Simplifying the Letter of Credit issuance through Trust

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A letter of credit (LC) is a contractual agreement between an issuing bank, on behalf of an applicant, authorizing the advising bank to make a payment to the beneficiary.

In global trade, LC is the commonly used trade finance instrument to ensure payments of goods and services. LCs are used in 11–15% of the global trade, accounting to over a trillion dollars per year.

A typical LC process involves following parties:

  • Applicant – importer who initiates the LC process
  • Issuing bank – bank that issues the LC for the applicant
  • Beneficiary – exporter for whom the LC is being issued
  • Advising bank – bank for the beneficiary, located in the country of beneficiary.

Challenges in the current process

  • Process latency: With multiple stakeholders at different locations, delivery of documents via courier or other means consumes a lot of time. This results in higher turnaround time at each step of the process, from initiation to LC submission.
  • Security: As the documents pass through multiple touchpoints, they can be tampered with or lost in transit.
  • Fraudulent activity: Once the bank documents are handed to the applicant, they can alter or submit bogus documents.
  • Lack of trust: As there is no clear visibility in the process, this can lead to loss of trust between parties.
  • Restricted visibility: Since there is no real-time visibility throughout this long process, this creates a black box for the buyer/seller in getting the information about the delay point.

To overcome these challenges, it is essential to develop a simplified, trust-based letter of credit issuance solution that would involve the following questions:

  • What are the typical steps required to build a solution for a system based on trust?
  • What components are required to create a system based on trust?
  • What service provider should be chosen to develop the solution?
  • How should the solution scale up as more personas are added to the system?
  • How should the system recognize and authorize its partners?
  • What are the levels of digitization to be considered (for example digitizing a bid or contract)?
  • How should one enable a “need-to-know basis access” feature?
  • How should existing applications be integrated?

The solution:

Capgemini has vast experience in building solutions based on trust. An accelerator built for issuance of LOCs consists of the components built on the Hyperledger Fabric framework, access control mechanism to provide access only on a need-to-know basis, standard set of RESTful APIs for easy integration with existing applications.

An Addon feature is for the applicant to conduct a bid and choose a single bank among multiple banks. This helps the applicant get the best rate and terms on the LC. Below is a short illustration of the accelerator in action:

Benefits of the Capgemini accelerator:

  • Processing speed is increased by almost 90% by real-time, digital tracking of documents.
  • Security All the documents and transactions are encrypted and stored on an immutable ledger, referred in a chain of interlinked blocks. Individual transactions within a channel is restricted by attribute-based access control (ABAC).
  • Fraud: Only the transactions that comply with the consensus configured for the network are committed to the blocks. These interlinked blocks are nearly impossible to tamper with, eliminating fraudulent activities.
  • Trust: Access to the documents is controlled by certificate-based authentication. The documents can be retrieved directly from the immutable ledger, ensuring authenticity.
  • Visibility: Provides end-to-end, real-time visibility of complete process and helps in identifying delay points. This helps in faster reporting and decision making.
  • Cost reduction: Reduces operational costs by 25%–30% by eliminating duplication of efforts towards data validation and reconciliation.

Capgemini, a trusted partner for building trusted networks

Capgemini has an ecosystem to help businesses improve their LOC issuance business processes to achieve better compliance and speed. Capgemini has reference roadmaps to develop a trust network for business processes. A team of domain experts can refine the business processes, and with the help of its team of cloud-native and blockchain experts, Capgemini accelerators play a major role in performing assessments, building target architecture, creating a scalable design, configuration, adaptors, and reusable code patterns. Capgemini has models that can help scale up the solutions at enterprise level. Its benefits have been realized at PoC level. Blockchain service provider alliances enable Capgemini to get required assistance to build an end-to-end solution for its clients.

Conclusion

Any process that requires data immutability, data transparency, trust, multiple stakeholders, need automation of business logic, and system resiliency can have a good impact with blockchain. Any business looking out to upgrade its business processes can save up to 20% in developing such solutions.

This blog is co-authored by Ganesh Prabhu.

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