A shift toward remittance, and Bank of Korea figures from 1999 to 2011

Many statistics, at home and abroad, the notes say, show that the method of paying for international trade is moving from the letter of credit toward non-L/C methods. Among those methods, remittance is used overwhelmingly. The puzzle they pose is why so many trading firms avoid a relatively safer letter of credit for a remittance method that carries a higher credit risk.

A changed trade environment, at home and abroad, has, they write, sharply reduced firms’ preference for the letter of credit. Where Korean trading firms once had little choice but to use a bank’s public credit in settling trade payments, they now weigh the efficiency of time and cost more than a stable success, and avoid a method that is relatively complex and slow. That avoidance is said to travel with a crisis of the bill of lading, even a theory that the bill is no longer useful, because the practical value of a negotiable bill of lading — the core document of the L/C method — has fallen in step with the L/C’s shrinking share.

The Bank of Korea’s economic statistics system, they record, shows a large change in trade payment methods from 1999. The letter of credit and collection, once used vigorously, fell sharply, and remittance rose sharply. For exports, over the most recent ten years in that telling, the remittance share rose 18 percentage points and the letter-of-credit share fell 12; as of 2011 the proportions were remittance 62 percent and letter of credit 15 percent. For imports, over the same ten years, remittance rose 33 percentage points and the letter of credit fell 27; as of 2011 the payment shares were remittance 68 percent and letter of credit 23 percent. Those 2011 figures stay in 2011 as the notes record them, not as a 2026 official total.

What a letter of credit is, and an irony between new trades and old ones

A letter-of-credit method, they write, is a trade carried on the basis of a certificate issued on a bank’s credit. Definitions differ somewhat by doctrine, but under the ICC’s Uniform Customs and Practice for Documentary Credits, as the notes retell it, the issuing bank — the importer’s, or applicant’s, bank — issues the credit to the exporter, or beneficiary, at the importer’s request and instruction. When the exporter draws a draft and presents shipping documents that match the credit’s terms, the bank undertakes to pay the exporter directly, or to accept the draft, or to authorize another bank to pay, accept, or negotiate. Because payment is promised on the importer’s credit and on the issuing bank’s undertaking, the method can be used efficiently when the trade is new, when its scale is large, or when trade finance is needed between a head office and a branch.

At negotiation there are two ways: paying the settlement amount at once, and accepting a draft. The latter still uses a letter of credit, but in the end turns into collection, and some therefore wish to treat that accepting method as a kind of collection as well. The advantages named are these: in a new trade, the bank guarantees safety and certainty, so that the parties can deal with an easier mind; and trade finance can be used on the issued credit, so that funds can be raised for a period.

In recent years, though, when a new trade is to be settled by letter of credit, banks are said not to be positive about negotiation, while they tend to keep the letter-of-credit method for existing trades. That tendency, the notes say, is ironic for the parties themselves: at the start of a contract, when credit is not yet guaranteed, they need the bank’s letter of credit; once the trade has continued for a time and information and credit are shared, they no longer need to issue one. Banks, for their part, become reluctant to purchase a credit when they judge that, in a new trade, credit is shaky and the chance of a defect after negotiation is high. Even when the guaranteeing bank takes a deposit or physical collateral, a later defect still leaves the bank in material difficulty. Banks also find the complexity and the inefficient paperwork a burden, so they are said to recommend that long-standing customers, with whom credit and information already exist, keep the higher-fee letter-of-credit method, and to recommend collection to most new firms.

Documents that stay too long, a bill-of-lading crisis reread as an L/C crisis, and refusal rates

In collection, the notes write, the bank only hands the exporter’s shipping documents to the importer and recovers the funds — a mere messenger — so the documents stay longer at the bank, and the method is unfavorable to the exporter. If a trade has been collection from the first, the exporter may already have accepted that; but if a letter-of-credit settlement is refused at negotiation and then switched to collection, the exporter is said to enjoy none of the letter of credit’s benefits and still to have to do the inefficient paperwork. Anyone who has used the method even once, they add, may have wondered at the time and labor the documents take. Some documents can now be printed on a clerk’s own computer through EDI, without a visit, so preparation is simpler and faster than it was; but the bill of lading, the backbone of the method, is only extremely limited in electronic use. Even as much of the rest of the shipping file has been made electronic and the time to pass documents has shortened, the bill’s crisis remains as it was.

On that basis, the recent crisis of the bill of lading is, they write, a phenomenon that arises because the bank’s processing of documentary credits cannot keep up with the speed of the ships, and is therefore more appropriately read as a crisis of the letter-of-credit method itself. The method is relatively complex and slow, they add, because it asks for too many documents, and because the bank, under the doctrine of strict compliance, checks and compares those documents one by one with the human eye.

Under that doctrine of strict compliance, first negotiation is refused in 50 to 60 percent of cases in the United States, 80 percent in Europe, and 90 percent in Hong Kong, as the notes state those rates. They are left as the notes give them, not as a later official rate, and no year is attached to them in the unique body. When first negotiation is refused, the beneficiary may amend the documents and negotiate again, or switch to collection. The same Korean report, at fuller length, is on CampusDown.

Sources

1. Notes on a shift in international trade payment from the letter of credit toward remittance, posing why firms avoid a relatively safer method.
2. Bank of Korea economic statistics from 1999, and export and import shares as of 2011, left in that year and not recast as a later official total.
3. The ICC definition of a documentary credit as the notes retell it; the bill of lading’s delay; strict compliance; and first-negotiation refusal rates left as stated.

Last updated: 14 November 2026