Virtual networks – precondition for successful implementation of eJOP and development of long term relations between participants in letter of credit operations

Eldin Mehić, Mr.Sc.

Vesna Babić - Hodović, Ph.D.

Amra Kramo

Trg oslobodjenja 1, 71000 Sarajevo, Bosnia and Herzegovina

Abstract. Contemporary world exchange (trade) is characterized by increasing portion of e-Commerce. The foundation of traditional world trade and international payment transactions is a letter of credit as the most important instrument of the international payment transactions. Transfer to the e-Commerce conditions the need to transform the mode of opening an international L/C and opportunity to present documents. The main motive of these changes lies in keeping the L/C as a dominant form of payment. In accordance with that, in April 2002 International Chamber of Commerce from Paris issued the Supplement to Uniform Customs and Practice for Documentary Credits for Electronic Presentation or “eJOP”. However, the application of electronic letter of credit has not enough accepted in foreign trade operations. Reasons for not accepting are directly connected to not understanding the provisions of the eJOP, not knowing how the technologies that are used to present a document function, and finally lack of respect for advantages that creation of virtual networks offers for improvement of quality of L/C operations and building and improving mutual relations between business partners. Regarding that, in this paper a hypothesis that virtual networks enable easier acceptance of electronic L/C and developing long term relations between participants in L/C operations has been analyzed. To test this hypothesis in this paper the mode of functioning of electronic L/C has been analyzed, with the special reference to electronic presentation of bill of lading, possibility of using XML technology for document presentation and possibility to create virtual networks based on use of application services in electronic business. The most important results of survey are:

  • participation in electronic L/C operations, from enterprises and banks, demands standardization and integration of mutual relations which results with infusion (amalgamation) of theretofore separated value chains
  • progress made by ICT technology is basis for making a virtual network of values that enable enterprises and banks to link with similar infrastructures, which are developed by their partners in L/C operations.
  • basis for creation of virtual network between participants in L/C operations needs to be XML technology and application services, based on it, for electronic presentation of documents, like Bolero.
  • creation of virtual network for participants in L/C operations offers decrease in costs of doing business, security of data and transactions, and exchange of information with what the main reasons for not accepting the electronic L/C are eliminated.
  • use of virtual network in L/C operations will directly influence on increase of satisfaction of business partners and development of long-term relations between banks and enterprises.

Key words: virtual networks, L/C, long term relations

  1. Introduction

Globalization and deregulation, in combination with the development and advantages that information technologies bring, condition radical changes in managerial context of modern business, especially in a field of communication and cooperation between participants of the exchange, companies, agents, and banks.

In that context, the changes in international payment transactions and usage of letter of credit (L/C) are noticeable, which is today the most secure and most frequently used instrument of the international payment transactions. Reasons for expansion and acceptance of L/C in business practice are consequence of global nature of world’s economy and domination of distant sale in the international trade. Above all, it is it about not knowing at all or not knowing well of your partner, long transportation – often by ship, need for safe payment, realization of the delivery according to the contract, overcoming the risks, that may happen because of the separation of delivery and payment, numerous economical and political risks that follow international business operation.[1] Ignoring the above mentioned reasons, philosophy of L/C is determined by need to meet two, in fact, opposite demands: security of reimbursement for the sold goods and security of realization of the delivery according to the contract. That is possible to achieve including the bank/banks in which seller and buyer have confidence.

Technological development directly influenced practice of L/C creating the need to create electronic equivalent to the paper documents and construction of corresponding regulation for their implementation in electronic way of doing business.[2] Because of that, ECE made seven messages in EDIFACT standard.

According to UCP 500, electronic way of doing business in L/C shows in the moment when notifying bank notifies the user that the L/C of certain content has been opened in his/her advantage or that the change in L/C had occurred.[3] In that case, usage of the communication technologies has differentiated two possible ways of fulfilling the obligations of notifying bank:

  • Authentic electronic tele-transmission of L/C is an operative L/C document, unless something special in it has been said. Additional postal notification does not creates a commitment for notifying bank to compare the text delivered by electronic media with it.[4]
  • If the teletransmission says “full details follow” or similar expression that implies on additional sending of the written L/C document, than teletransmision is not operative instrument to open or change L/C.[5] In that case confirming bank needs to send new L/C in paper form, i.e. its change.[6]

According to the previous, it is possible to conclude that eUCP 500 rules have successfully introduced L/C into e-business and enabled creation of EDIFACT messages for electronic opening and notification of L/C.

2. Electronic letter of credit

2.1. “eUCP”

Because L/C is a mechanism of payment that works with presentation of the documents, practice demands that process of L/C transition continues towards e-commerce and bringing the rules that will enable electronic presentation of the documents. As a response, Banking Commission MTK has established Working Group that had experts for eUCP, electronic trade, legal issues, and with them connecting industrial branches to prepare corresponding rules as a supplement to eUCP 500. Result of Work Group after 18 months is Supplement to Uniform Customs and Practice for Documentary Credits for Electronic Presentation or “eUCP”.

Issuing eUCP, traditional practice of doing revision of uniform rules, has been abandoned because of the wide acceptance of eUCP in practice.[7] eUCP is the supplement to UCP that is going to be used together with UCP, insure necessary rules for presentation of electronic equivalents to L/C on paper.

In legal technique of creating rules of e-business with this supplement, MTK confirmed its commitment that it does not bring independent codification of the rights to do business and presentation of the documents using electronic media, but existing rules are adapted to the specifics of this media. eUCP is made, that it does not depend on development of information technologies and systems for electronic trade, that it does not determines technologies nor systems that are necessary to present documents.

According to the explanation in preface, eUCP is written in a way that UCP 500 and eUCP work together. It contains 12 acts that are consistent with the UCP500, except in cases where they are talking about electronic presentation. In those cases, the changes with eUCP have been made to make a difference between presentations in paper and electronic form. To avoid mixing UCP and eUCP articles, eUCP articles are marked with letter “e” that proceed to the number of every article.

To realize the advantages that creation of virtual networks offers for improvement of quality of the L/C business special significance have acts that describe the form, the presentation, review, the issue date and transportation.

2.1.1. The Format

According to the regulations of eUCP, it is necessary to specify the form in which electronic records have to be presented.[8] Form represents organization of data in which electronic transcript has been encoded and to which relates and uses for description “system language” or protocol in which the electronic transcript has been coded. Specification of the form has the biggest significance during the review of the document. Therefore, we think that its navigation is in the interest of all participants in the business.

eUCP does not say precise about the specification of the form, so it is necessary to specify the form that it can be understood by the user and by nominated banks. Usually, specification relates to the abbreviation, where it is very important to stress the version of the form that is acceptable because of the fast development of the software (e.g. Word 6.0/95). In one L/C that goes under eUCP it is possible to demand different forms for different documents. In that case, electronic transcripts need to be presented in demanded forms.

2.1.2. Presentation

Presentation of the documents that completely follow all L/C terms in obligatory terms represents a base for reimbursement of L/C. Presented documents for notification bank and a buyer represent a proof that the goods is really shipped to the buyer according to the agreed quantity and quality. (That it is insured from transportation and other risks depending on agree term of INCOTERMS). For seller it represents the means that he/she is going to use to charge agree value for the goods from confirming bank. That is way is so important while making an agreement to precisely decide on documents that as going to be presented in L/C situation.

Development of the technology preconditioned acceptance of possibility of presentation of needed documents required in electronic form. In that case important elements that have to be determined are:

  • Place of the presentation in form of certain electronic address of confirming bank or bank of payment, i.e. place of presentation in traditional sense for presentation of paper document, if the they are anticipated.
  • Eventual link for external system, if the electronic transcript is possible to be examined using reference to external system.
  • Possibility of separate presentation, which is the consequence of awareness of the reality of electronic transmission (even when all the documents are sent at the same time they do not arrive all the once) and tries to speed up the way of doing business (if the electronic transcripts are sent to a bank directly from the side that creates them).
  • Responsibility of the user to deliver notification to the bank about finished presentation or complete presentation (in electronic or paper form).

Besides the duty of presentation in a terms of validity of L/C, condition that electronic transcript is going to be presented is its verification that includes verification of an identity of the sender and message to be unchangeable while transmitted. Electronic transcript that cannot be verified using the electronic signature is not going to be considered as presented.

In some cases linked with electronic presentation its eUCP regulations are not precise enough. E.g., in eUCP regulations it is not emphasized obliged specification of the media that it is going to be used for every document to be presented. Besides, eUCP L/C can ask for obliged presentation of B/L as electronic transcript, but without mentioning the media for other documents. This conditions the difficulty in interpretation of that L/C and demands consolidation and standardization of communication between partners.

2.1.3. Examination

eUCP regulations determine as a moment of reception of the documents, moment of entering the information system of the receiver, in form suitable to be accepted from the same side.[9] With that, the confirmation of the reception from the receiver is not demanded. That way the sender does not have the information did the sent transcript arrived to certain address and is it possible for receiver to use the same one. On the other side, important element for procedure of L/C is the fact that confirmation of the received message does not represent acceptance not rejection of the electronic transcript, which is very important for realization of payment based on documentation that has to be presented.

The fact is that development of software, for electronic communication and possibility of sending message automatically about confirmation of reception, enables very simple solution to the problem of sending confirmation of message reception. According to the eUCP regulations, that does not mean accepting or rejecting electronic transcript. Regulation like that should not limit usage of different forms of software solution for confirmation of reception, because eUCP is made that it does not depend on system from electronic trade.

On the other side, during the examination of the electronic transcripts it can happen that bank is not able to check electronic transcript in presented form, especially in a case when eUCP L/C allows that the transcripts can be presented in any form. That kind of case according to the eUCP cannot be a base for rejection of the presentation, but the emerged situation is not advantageous for the user of L/C, because it slows down the payment for L/C. That is way; like in previous case (form), to avoid those kinds of situations, obliged specification of the form of presentation of electronic transcript is recommended. That way a bank that revises the documents can ensure the necessary software for revision of specific form on time.[10]

2.1.4. Date of Issuance

In L/C business, according to UCP 500, date of issue of document, that is not older than the date of issuing the L/C, represents means that is used to check validity of the document and defines terms for the presentation. In accordance with that, dates of issue should be defined with electronic transcripts as well.

Here the differences between eUCP and UCP are noticeable, because according to the eUCP date of issue does not represent the obligation for issuer. Namely, with eUCP regulations hierarchy method for determine the date of issue and acceptance of electronic transcript is determined[11]:

Date indicated on electronic transcript is considered as a date of issue

If the previously indicated dates do not exist, date of issue is the date when it seems that the transcript has been sent by issuer.

Here it is necessary to do a supplement that is about determination of the date of acceptance and it is linked with previously explained presentation problem. Namely, if none other date is not obvious, i.e. if the previous recommendation about sending the confirmation of reception is not respected, than the reception date is a sending date.[12] This directly implies to the need of sending message about reception from the receiver, so that the date of receipt would be obvious and acceptable and to stop possibilities of manipulation with the sending date (and receiving). This is very important in a case of transcript that is not good, because it defines that date of reception changed or repeated transcript.

2.1.5. Transport

Date of loading and shipping the goods is very important for document presentation, because for every L/C that refers to the transportation document needs to set the exact term after the date of delivery in which the presentation has to be done, and in accordance with the L/C conditions. If the term like that is not set, the banks will not accept the documents that are presented to them after 21 day from the day of delivery.

Here again, in a sense of defining certain categories, the specific of eUCP is noticeable. According to the article 10e, if the electronic transcript that proves the transportation does not indicates the date of shipment or sending date, the date of issuance of electronic transcript will be taken as date of shipment or sending date.[13] If the electronic transcript has a note that proves the date of shipment or sending date, the date of the note will be taken as date of shipment or sending date. In a case that the note that shows the content of extra information exists, it does not have to be separately sign or verified on other manner.

The problem is the fact how and when the mentioned note should be presented (together with the transportation document or separately, what will be considered as a date of shipment in a case of separated presentation and how the extra note should refer to the transportation document.

Analyzing the acts of eUCP, it is possible to conclude that eUCP shows non-sufficient precision in including electronic media as a means of presentation of L/C documents.[14] The most important are:

  • Determination of the media that it is going to be used for presentation of the document
  • Indicating the place of presentation
  • Indicating the form in which electronic transcripts need to be presented
  • Indicating the date of issue of the document.
  • Indicating the date of loading or transportation of the goods and
  • Presentation and way of connecting the extra note to the transportation document

However, we think that mentioned cases do not represent significant obstacle in eUCP implementation, because they are mostly the consequence of eUCP independence from technologies and systems for electronic trade and that they can be overcome with the creation of virtual networks that would encompass all the participants in L/C business. It is necessary to emphasize that first two problems do not have a direct link with the usage of virtual networks for electronic presentation of documents, because are about clear definition of L/C terms that result from sale contract.

3. Virtual networks, electronic signature and XML – base for electronic presentation of L/C documents

Taking into account mentioned characteristics and specifications with what we confront while using L/C, it is possible to conclude that the creation of virtual networks as a base for L/C business is going to be very determined by the concept of value chain of mutual partners and increasing usage of outsourcing in the field of IT services.

Implementation of virtual networks conditions redefinition of the value chain concept for the companies. Namely, creation of virtual networks causes overlapping of the value chains of the different organizations that are included into virtual network. This, for the consequence, has bigger virtuality of the space in which the businesses are done. Electronically connected companies build the network of values that are supported by intranets of single companies and mutual extranet. Linking the business processes between buyers, suppliers and other business partners with the aim of accomplishing business goals leads to the integration, i.e. amalgamation up to those point-separated chains of supply and demand. That kind of integration demands electronically supported communication inside of complete business process. The base for amalgamation of value chain is technological development realized through the convergence of information and communication technologies and phenomenon so called Internet technologies. Instead of building and establishing bigger number of separate communication channels, the company can develop own internal communication structure – intranet and link it directly with similar infrastructures that are developed by its relevant business partners, creating flexible and effective extranet that enables transformation into extraprise. Integration of business processes and flows of information results with the implementation of one very new business model called Virtual Value Network.[15]