Methods of payment are sometimes not as efficient as they should be because of exchange control regulations imposed by the government in the country of import, or because traders are not fully conversant with the implications of certain methods, or because they wish to over protect the payment. These restrictions are generally counter productive and result in deterring rather than encouraging trade.
One of the most widely used methods is the Letter of Credit (L/C). The Documentary Credit system which has been in use for over a hundred and fifty years was introduced to provide payment against proper presentation of documents. L/Cs are used for consignments of both very low and very high value, even though for low value consignments this method is not always economically justifiable.
The requirements for a L/C vary considerably throughout the world, the more difficult cases being associated with developing countries. For example, a credit from one of those countries could well be expected to consist of four pages of requirements, which must be strictly adhered to, and are often contradictory. (See recommendation O.1)
Research in the United Kingdom has also indicated that in over 50% of cases, the documents which had to be presented to secure settlement were rejected on first presentation because of defects or errors which made them unacceptable according to the terms of credit. Not surprising, this was found largely to be due to reliance on manual processing and the rewriting or rekeying of information.
Credit requirements are also affected by interpretation of language. This is especially evident where, under the terms of the credit, transhipment is prohibited. Although defined in the Uniform Customs and Practice for Documentary Credits (UCP) of the International Chamber of Commerce (ICC), the term transhipment is sometimes interpreted in different ways, and this can result in the credit being void. Similar difficulties may be caused by misunderstandings between buyer and seller. Frequently the buyer will specify a condition, e.g. "shipped on deck", which may have a particular interpretation to him whilst to the seller it has a conflicting meaning. If parties do not agree on the conditions beforehand, the discrepancy may come to light at the time of presentation to the bank when the possibility for amendment is limited. Although the ICC has produced the above mentioned UCP (recently revised and issued as "UCP 500"), (the UCP 500 are referred to on various occasions in group O) some countries insist on referring to their standard banking practice, which is specific to that country and often not definitive.
As well as methods of payment, the methods of remittance of funds are also important. These methods range from the S.W.I.F.T. Express Money Transfers (EMTs) to postal cheques, and delays in the system vary considerably. It is not untypical for a payment transfer to take up to thirty days and, in interest costs alone, it can amount to a considerable sum. From a buyer's standpoint remittance times are not beneficial as the sum has already been removed from his account. All major banks openly state that it is not their policy to retard money transfers nor retain traders' money any longer than absolutely necessary. Nevertheless, in almost all international trade transactions where money passes from buyer to seller, more than one bank is involved in the money transfer and delays occur, which are often caused by technological flaws or human error.
Delays can be reduced by using efficient and fast remittance systems such as EMTs, but the cost for using these systems could be prohibitive: At present it would not be economical to use EMTs for sums of less than USD 10,000 as the cost would exceed the benefits. This directly affects international trade efficiency and has particular implications for the smaller international trader who relies heavily on cash flow.
An additional and very frequent cause for delays stems from strict Exchange Control regulations in a number of countries, which impose certain payment methods (like the compulsory use of L/Cs whilst other more flexible methods such as bills of exchange or open accounts could be used in many instances, e.g. when the transaction takes place between established and trusted partners). Mandatory requirements in letter of credit payments, e.g. the requirement for PSI, may result in additional delays when the Inspection Certificate is not issued or transmitted in time by the Inspection company. In practice, such official requirements may be particularly onerous to the trader and do impede trade information flows. They can actively discourage trade with certain countries where the requirements are too stringent. It would obviously be beneficial for these countries to study how their legitimate objective, i.e. to protect their scarce resources in hard currencies and, in some instances, to control the repatriation of export proceeds, could be attained through methods that would not delay normal payments between trade partners.