen’s effort to target fiction and lay out the facts:

1. LCs do not solve the issue of trust between "parties who have never met".
2. LCs are not guarantees of payment.
3. LCs do not assure that the goods contracted are shipped.

The reality:

1. LC is a credit substitute for counterparty payment risk.
2. LC is a method of trade settlement that mitigates certain risks.
3. LC provides a way for buyer and seller to obtain financing.

So, what’s there to worry about? Those that know the LC business, know to recognize and dismiss the nonsense and distortions. Looking at trade finance more broadly, one very real concern is that the vast and unevenly understood universe of supply chain finance is extremely vulnerable to rampant misinformation, not helped in the least by the intellectually lazy tendency to label SCF as inherently “opaque”. In recent years, this has been a common response to the Greensill debacle and First Brands episode, however, what transpired was something separate and distinct from legitimate supply chain finance. Should that not make it even more incumbent on the trade finance community to push back?

Let us always think before we post to LinkedIn or other public discussion forums whether what we have to say is accurate and adds meaningfully to the conversation. And constructively encourage others to do the same.