1
TO WHAT EXTENT ARE LETTERS OF CREDIT STILL A VALUABLE TOOL IN
TODAY’S COMMERCIAL WORLD GIVEN ONLINE PAYMENT SYSTEM LIKE
PAYPAL?
by
Biplav Jung Karki
Student number: 200735678
September 2013
LLM International Banking and Finance Law
School Of Law
2
Abstract
Over the years technology has changed the way we do things, it has also shaped
the architecture of letters of credit and international commerce. While letters of
credit at times has been criticised for not moving with the pace of technology,
new system to facilitate trade like PayPal have emerged which is a direct result
of technology and innovation. In this thesis, letters of credit and PayPal is
analysed to see what they offer and how important letters of credit is in the
modern era of ecommerce. The study also presents the challenges lying ahead
of PayPal in becoming an ideal instrument to trade. The findings of this thesis
shows that letters of credit cannot be written off immediately as some of the
functions it provides are unique and valuable to international commerce.
Nonetheless the findings also suggest that PayPal can offer some distinctive
features that can make trading less complicated and fast. The contribution of this
dissertation shall add to the existing knowledge about the scenario of
international trade and letters of credit. In addition to this it also seeks to inform
about the new possibilities that PayPal has to offer and how international
commerce can benefit from it.
3
Acknowledgements
This dissertation is a highlight in my academic career. I have been fortunate to
come this far and carry out a research on a topic that has been a significant
interest to me for a long time. I am grateful to a number of people who guided me
throughout the process and without whom my endeavours would not have been
fruitful.
First and foremost I offer sincerest gratitude to my Supervisor and Tutor,
Professor Gerard McCormack, who has supported me throughout the project
with his knowledge and patience whilst allowing me the room to work on my own.
He convincingly and continually forwarded a good spirit of adventure and
excitement in regard to the research. Without his persistent help and valuable
guidelines this dissertation would be limited to a premature idea rather than a
research project. One simply could not wish for a better and friendlier supervisor.
I would also like to take this opportunity to thank Mr Nirmal Chaulagain (Business
Consultant and Advisor risk management Merchant banking at KBC Financial
Products) who backed up my ideas and encouraged me to undertake it as my
dissertation topic. I am also grateful that he shared his experience, view and
insight about the working of letters of credit.
Lastly, thanks to my loved ones who have supported me throughout the process
by motivating and believing in me.
4
Table of Contents
Abstract ............................................................................................................... 2
Acknowledgements ............................................................................................ 3
Introduction: ........................................................................................................ 6
Chapter 1 Letter of Credit: Its development, function and effectiveness: ..... 9
Introduction: ................................................................................................................. 9
What is Letters of Credits? ........................................................................................... 9
Origin of Letters of Credit: .......................................................................................... 10
Clash of interest and risk in trade: .............................................................................. 11
ICC and its contribution to letters of credit: ................................................................ 11
The procedure involved in a typical LC transaction .................................................... 14
Variations in Letters of credit: .................................................................................... 22
LC’s reputation and unique advantages: .................................................................... 23
Network of legal contracts: ......................................................................................... 24
Strict Compliance:...................................................................................................... 25
The Autonomy principle/Autonomy of credit: .............................................................. 26
Autonomy and the fraud exception ............................................................................ 27
Banks and Buyer’s right and duties in a fraud situation: ............................................. 29
Disadvantages of LC: ................................................................................................ 30
Conclusion: ................................................................................................................ 32
Chapter 2: PayPal: its evolution and growing importance ............................ 33
Introduction to PayPal: ............................................................................................... 33
Beginning of PayPal: ................................................................................................. 34
PayPal and its services: ............................................................................................. 37
Framework of PayPal: ............................................................................................... 39
Why PayPal? ............................................................................................................. 40
PayPal and Innovation: .............................................................................................. 43
PayPal dispute settlement: ........................................................................................ 44
PayPal’s future: ......................................................................................................... 46
Conclusion: ................................................................................................................ 47
Chapter 3: International trade and LC in the electronic age ......................... 48
The digital age and its impact on the international commerce: ................................... 48
5
Electronic records in LC: ............................................................................................ 49
The eUCP: ................................................................................................................. 50
Scope of eUCP: ......................................................................................................... 52
The difficulty of proving electronic records in letters of credit: .................................... 52
Conclusion: ................................................................................................................ 53
Chapter 4: Can PayPal actively perform in international commerce? Where
does it stand against LC? ................................................................................ 54
Introduction: ............................................................................................................... 54
PayPal: not just an ordinary online payment system: ................................................. 54
PayPal’s potential contribution to International Commerce: ....................................... 55
PayPal feasibility:....................................................................................................... 56
Cost comparison between letters of credit and PayPal: ............................................. 57
Analysing the costs: ................................................................................................... 63
Benefits of LC over PayPal: ....................................................................................... 64
Can PayPal mirror some of these advantages? ......................................................... 65
Advantages of using PayPal over LC: ........................................................................ 66
Conclusion: ................................................................................................................ 66
Chapter 5: Challenges ahead of PayPal .......................................................... 68
Introduction: ............................................................................................................... 68
Disputes in international commerce: .......................................................................... 68
Differences in Law: .................................................................................................... 69
Unpredictable nature of foreign countries: ................................................................. 70
Conclusion: ................................................................................................................ 71
Chapter 6: Conclusion ...................................................................................... 73
Bibliography: ..................................................................................................... 75
6
Introduction:
Alexander Graham Bell famously stated that “Man is an animal which alone
among the animals refuses to be satisfied by the fulfilment of animal desires”1.
The never ending desire to possess every essential and luxury goods, fuelled by
the rapid technological development and innovation has resulted a boom in
transcontinental and transnational trade activities. Along the line as the reliance
amongst countries cemented further a reliable and efficient method was required
to carry out trade. Moreover, when trade is carried out between different
countries there are lots of barriers. For example differences in the language,
differences in trade practice, conflicts of law, cultural barriers, and above all lack
of trust.
Despite these barriers, Letters of credit (also known as documentary credit and
commercial credit) has been successfully facilitating trade and is considered to
be a revolutionary break through.2 Kerr J once stated that LC was the “life blood
of international commerce".3 Ronald Mann likewise mentioned that LC enables a
reputable bank to replace 'unknown promise by unreliable party' into a reliable
one and creates a possibility to carry out trade.4
However, things have changed in a drastic manner since the introduction of
letters of credit. Technology has direct or indirect impact on almost everything
including international commerce. However, to some extent measures have been
taken to 'modernise' or to accommodate LC with technology. Despite the
attempts at times LC is criticised of being too traditional and not "moving with the
1J Tulloch, Biography: Alexander Graham Bell, (Capstone Press, 2003), p13
2 A G Davis, The Law Relating to Commercial Letters of Credit (3rd edn, Isaac Pitman & Sons Ltd
1963), p19. 3 R D Harbottle Mercantile Ltd v National Westminster Bank Ltd [1977] 2 All ER 862 (QBD)
4 R J Mann, ‘The Role of Letters of Credit in Payment Transactions’ (200) 98(8) Michigan LR
2494 < http://www.columbia.edu/ ~mr2651/Data/RoleofLtrsofCredit2.pdf> Accessed 27 March 2013
7
flow".5 Disregard to the validity of the statement it cannot be denied that a better
alternative is always welcomed.
The aim or the overall purpose of the study is to see how important LC is in the
modern world in relation to recent development like PayPal and can PayPal
become a suitable alternative. The first objective is to rigorously analyse both LC
and PayPal individually, in order to build a strong understanding of how they
work and examine their effectiveness. The second objective will be to see the
impact of electronic age on international commerce and LC. Third objective is to
examine PayPal’s potential in international commerce and compare it with LC.
Based on the findings of the study the final objective is to summarise the
importance of LC in modern world and to point out challenges surrounding
PayPal in becoming the ideal instrument in international commerce.
This research is divided into six chapters. Chapter 1 and Chapter 2 are aimed to
meet the first objective of this paper which is to formulate a broad understanding
of LC and PayPal. Chapter 1 deals with LC which examines the development,
functioning and effectiveness of LC. In similar manner Chapter 2 will look at
PayPal but additionally focus on the evolution and growing importance of PayPal.
Chapter 3 is set to fulfil the second objective of the research where the impact of
electronic age on international commerce and LC will be studied. Chapter 4 is
drafted to meet the third objective of the research which is to examine PayPal’s
prospective in international commerce and compare it with LC. While doing the
comparison unique advantages of LC will be looked at and the chapter will also
see to what extent can PayPal fulfil them. Chapter 5 will highlight the challenges
surrounding PayPal in becoming an ideal instrument in international commerce.
Finally the dissertation will conclude with Chapter 6 where it will summarise the
findings of overall research. It will also comment on the importance of LC in the
5 A Davidson, ‘ Electronic Records in Letters of Credit’, (UNCITRAL, 2010) Available from:
<http://www.uncitral.org/pdf/english/colloquia/EC/UNCITRAL-paper_Feb2011-Alan-Davidson.pdf> [Accessed on 18 June 2013], p9
8
modern world based on the research and highlight the challenges faced by
PayPal.
9
Chapter 1 Letter of Credit: Its development, function and
effectiveness:
Introduction:
The main objective of first chapter is to look at LC in detail and analyse its
effectiveness. While doing so the paper will firstly attempt to define LC and
illustrate the origin and development of LC. The chapter will then look at the
challenges in international trade and try to see how far LC has been successful in
overcoming the challenges.
ICC’s contribution to LC has been immense and vital throughout its
development, which will also be looked at in this chapter. In order to analyse the
overall effectiveness of LC it is important to examine the framework of LC. While
observing the framework of LC, each stage will analysed individually and along
the process its effectiveness will be examined.
There are two key principles in LC the autonomy principle and the strict
compliance which will be looked at since the framework of LC relies on this
principle. In the final segment, this chapter will draw out some of the drawbacks
of LC based on the analysis of the process.
What is Letters of Credits?
Dalhuisen once interestingly mentioned that “Letter of Credit is neither letter nor
credit, but it is an independent payment obligation”.6 Other writers like Davis7 and
McCurdy8 have put that it is not quite possible and very misleading to exactly
define LC. Nonetheless Uniform Customs and Practice (UCP)9 define LC as
6 Dalhuisen, Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law, Vol
3 (Hart Publishing 2010) p380 7 A G Davis, The Law Relating to Commercial Letters of Credit (3rd edn, Isaac Pitman & Sons Ltd
1963), p10 8 W E. McCurdy, ‘Commercial Letter of Credit’ (1921-22) 37 Harv. L. Rev. iii (1923-1924), p3
9 International Chamber of Commerce, Publication Number 600 (2007 Revision) (hereinafter
UCP).
10
“Credit means any arrangement, however named or described, that
is irrevocable and thereby constitutes a definite undertaking of the
issuing bank to honour a complying presentation”10
In simple words, a letter of credit is a letter through which a bank guarantees or
assures payment from buyer to the seller for the right amount and on agreed
time. In an event where the buyer does not make the payment, the bank is
obliged to make the remaining or full payment. It is important to note that banks
also act in favour of the buyer by not paying the seller until receiving evidence of
goods dispatched (discussed further later in the paper). Hence it would be fair to
say that letter of credit enables a bank to act in an independent and unbiased
manner.
Origin of Letters of Credit:
The inception of letter of credits is a debatable topic as different writers have
expressed different opinions. Boris Kozolchyk put in his article that modern
commercial letter of credit is the forerunner of ‘bill of exchange’, also referred to
as letter of payment, which were used in twelfth and thirteenth century.11 Williston
on the other hand has stated that it was around fifteenth century when
preliminary version of LC was introduced.12 Nonetheless it would be fair to say
that between end of ninetieth and beginning of twentieth century saw the origin
and development of LC.13 Since, then LC has prospered and played a vital role in
globalisation by facilitating global trade.
Letters of credit was initially known as ‘Buyer’s Credit’; where banks or
individuals with high credentials and reputation would issue documents on behalf
10
UCP Article 2, International Chamber of Commerce, Publication Number 600 (2007 Revision)
11 B Kozolchyk, ‘The Legal Nature of the Irrevocable Commercial Letters of Credit’ (1965) 14(3)
The Am J Comp L 395 p2 12
S Williston, A Treaties on the Law of Contracts, Vol 1(Richard A Lord ed, 4th edn, WEST 2007), p234 13
HN Finkelstein, ‘Performance of Conditions under a Letters of Credit’ (1925) p25
11
of a buyer that would enhance their (buyer’s) reputation.14 Therefore, it was
almost like a recommendation letter that would give confidence to the seller.
However, this was not a guarantee and along the time LC started becoming more
sophisticated. Today LC is capable of providing assurance to the seller about the
payment rather than just sheer recommendation.
Clash of interest and risk in trade:
Trading in business to business (b2b)15 scenario in international commerce can
get complicated. Unlike when consumers buy goods from a market place where
goods and payments are exchanged simultaneously, this is not always the case
in international trade. Since payment and goods are not exchanged at once there
is a risk that one of the parties might not fulfil their duty.
From a buyer’s prospect it is safer to pay for the goods after receiving and
inspecting it. This gives the option to deny payment if the goods are not as
described and agreed. Moreover it also avoids the classic scenario where the
seller delays dispatching of goods or disappears completely after receiving the
payment. Contrary to this a seller would prefer if the payments are made before
dispatching the goods as it would eliminate the risk of not receiving payments
after dispatching the goods.
ICC and its contribution to letters of credit:
Every system needs to be governed by an effective set of rules; similarly LC is no
different. As demonstrated in pervious paragraph international trade is
complicated and risky business. Nonetheless with effective system and proper
rules in place, trade could be secure and simpler.
International Chamber of Commerce (ICC) aims to achieve this through Uniform
Customs and Practice for Documentary Credit (UCP).16 UCP is the set of rules
14
Davis (n 3) p20-21
15 b2b here after
16 UCP 600, International Chamber of Commerce, Publication Number 600 (2007 Revision) p1
12
that govern the use and issuance of LC.17 The current version is the sixth
revision since the rules were first written in 1933.18 ICC's Commission on
Banking Technique and Practice spent more than three years drafting the sixth
version by working along with private and public sectors.19 It is also worth
mentioning the fact that unlike most of the regulation which is designed by the
politician, UCP's rules of practice was drafted after ample consideration and
debate by merchants and bankers.20
Guy Sebban, Secretary General of ICC, stated that the primary objective of ICC
since its origin in 1919 has been to facilitate international trade.21 During the early
years protectionism and nationalism were the biggest barriers that restricted the
trade. In addition to this every country and bank seem to have their own version
of letter of credit. ICC played a vital role in international trade by standardising
the LC.22 Since then the main objective has been to ‘set contractual rules’ which
would ‘alleviate the confusion’ and promote uniformity in practice.23
Roy Goode in his book has stated UCP as one of the ‘most successful
harmonising instrument in the field of international commerce’.24 The six revisions
that have taken place since its inception has made it more reliable and up-to-date
instrument.25
Date Rules Published
1933 Uniform Customs and Practice for Commercial Documentary Credits
1951 First Revision
1962 Second Revision
1974 Third Revision
17
ibid 18
ibid 19
ibid 20
Ibid., p2 21
ibid 22
ibid 23
ibid 24
R Goode, ‘Commercial Law’, 3rd
edn (Penguin Books, 2004), p971
25 ibid
13
1983 Fourth Revision
1993 Fifth Revision
2007 Sixth Revision
Table No. 1
The table above shows the dates for the rules drafted by ICC.26 Starting off in
1933 when the first rules were written till the sixth revision which is the most
recent one. The mean difference between the dates is roughly around 12 years.27
Jimenez puts that ICC closely monitors trade activities in international commerce
and amends them when necessary.28
One of the other facts that suggest that ICC amends according to necessity is the
introduction of eUCP. ICC mentions that eUCP is supplement to UCP which
allows presentation of electronic documents. eUCP was introduced mainly to
accommodate with bank transactions which were becoming paperless. eUCP is
dealt further in chapter 3.
26
G C. Jimenez, ‘ICC Guide to Export-Import’, ICC Publication No. 686 , 2012 Edition p32 27
Mean calculation of the dates (73.8/6 years = 12.3) 28
G Jimenez n (26)
14
The procedure involved in a typical LC transaction
Figure 1: Letter of Credit: Flow Chart
The diagram above shows the process involved while using LC. It is a basic
model of LC which shows the fundamental stages involved. It is important to note
that there could be different versions to figure 1 where there could be several
banks, more than one beneficiary and a reimbursing bank. In addition to this the
payment options could be different depending upon the previous agreement.
15
1. Sales Contract:
The first step is to draft a sales contract between the buyer (applicant) and the
seller (beneficiary).29 A sales contract is a
legal agreement that has the terms and
condition for the trade.30 This includes the
parties’ name, shipping/transportation
details, the details about the payment
including the mode and time of the payment,
sale price, product description, quantity, last date of shipment and most
importantly the fact that payment shall be made under documentary credit.31 The
sales contract needs to be agreed and signed by both the parties.
2. Application for LC:
In the second step the buyer applies or provides instruction requesting issuing
bank (buyer’s bank) to issue a LC on behalf
of the seller. The issuing bank then
evaluates application.32 This is an important
phase as opening LC on behalf of the seller
would mean that the bank agrees to pay the
contracted price to the seller (beneficiary),
on condition that all the terms of credit is fulfilled and all the relevant documents
are submitted. In addition to this it is important to analyse the creditworthiness of
the buyer before honouring and issuing the document as there is a risk that the
buyer might not pay or delay the payment to the bank.33
From the issuing bank’s perspective opening a LC would have different
consequences depending upon the type of LC. The most common form is an
29
L S. Sealy & RJA Hooley, “Commercial Law: Text, Cases, And Materials” (2009), 4th edn
(Oxford University Press, 2009), p849 30
ibid 31
R Goode, ‘Commercial Law’, 3rd edn (Penguin Books, 2004) p195 32
Sealy & Hooley (n 16) p850 33
R Goode n (17)
16
irrevocable credit.34 By agreeing to open an irrevocable credit the bank is
agreeing to take over the payment obligation and pay the contracted price on
stipulation that the terms and condition of the sales contract is fulfilled. This
would include submission of necessary documents which generally include
documents such as transport documents, origin and packaging documents,
policy of insurance, bills of lading, certification of quality and any invoicing other
documents.35
The issuing bank also needs to make sure that the LC is coherent with the sales
contract. It would be a ‘repudiatory breach’ of contract if it is not done in the
agreed time frame.36 This feature enables the seller to claim for the loss due to
the breach of the contract.37 Hence after signing the sales contract either the
trade will take place or the seller can make a claim or the loss, either way seller
is secured. From a seller’s point this is an added benefit as it mitigates the risk
against losing potential opportunity to trade.
The fact that the seller is not losing encourages the seller to go forward with the
sales contract even with new buyers, this is one of the major advantages of LC
which encourages and facilitates trade. Nonetheless if the seller has to make
claim for the loss it could be both difficult and arguable to calculate the
compensation.38 This was demonstrated in Trans Trust SPRL v Danubian
Trading Co Ltd.39 Hence it would be fair to say that despite the measures of
protection available to the seller it is not hassle free.
It is buyer’s duty to provide clear instructions to the issuing bank while opening a
credit. Similarly issuing bank has to make sure that it strictly follows the
guidelines provided by the buyer. An application form is used as the medium to
34
A G. Davis, The Law Relating to Commercial Letters of Credit (3rd edn, Isaac Pitman & Sons Ltd 1963) p10
35 Sealy & Hooley (n 22) p849
36 Dix v Grainger (1922) 10 Ll L Rep 496, p497
37 ibid
38 R Goode n (17) p961
39 Trans Trust SPRL v Danubian Trading Co Ltd [1958] 2 QB 130 p145
17
provide information to the issuing bank which is filled by the buyer and signed by
both the parties (buyer and the issuing bank). In Commercial Banking Co of
Sydney Ltd v Jalsard Pty Ltd, Lord Diplock stated that if the issuing bank was
unclear of the instructions provided by the buyer they have the right to act in a
‘reasonable sense’.40 Nonetheless, in more recent case like European Asian
Bank AG v Punjab and Sind Bank it was advised that issuing banks should get
clarification before acting.41 The argument was that with the availability of modern
communication it is not really difficult to seek clarification.42
3. Issuance of LC:
The LC is generally issued to the seller’s bank in its country by the issuing
bank.43 Only in very rare scenario there is no
advising bank and the issuing bank directly
deals with the seller.44 The seller’s bank is
also known as corresponding bank or
advising bank.45 Issuing banks issues the LC
usually by sending it through electronic
medium like SWIFT.46 Previously air mails were used instead of electronic
SWIFT.47
40
Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd [1973] AC 279, p 286 41
European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 WLR 642, p656
42 ibid
43 Sealy & Hooley (n 11) p849
44 ibid
45 R Goode n (17) p961
46 ibid., p951
47 ibid
18
4. Advice of Letter of Credit:
After receiving the LC the advising bank checks and authenticates the LC. It is
usually done by ‘signature books and or test
codes’.48 After checking and authenticating
the LC it is transferred to the seller. Williston
mentioned in his book that issuing bank may
request advising bank to add its confirmation
to the credit.49 If the advising bank agrees to
add its confirmation it would be coined as ‘confirming bank’.50
Presence of confirming bank is definitely better for the seller as if the seller has to
make a claim it would be against the confirming bank and the legal case can be
taken to the local court which is less complicated and inexpensive then taking the
case aboard. In addition to this the advising bank (or confirming bank) can
provide much needed guidelines to the seller regarding various matters of
international trade. The involvement of banks provides extra security and
confidence to the buyers and the sellers. Without these banks it would be almost
impossible to trade with new traders.
One other important fact is that the payment obligation is transferred to the
banks. This means that as long as the seller fulfils its duty and submits the
agreed documents by sticking to the terms and condition of the sales contract it
is bound to receive the payment. Like other points mentioned above this feature
provides the seller with the confidence to trade. However, this provision is not
completely free of fault. In cases where the terms and condition of trade are
vague and ambiguous, the whole process gets complicated (dealt further in this
paper) .
48
S Williston, A Treaties on the Law of Contracts, Vol 1(Richard A Lord ed, 4th edn, WEST 2007), p236 49
ibid
50 Sealy & Hooley (n 22) p850
19
5. Checking the document s and delivering the goods:
It is seller’s responsibility to verify that the LC is accordance to the sales
agreement after receiving it from the advising bank.51 Sellers need to pay
attention to the documents that is required
as the proof of goods being dispatched as it
is on the basis of the documents they get
reimbursed. If the seller is not sure about the
documents and feels that it might create a
problem they can always request for an
amendment.52
Once the LC is verified the goods are then dispatched and the seller gathers all
the relevant documents like courier receipt, insurance cover documents and
transport documents. The goods are either
sent by air, Inland water way or road. UCP
600 provides the general requirement for air
transport document in article 24 and road,
rail or inland waterway transport documents
in article 25.53 It is clear that UCP has made
efforts to eliminate any possible ambiguity regarding the requirement of the
documents. The fact that every transportation mode has its own requirement
makes UCP’s contribution more effective.54
Article 27 states that “banks will only accept clean transport documents”.55 UCP
defines clean transport documents as one that does not bear any clause or
notation stating “defective condition of the goods or their packaging”.56 Similarly,
Article 28 mentions about the requirement for “insurance documents and
51
Dean Pawlowic, ‘Letters Of Credit: A Framework For Analysis Of Transfer, Assignment, Negotiation And Transfer By Operation Of Law’ 39 Wayne L. Rev. 1 1992-1993 p9 52
ibid 53
UCP 600 Article 24 & 25 (n 16) 54
ibid 55
UCP 600 Article 27 (n 16) 56
ibid
20
coverage”.57 Sellers need to provide insurance documents such as an insurance
policy or insurance cover signed by an underwriter or an insurance company.58
These documents should clearly mention the amount and date of insurance
coverage.59
6. Submission of the documents to the advising bank:
After dispatching the goods and collecting the documents the seller submits it to
the advising bank in order to receive the payment. Article 8 of UCP states that if
the seller “provides the stipulated documents” to the advising bank then it needs
to honour the credit by making the payment.
7. Honour/Negotiate:
The advising bank checks the presented documents against the LC.60 Then
depending on the document it decides to
honour/negotiate the credit. If the
documents meet LC and the terms of trade,
the advising bank makes the payment with
assurance that it will be able to receive the
reimbursement from issuing bank.
According to Article 2 of the UCP 600, honouring the credit would either mean to
pay at sight, accept bills of exchange (pay at maturity) or make deferred
payments.61 Alternately, the advising bank may decide not to honour the credit
and request the relevant documents.
This phase is one of the most important stages in LC transaction that makes it
unique and effective compared to other instruments available in international
trade. Here the seller is entitled to receive the payment right after fulfilling its
57
UCP 600 Article 28 (n 16) 58
ibid 59
ibid 60
Sealy & Hooley (n 22) p850
61 UCP 600 Article 2 (n 16)
21
duties without having to wait for the buyer to receive the goods. However, this
stage could be the point of conflict if there is a misunderstanding or if the buyer
or the seller has a hidden agenda. For example the buyer after receiving the
goods might realise that it was not according to the contract and start a conflict.
8. Claim funds and payment to the advising bank:
As mentioned earlier the advising bank then claims reimbursements from the
issuing bank and forwards the documents.62
After analysing the documents the issuing
bank makes the payment to the advising
bank.63
There is also a possibility that the issuing
bank may not be satisfied with the documents forwarded by the advising bank.
This situation might occur when the issuing bank and the advising bank are
dealing for the first time and both are use to different trade practices. In these
cases the issuing bank will reject the documents and request advising bank to
provide specific document.
This stage is another potential point of conflict, however, as demonstrated earlier
in the paper, UCP’s effort to standardise the documents would definitely reduce
this type of conflict.
9. Payment to the Issuing Bank:
The issuing bank then informs the buyer to collect the document and make the
payment. In most of the scenarios the buyer needs to pay the issuing bank
before releasing the goods from customs. However, it is also possible for the
buyer to pay the bank later if it is agreed with the bank. Sealy put in his book that
banks prefer payment before handing in the documents. Nonetheless if the buyer
is not able financially and has to sell the goods to be able to pay there is an
62
Sealy & Hooley (n 22) p850 63
ibid
22
option to issue a ‘trust receipt and release the documents.64 This is another
possibility with LC and another example how LC facilitates trade.
10. Endorsement of documents:
Endorsement of documents means to transfer the legal title on buyer’s name
which would allow them to release the goods
from the customs.65 Normally the buyer has
to pay the import duties while realising the
goods. After paying the import duties the
buyer finally gets the goods.
One of the things that is eminent from the process is the fact that LC can be very
long and bureaucratic especially If there is involvement of more than two banks.
Variations in Letters of credit:
It is also important to note that there are lots of variations to LC and every
process is not identical to the one shown in figure number 1. This is one of the
many reasons why LC is considered to be vague and complicated to understand.
Some other variations may include when the payment has a maturity date (when
the credit or the negotiable instrument becomes due) and hence the payment
does not take place 'at sight'. As mentioned earlier in the paper in some
scenarios there are more than two banks (other than issuing and advising banks)
involved. For instance where there is a reimbursing bank between the issuing
bank and the advising bank.
In some cases the LC is transferable nature and hence is called 'transferable LC',
here there is more than one beneficiary and any beneficiary can receive payment
as part of the LC from the first beneficiary.
64
Sealy & Hooley (n 22) p850 65
Pawlowic (n42) p10
23
LC’s reputation and unique advantages:
Use of LC is considered to be amongst the most secure trading instruments
available to international traders.66 It is regarded to be relatively less risky
compared to other popular methods like open account67, credit insurance, export
factoring and cash in advance.68
It is important to note that LC is amongst the few instruments which actually
enables to trade with new traders because of the involvement of reputed banks.
According to Federal Trade Commission the only realistic alternative to LC when
it comes to trading with new traders is credit insurance. However the biggest
drawback of using credit insurance is the cost as it can be very expensive
depending upon the goods traded and traders.69
As discussed earlier in the chapter LC also allows various ways of financing and
has different payment options depending upon the prior agreement. It also allows
more than one beneficiary to be paid together. These features are unique to LC
which provides range of option to facilitate trade.
66
Trade.gov, ‘Letters of Credit’, (2012) Available from: <http://trade.gov/media/publications/pdf/trade_finance_guide2007ch3.pdf> [Accessed on 12 June 2013] 67
Trade.gov, ‘Open Account’, (2012) Available from: <http://trade.gov/media/publications/pdf/trade_finance_guide2007ch5.pdf> [Accessed on 12 June 2013] 68
Gov.uk, ‘Letters of credit for importers and exporters’, (2013) Available from: <https://www.gov.uk/letters-of-credit-for-importers-and-exporters> [Accessed on 13 June 2013] 69
Federal Trade Commission, ‘Credit Insurance’, (2011) Available from: <http://www.consumer.ftc.gov/articles/0110-credit-insurance> [Accessed on 13 June 2013]
24
Network of legal contracts:
Figure 2: Network of Legal Contracts70
As seen in previous section the working of LC is interlinked by series of
contractual promises. Contract 1 as shown in the diagram above is the first
contract which is the sales contract between the buyer and seller.71 Contract 2 is
the agreement between the issuing bank and the buyer by which the issuing
bank opens the credit on behalf of the seller. This agreement mentions about the
payment whether it is at sight or has a maturity date.
Contract 3 is between issuing bank and advising bank where the advising bank
agrees to advice or confirms the credit. Sealy puts the relationship between the
banks is of contractual nature.72 The fourth and the final contract is the between
the confirming bank and the seller. Here the confirming bank agrees to pay
against the documents and gives a separate undertaking.73
70
Sealy & Hooley (n 22) p850 71
Sealy & Hooley (n 22) p851 72
ibid 73
ibid
25
On the surface level, the network of contractual agreement may appear
confusing. Nonetheless these contracts enable to delegate responsibility
effectively and clearly. In addition to this since these contracts have legal
consequences it ensures that the responsibility is carried out by the parties and if
not carried out it gives option to take them to the court and take necessary
action. Without these contracts it would be almost impossible to get agreement
and carry out trade successfully. Therefore, these contracts are integral part of
LC and despite confusing it is necessary.
Strict Compliance:
As seen in the earlier paragraph the effectiveness of LC heavily relies on the
network of legal contacts. Strict compliance in LC ‘oils the wheels’ of legal
contract and ensures that trade takes place effectively. Sealy has mentioned in
his book that ‘the tendered documents need to strictly comply with the terms of
the credit’.74 Likewise, Viscount Sumner in Equitable Trust Co of New York v
Dawson Partners Ltd famously said that ‘there is no room for documents which
are almost the same, or which will do just as well’.75 This applies to all of the
contracts that are used in a LC transaction.
One of the issues with strict compliance is that the level of strictness can vary
from country to country. Kozolchyk put in his book that the level of strictness
varied according to the nature of the contract in different jurisdictions.76 For
example in US the contract between the issuing bank and the buyer seem to be
less strict compared to the contract between the bank and the seller. According
to Sealy this was also demonstrated77 in Far Eastern Textile Ltd v City National
Bank and Trust and Transamerica Delaval Inc v Citibank.78
74
Sealy & Hooley (n 22) p867
75 Equitable Trust Co of New York v Dawson Partners Ltd (1927) 27 LI L Rep 49
76 B Kozolchyk, ‘International Encyclopaedia of Comparative Law’, Vol 9, pp 82-83
77 Sealy & Hooley (n 22) p857
78 Transamerica Delaval Inc v Citibank NA 545 F Supp 200 (SDNY 1982) p203-204
26
The Autonomy principle/Autonomy of credit:
One of the features that make LC unique and different from other instrument is
the fact that LC creates an independent abstract payment solution which does
not rely on the actual performance of any contracts used in LC. Article 4.1 of
UCP 600 states
“a credit is a separate transaction from the sale or other contract on
which it may be based. Banks are in no way concerned with or
bound by such contract, even if any reference whatsoever to it is
included in the credit...”79
Article 5 further clarifies the concept of autonomy principle by mentioning that
“Banks deal with documents and not with goods, services or performance to
which the documents may relate”.80 Similarly, in article 34 it is mentioned that
there is no added responsibility on banks other than to comply with the
documents.81 Hence ‘documentary credit is independent and separate from the
any of the underlying contracts’.82 Sealy puts that there are numerous cases
where various courts including the English courts have applied the autonomy
principle. 83 One of the leading cases is Hamzh Malas & sons v British Imex
Industries Ltd84 where principle was illustrated by Jenkins LJ.85
There is possibility that this principle could be controversial as it might create
loophole for sellers who breach the sales contract. For example a seller might
knowingly or unknowingly ship less than the agreed quantity of goods or might
dispatch faulty goods. But in any case the seller is able to obtain payment on the
presentation of the documents. Similarly the issuing bank needs to honour the
credit even if the buyer refuses to pay.
79
UCP Article 5 (n 16) 80
UCP Article 5 (n 16) 81
UCP Article 34 (n 16) 82
Sealy & Hooley (n 22) p865 83
ibid 84
Hamzeh Malas & Sons v British Imex Industries [1958] 2 QB 127 85
Sealy & Hooley (n 22) p865
27
Despite the room for controversy Sealy mentions that the autonomy of credit is
integral part of documentary credit which is the “life blood of international
trade”.86 He further adds that it is also heavily defended in the courts.87 In R D
Harbottle (Mercantile) Limited v National Westminster Bank Limited Kerr J stated
that in order to maintain the faith in international commerce it was necessary to
have the autonomy principle.88
Sirius International Insurance Company (Publ) v FAI General Insurance Co Ltd89
puts a big question mark about extent of the autonomy principle.90 As mentioned
earlier, although banks only deal with documents and not the performance it
does not allow the seller to withdraw payment without fulfilling certain conditions
that they expressly agreed to perform. This was demonstrated in Sirius
International Insurance Company (Publ) v FAI General Insurance Co Ltd where
May LJ mentioned that the seller was not allowed to draw payment unless he
had fulfilled certain conditions which agreed and signed by the seller. In this case
the conditions were drawn up in a separate agreement.91
From the above case it suggests that for a buyer to be 100% secure they need to
draw a separate contract where they put all the important duties that seller is
suppose to fulfil and get it signed. However, this point is not mentioned or
recommended in the UCP, so perhaps there is some work needed to done
regarding this.
Autonomy and the fraud exception
United City Merchants v Royal Bank of Canada92 is considered by many to the
classic and leading case for fraud exemption to autonomy principle.93 Lord
86
Sealy & Hooley (n 22) p857 87
ibid 88
R D Harbottle (Mercantile) Limited v National Westminster Bank Limited [1978] QB 146 at 155-156 89
Sirius International Insurance Company (Publ) v FAI General Insurance Co Ltd [2003] 1 All ER (Comm) 865 90
Sealy & Hooley (n 22) p865 91
Sealy & Hooley (n 22) p867 92
United City Merchants v. Royal Bank of Canada [1983] AC 168 93
Sealy & Hooley (n 22) p867
28
Diplock in the hearing started off by asserting the autonomy of credit principle
where he mentioned that “banks deal with documents and not goods”94, hence
they are obliged to pay on the face of the documents.95 However, importantly he
added and established that sellers are not allowed to fraudulent representation of
documents in order to draw the payment. 96 He stated that the courts would not
with stand ‘dishonest person to carry out fraud’.97 Lord Diplock’s explanation and
justification to the case is considered to be the ‘authoritative expression’. Since
then it has been demonstrated in numerous cases like Mahonia Ltd v JP Morgan
Chase Bank98 and JP Morgan Chase Bank and Montrod Ltd v Grundkotter
Fleschvertriebs-GmbH99
Montrod Ltd v Grundkotter Fleschvertriebs-GmbH and Mahonia Ltd v JP Morgan
Chase Bank confirm that submission of documents with fake information is
treated similar to as submitting unauthorised documents. However, it was
demonstrated in Group Josi Re v Walbrook Insurance Co Ltd100 that if the seller
had not knowingly carried out fraud while submitting the documents then the
seller would be entitled to receive the payment. Staughton LJ mentioned that ‘it is
the time of presentation that is crucial’.101
It is important to note that the fraud exception is not just limited to the documents.
In Bank of Nova Scotia v Angelica-Whitewear Ltd102 Le Dain referring to Lord
Denning’s dicta in Edward Owen Engineering ltd v Barclays Bank Ltd103,
mentioned that fraud exception is not limited to documentary fraud. Similarly,
94
United City Merchants v. Royal Bank of Canada [1983] AC 168, p183 95
Sealy & Hooley (n 22) p867 96
ibid 97
Sealy & Hooley (n 22) p868 98
Mahonia Ltd v JP Morgan Chase Bank [2003] EWHC 1927 (Comm), 2 Lloyd’s Rep 911
99 Montrod Ltd v Grundkotter Fleschvertriebs-GmbH [2001] EWCA Civ 1954 at [59]
100 Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152
101 ibid., p 1161
102 Bank of Nova Scotia v Angelica-Whitewear Ltd [1987] 1 SCR 59, p83
103 Edward Owen Engineering ltd v Barclays Bank Ltd [1978] QB 159
29
Lord Diplock once stated that ‘fraud unravels all’104, meaning the seller cannot
receive payment by relying on wrongdoing. This ideology is consistent with
writers like A Malek and R Jack who have mentioned that it would be very odd if
banks were forced to pay because of true documents even though the seller had
wrong intention.105
Nonetheless, Professor Dolan, one of the dominant commentators in US advises
caution to the courts when dealing with fraud exception. 106 He further suggests
that act of balancing is necessary before engaging in ‘wide ranging fraud inquiry’
since it posses risk to autonomy of credit by undermining it which is not good for
international commerce.107
Banks and Buyer’s right and duties in a fraud situation:
Sealy puts in his book that a bank is not expected to pay a seller knowing that
there is a fraudulent conduct by the seller.108 If the bank despite being aware of
the fraudulent conduct decides to pay the seller then it is restricted to receive
reimbursement from the issuing bank or the buyer.109 Rix J in Czarnikow-Rionda
Sugar Trading Inc v Standard Bank London said that ‘payment in the face of
fraud’ is unacceptable.110
This might sound less favourable to the seller as there is possibility that bank
might accuse it of fraudulent conduct and refuse payment. However there has to
be reasonable evidence for a bank to refuse payment. This was demonstrated in
Society of Lloyd’s v Canadian Imperial Bank of Canada111, where it was
established that bank “must be able to prove that there was fraud on part of the
104
Sealy & Hooley (n 22) p868 105
R Jack, A Malek, ‘Documentary Credits, (3 edn, 2001), para 9.24
106 Sealy & Hooley (n 14) p877
107 ibid
108 Sealy & Hooley (n 14) p878
109 ibid
110 Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Ltd [1991] 1 All ER (Comm)
890, p914 111
Society of Lloyd’s v Canadian Imperial Bank of Canada [1993] 2 Lloyd’s Rep 579, p581
30
seller at the time of presentation of documents”.112 Similar applies to buyers if
they are to refuse reimbursement to the bank. This was seen in the Turkiye Is
Bankasi AS v Bank of China and it was mentioned that buyer needs to either
prove that there was “recklessness on bank’s behalf” or prove that the bank was
facing an obvious case of fraudulent conduct.113
It is important to provide sufficient protection to buyers and sellers in order to
promote international commerce. The fact that no party can just blame or accuse
of fraudulent conduct and in order to do so one needs to provide sufficient
evidence means that it will reduce cases of false blame. However, this might also
create ‘a burden of proof’ which is sometimes challenging to gather.
Disadvantages of LC:
This section of the chapter will look at the disadvantages of based on the
analysis carried out so far in the paper. It is also aimed to touch upon some
issues which have not been discussed as of yet.
1. High Cost: One of the disadvantages of LC is the fact that it is expensive.114
The main reason why LC is costly is because it involves banks and they play an
important role in any LC transaction. Earlier it was established that banks take on
the responsibility of payment.115 The costs are higher if the advising bank adds
its confirmation. Banks are specialised and have the ability to calculate and take
risk. This does not come for free and banks like any other business are profit
oriented.
Chauffour mentions in his books that LC can be more expensive than credit
insurance.116 The fact that credit insurance covers all sales (more than one
transaction) and LC covers only one transaction makes LC more costly. Apart
from charges based on percentage basis LC also has fixed single charges which
112
Sealy & Hooley (n 14) p877 113
Sealy & Hooley (n 14) p878 114
Edward G. Hinkelman, 'Illustrated Guide to Letters of Credit', (World Trade Press, 2008) p121 115
ibid 116
Jean-Pierre Chauffour, 'Trade Finance during the Great Trade Collapse', (The World Bank,2006) p203
31
apply every time the LC is used. These charges generally include checking and
handling charges, advising fees, amendment charges, confirmation charges and
negotiation fees.117
Wood and Murphy have put that the bank commission are mostly between 0.5 to
2% with additional fixed charges.118 Hence they advise that it could be expensive
if used for small transaction.119
2. Risk of inferior quality goods being shipped: Chauffour mentions that
unless certification of inspection or quality check is asked and agreed, the buyer
is always vulnerable to inferior quality of goods being shipped.120 In this case the
LC does not provide any protection as the banks act on basis of documents and
not the performance as they are bound by the autonomy principle (demonstrated
earlier in this chapter). In case where the seller acts fraudulently the only remedy
available to the buyer is to undertake a legal action.
Legal proceedings in any case are expensive and time consuming. However, in
case of international trade it could be even more challenging and costly because
the defendant is residing in another country.
3. Line of credit or adequate credit facility: For a buyer to be able to request
the bank to issue a letter of credit they need to have line of credit. The line of
credit applies against the amount outstanding in the LC. It is sometimes difficult
for new buyers to have line of credit enough to facilitate trade.
4. Strict compliance of documents: As seen earlier in the chapter since the
banks completely rely on the documents (autonomy principle) the seller needs to
provide the exact documents. If the seller is not able to provide exact documents
it might not be able to receive the payment.
117
ibid 118
Donald F. Wood, 'International Logistics', (Kluwer Acedamic Publishers Group, 2001), p253 119
ibid 120
Ibid n(108)
32
Chauffour mentions in his book that despite agreeing on documents that needs
to be provided in order to receive payment, sellers often find themselves where
they are unable gather exact documents that were agreed.
Conclusion:
This chapter has demonstrated that international commerce is a complex
process especially due to differences in culture, trade practice and law. Hence,
any trade instrument needs to be efficient and effective to manage these
differences.
LC despite its complex and lengthy process is by far an effective device to carry
out trade. As established in this chapter LC is especially effective when dealing
with new trades. The involvement of banks provides confidence and assurance
to the traders as the banks act independently and in an unbiased manner.
Over the time LC has evolved from Buyer’s Credit which was merely a
recommendation letter to more sophisticated instrument which actually assures
payments. In addition to this ICC’s contribution has been integral part of LC in
making it more efficient by bringing uniformity to the practice. The fact that UCP
is updated on regular basis makes LC up to date with new development and new
trade practices. The LC also delegates the responsibilities effectively with
network of legal contracts. Although it is arguable that at times it is relatively
complicated to understand the network of contracts, nonetheless it is not possible
to delegate duties without series of contract.
In the final segment it was seen that LC has few drawbacks like high cost, risk of
inferior goods, obligation to have adequate credit facility and strict compliance of
documents. Depending on the need of traders these drawbacks are certainly
capable of putting off traders into finding and switching to a different trade
instrument.
33
Chapter 2: PayPal: its evolution and growing importance
In the previous chapter LC and its effectiveness was looked upon. This chapter
will focus on PayPal. However, rather than just introducing and explaining briefly
about PayPal, the main objective of this chapter is to analyse PayPal in depth.
While doing so PayPal’s establishment, development, functions, framework and
other important issues surrounding it will be dealt. This chapter will also try to
predict where PayPal is heading in the near future.
Introduction to PayPal:
PayPal is a worldwide e-commerce business providing online payment and
money transfer service.121 In simple words PayPal describes itself as a ‘digital
wallet’.122 The main purpose of PayPal is to provide an alternative to traditional
payment methods and to large extent it has been successful in replacing them.
Today PayPal is regarded as one of the leading and reliable online payment
providers. In last decade ecommerce grew by more than 400%, therefore the
industry itself is growing which has helped online payment companies to
flourish.123
PayPal acts like an acquirer (acquiring bank) which processes online payment for
auction sites, online vendors and commercial users. For all these service PayPal
charges a fee proportional to the payment amount.124 In 3rd October 2002
PayPal was wholly acquired by eBay.125 Same year two-thirds of eBay’s revenue
121
PayPal, ‘Account Features’ (PayPal, 2013) < https://www.paypal.com/uk/webapps/mpp/what-is-paypal> accessed on 29 May 2013
122 ibid
123 Kim Hart, ‘e-commerce grows by more than 400 percent during last decade’ (The Hill, 15
March 2010) <http://thehill.com/blogs/hillicon-valley/technology/86683-us-e-commerce-grows-by-more-than-400-percent-during-last-decade> accessed on 29 May 2013
124 PayPal, ‘Fees’ (PayPal, 2013) <https://www.paypal.com/uk/webapps/mpp/paypal-fees>
accessed on 25 May 2013
125 Margaret Kane, ‘eBay picks up PayPal for $1.5 billion’ (eBay, 2013)
<http://news.cnet.com/2100-1017-941964.html> accessed on 3 June 2013
34
was generated by PayPal.126 Since then PayPal serves as eBay’s official
payment method, however, it is important to note that PayPal is not just limited to
eBay.
In recent years PayPal has gained significant reputation as reliable method for
online payment.127 As a result the number of online vendors using PayPal as the
payment service provider has been increasing in recent times.128
Beginning of PayPal:
Technically PayPal marked its beginning in October 1999 when engineers from
Confinity (now PayPal) managed to launch an online demo where they
successfully made email payments.129 PayPal was initially called Confinity (Palm
Pilot payments and Cryptography Company) which then merged with X.com
(internet financial services company) in March 2000.130 Both the companies
(Confinity and X.com) were formed at the end of the 1990’s in California, United
States.131 The founders of the company Peter Theil and Max Levchin had a
simple theory that ‘digital wallets’ are safer than cash.132 They managed to build
on to their theory and finally made it come true through PayPal. PayPal officially
got its name in June 2001.133
As part of their promotional campaign PayPal launched a scheme where first
time users received $10 reward for signing up for a PayPal account.134 However,
PayPal managed to gain much popularity and success when it first got involved
126
Bob Porterfield, PayPal Shareholders OK eBay Merger, ASSOCIATED PRESS ONLINE, Oct. 3, 2002, available at 2002 WL 101073053. 127
Kingsborough, D 2013, 'Mobile Payments', Chain Store Age, 89, 2, p. 24, Business Source Premier, EBSCOhost, viewed 10 July 2013.
128 Ibid
129 'MasterCard Debit Card from PayPal' 2000, American Banker, 165, 247, p. 9, Business
Source Premier, EBSCOhost, viewed 30 July 2013. 130
'THE BEST & WORST 2000: CYBERTECH' 2000, Time, 156, 25, p. 88, Business Source Premier, EBSCOhost, viewed 30 July 2013.
131 ibid
132 PayPal, 'History', Available from: <www.paypal-media.com/history> Accessed on 12 June
2013 133
ibid 134
ibid
35
in eBay auctions. In January 2000 PayPal made its first ‘foray’ in eBay.135 The
success of PayPal was transparent as it got 100,000 new accounts through eBay
rising up to 1 million accounts within 3 months.136
EBay on the other hand had already established itself in the market and was
keeping close eye on online payment companies. As an attempt to boast sales
and auctions eBay acquired Billpoint in 1999 and coined it as official payment
system for eBay.137 Surprisingly though PayPal generated more revenue than
Billpoint. Indeed more than 50% of the eBay users preferred PayPal.138 This was
more than a hint to eBay who then acquired PayPal for $1.5 billion and listed it as
its official payment system in October 2002.139
The ideology behind PayPal was to provide secure method for payment that
could replace other forms of payment. Hence in early days of its establishment
PayPal was involved in security of payment and “war on fraud”. 140 Indeed Max
Levchin, one of the founders was involved in developing ‘Gausebeck-Levchin
test’.141 Gausebeck-Levchin test is commonly known as CAPTCHA (an acronym
for "Completely Automated Public Turing test to tell Computers and Humans
Apart") to fight against fraud.142 Similarly, PayPal had acquired various
companies specialising in fraud management for the same reason.143
It is also important to note that the economic condition when PayPal was forming
was not particularly stable. During the last decade PayPal has been able to stay
strong and running throughout the dotcom crash of 2001 and the financial crisis
135
ibid 136
ibid 137
Kingsborough (n 6) p5
138 ibid
139 Kane (n5)
140 Eric M. Jackson, 'The PayPal Wars: Battles with EBay, the Media, the Mafia, and the Rest of
Planet Earth', (World Ahead Publishing, 2004) p43 141
ibid 142
ibid 143
B Chen, ‘Some PayPal Users Criticize Antifraud Measures’, (The New York Times,1 August 2012) Available from: <http://www.nytimes.com/2012/08/02/technology/paypal-antifraud-measures-are-extreme-some-users-say.html?pagewanted=all&_r=1&> [Accessed on 14 June 2013]
36
of 2007/2008. The dotcom crash of 2001 had badly affected most part of the
Silicon Valley.144 Moreover most of the tech companies suffered loss of image
and lack of trust from the public. Nonetheless PayPal managed to thrive despite
these challenges.
According to Kaminski, PayPal also survived several lawsuits and regulatory
disputes, especially in the early years when it was just established.145 The fact
that PayPal was one of its kinds and provided relatively new service meant that
the law governing it was lacking. However ones the norms were set it attracted
various new players like Google wallet/Google checkout, yet PayPal remains a
profitable pioneer in the online payment market.146
Milestones of PayPal is summarised in the table below.
Milestones
Date Description
October 1999 First email payment was sent which marked the birth of
PayPal.
March 2000 Confinity (payments and cryptography company) and
(Internet financial services company) merged
April 2000 PayPal services had more than 1 million auctions clearly
beating Billpoint (eBay's official payment system at that
time)
October 2002 PayPal becomes available in pounds and euro
October 2002 PayPal was acquired by eBay for $1.5 billion. More than 50%
of the buyers chose to use PayPal
144
R Waters, ‘Technology: the internet bubble’, (Financial Times, 20 June 2011] http://www.ft.com/cms/s/0/6fd71904-9b69-11e0-bbc6-00144feabdc0.html#axzz2bgtSOag3 145
Carl Kaminski, ‘Online Peer-to-Peer Payments: PayPal Primes the Pump, Will Banks Follow?’, 7 N.C. Banking Inst. 375 (2003) p377 146
ibid
37
October 2005 PayPal acquires VeriSign’s Payment Gateway
April 2006 PayPal is now available to use via mobile
October 2006 PayPal expands internationally in 103 markets, adding 10
new currencies
March 2007 Granted the banking license by the Commission de
Surveillance du Secteur Financier (CSSF) to operate in EU
January 2008 Acquired Fraud Science in order to enhance the fraud
management systems
December
2008
PayPal's total payment volume reached $60 billion, an
increase of 27%
over the previous year November
2009
PayPal now available in 24 currencies
December
2009
An increase of 19%, total payment volume reached $71
billion
September
2010
PayPal Expands Purchase Protections
December
2011
Started offline business, customers can make payment
through PayPal in stores
December
2012
The total payment volume reached $145 billion. 40% of
eBay’s revenue
Table 2: PayPal’s Milestone147
PayPal and its services:
PayPal allows any consumer or business to create an account using their email
address.148 Once the account is created the user needs to link it to their bank
account or debit/credit card and use it to receive or send payments online.149 For
147
PayPal, 'History', Available from: <www.paypal-media.com/history> Accessed on 12 June 2013 148
PayPal, About Us, at http://www.paypal.com/cgi-bin/webscr?cmd=p/gen/about-outside (last visited May 15, 2013) 149
ibid
38
every transaction in PayPal the bank account will be debited or credited
accordingly. When making or accepting payments the user does not disclose the
card number or any other account details, this makes PayPal less prone to
financial crime.150 Once the payment is made or received the user is notified
through email about the payment.
The business model of PayPal offers three major services:
1. PayPal buyer account (to make payments) - This service allows users to
buy using PayPal from online stores. The service is free of cost in most of the
countries including UK151 and USA152.
2. PayPal seller account (to receive payments) - This account allows sellers to
receive or request payment from the buyers. Unlike the buyer account PayPal
charges a small fee for this service (dealt further in chapter 3).153 Sellers are also
eligible to receive international payments using this account without any
additional cost.154
3. Money Transfer- The facility to transfer money is available to both buyer and
seller account.155 With this service users can transfer money to another user just
by using the email address. This feature is for free however, if the money needs
to be transferred to another country in different currency then there is a small
fee.156
150
Lee S. Adams & David J. Martz, Developments in Cyberbanking, 57 Bus. LAW. 1257, 1272 (2002). 151
PayPal, ‘Fees’, Available from: <https://www.paypal.com/uk/webapps/mpp/paypal-fees> [Accessed on 12 June 2013] 152
PayPal, ‘Buy Overview’, Available from: <https://www.paypal.com/us/webapps/mpp/how-paypal-works> [Accessed on 11 June 2013] 153
Ibid n(141) 154
ibid 155
PayPal, ‘Transfer Overview’, Available from: <https://www.paypal.com/uk/webapps/mpp/transfer-money-online> [Accessed on 14 June 2013] 156
ibid
39
Framework of PayPal:
One of the main reasons why PayPal was introduced was to make payment
simpler and secure. Hence the framework of PayPal is relatively straight forward
compared to framework of LC that was seen in chapter 1.
When PayPal is used as payment method users need to confirm that they are
definitely buying the product and agree to terms and condition provided by the
seller. This is process is usually known as ‘commit to buy’.157 The diagram below
is the screen shot taken from eBay.
Figure 3: Screen shot of commit to buy
‘Commit to buy’ is equivalent to the sales contract when using PayPal which is
legally binding.158 As shown in the figure above, the information regarding the
product and final payment amount is clearly given. However, unlike other sales
157
EBay, ‘How does commit to buy work’, (EBay, 2012) Available from: <http://community.ebay.com/t5/Checkout/How-does-the-commit-to-buy-work/qaq-p/9339535> [Accessed on 23 June 2013] 158
PayPal, ‘Commit to buy’, (PayPal, 2013) Available from: <community.Paypal.com/t5/Checkout/How does the commit to buy work?> [accessed on 4 June 2013]
158 Financial Fraud Action UK, ‘Fraud the Facts 2012’ (financialfraudaction.org
40
contract where trading parties sign a separate document, here contract is signed
by clicking.159
It is important to note that ‘commit to buy’ is not limited to eBay. According to
PayPal, ‘commit to buy’ is a standard process of agreeing to a contract before
making the payment and users go through similar process when using PayPal
with most of its online vendors.160
After committing to buy, next step is to log in to PayPal and make the payment.
Once the payment is sent an email confirmation is received instantly confirming
the payment detail.161
Why PayPal?
In any industry for a business to stand out from the crowd it needs to have a USP
(Unique Selling Proposition).162 This section will try and find PayPal’s USP.
PayPal claims that all the other payment options involve “lots of plastics and
numbers” which makes them complicated and messy to use.163 It is also time
consuming as usually users need to put the card number and pin. PayPal on the
other hand is comparatively simple to use as it only involves logging in and
making the payment which is done in a click of a button. With PayPal sending
payment is as easy as sending an email. Hence is fair to say that PayPal is
comparatively easy to use.
One of the most important factors while choosing a payment method is security.
This is also one of the main reasons why payment methods other than cash were
developed like cheque and debit/credit card. Nonetheless with time the need for
159
ibid 160
ibid 161
ibid 162
K Kangas, 'Business Strategies for Information Technology Management', (2nd edn, IRM Press, 2003) p23 163
PayPal, ‘Security’ (PayPal, 2013) Available from: <https://www.paypal.com/uk/webapps/mpp/paypal-safety-and-security> [accessed on 4 June 2013]
41
more protection is realised and even cheque or card payment methods at times
do not seem to provide adequate security, especially in online transactions.
The diagrams below demonstrate the fraud related to cards and cheques in UK.
Since it is not quite possible to cover every country the figures of UK has been
used to give an overview of the problem.
Figure 4: Internet/Ecommerce Fraud Losses on UK based Cards164
164
Financial Fraud Action UK, ‘Fraud the Facts 2012’ (financialfraudaction.org.uk, 2013) <http://www.financialfraudaction.org.uk/Publications/#/32/> [accessed on 19 June 2013]
42
Figure 5: Cheque fraud losses165
Figure 4 shows the internet fraud losses in UK-issued cards and figure 5 shows
cheque fraud losses respectively for the last decade. Internet fraud losses
(figure4) increased rapidly between 2003 and 2004. In more recent years since
2009 there is slight reduction but still the figures are very high compared to 2001.
Cheque fraud losses on the other hand have remained relatively constant with
only slight fluctuation. However, anything other than a decrease is a bad news.
PayPal is arguably ahead of its competitors when it comes to offering buyer
protection. Unlike most of the payment methods, the buyer’s financial information
like account details, card number and signature is not revealed when using
PayPal. Most of the online payment processers other than PayPal share the
account information with the seller and seller’s website every time a payment is
paid. This makes them more prone to internet crime. PayPal on the other hand
does not share any information other than the email address.166 PayPal also
165
Financial Fraud Action UK, ‘Fraud the Facts 2012’ (financialfraudaction.org.uk, 2013) <http://www.financialfraudaction.org.uk/Publications/#/44/> [accessed on 19 June 2013] 166
PayPal, ‘How secure is the PayPal site?’, (PayPal, 2013) Available from: <https://www.paypal.com/cgi-bin/webscr?cmd=xpt/Help/general/TopQuestion6-outside> [Accessed on 12 June]
43
claims that the account information such as account details and card number are
not accessible to anyone including users themselves in order to avoid fraud
situation when the password is hacked.167
In addition to this as seen earlier, PayPal keeps a close eye on any development
in fraud management system and integrates it if necessary. This ensures that
PayPal is well equipped with latest anti-fraud system.
PayPal and Innovation:
Like any successful business PayPal has established itself as an innovator and a
market leader in its field. Its character is well reflected in its business as PayPal
has been coming up with new ideas frequently and adding them to the range of
services it already provides.168 Over the years PayPal has shown a tendency
where it reflects on its services and makes amendments to improve. This
phenomenon has resulted in better quality of service along the time. For
example, in January 2008 PayPal acquired ‘Fraud Sciences’ which allowed
PayPal to gain expertise on online fraud management tools. Likewise, in August
2011 PayPal acquired Zong (specialist in mobile payment service); realising the
fact that increasing number of customers were using mobile devices to shop,
PayPal got the best in the business to enhance payments through mobile
devices.
Strategic acquisition has been integral part of PayPal’s growth. It has helped
PayPal to stay innovative and ahead of the competition. According to Williams
PayPal has made seven major acquisitions since its origin in order to enhance its
business.169 He further adds that this phenomena was not only limited to
businesses as PayPal also hired numerous programmers when needed.170
In ecommerce it is not always possible to keep pioneering and hence acquisition
is required. Ecommerce (or internet in general) is arguably one of the most open
167
ibid 168
Damon Williams, 'Pro PayPal E-Commerce', (Damon Williams, 2007) p12 169
Ibid., p23 170
ibid
44
markets with least barriers to enter.171 Since it involves lots of programming and
coding it attracts many young enthusiastic programmers. Moreover, the start up
cost is relatively low start because of the intangible nature of the business.
Not only in terms of acquiring companies but also introducing new service and
the desire to keep innovating is PayPal’s strategy behind its success. In late
2011 PayPal announced to move its business offline which would allow
customers to pay by using PayPal stores.172 Since then PayPal has been
launching various workshops and demonstrating it. Recently, PayPal launched a
new app that would allow users to pay in restaurants using PayPal.173 Initial
reviews has been great as restaurant operators insist that it is faster than cash or
card payment and it allows them to the interact with customers better.174
PayPal dispute settlement:
PayPal claims to provide one of the most secure and safe platforms available to
both buyers and sellers.175 Unlike most of the online payment system where the
payment is directly transferred to the seller when a payment is made, PayPal
seems to do it differently. PayPal holds the money for 21 days to make sure that
there is no problem with the transaction, such as claims, disputes, charge backs
or return.176 However if the seller has a good record and has used reliable courier
service then the money is held for shorter period.177
171
Nikhilesh Dholakia, 'Global E-commerce and Online Marketing: Watching the Evolution', 2nd edn, (Greenwood Publishing Group, 2002) p42 172
Alistair Barr, 'EBay's PayPal going offline, targets big retailers', (Reuters, 2011) Available from <http://www.reuters.com/article/2011/07/21/us-ebay-idUSTRE76J6TD20110721> [Accessed on 19 July 2013] 173
BBC News, 'Pay for goods 'with your face': PayPal launches new app', (BBC News, 2013) Available from: <http://www.bbc.co.uk/news/business-23605025> [Accessed on 12 June] 174
ibid 175
PayPal, ‘Safer with every transaction’, Available from: <https://www.paypal.com/uk/webapps/mpp/paypal-safety-and-security> [Accessed on 29 June 2013] 176
PayPal, ‘User Agreement: Section 5.2’, Available from:< https://cms.paypal.com/uk/cgi-bin/marketingweb?cmd=_render-content&content_ID=ua/UserAgreement_full&locale.x=en_GB#13. PayPal Buyer Protection> [Accessed on 15
July 2013]
177 PayPal, ‘Frequently Asked Questions – Funds Availability’, Available from:
<https://www.paypal.com/uk/webapps/mpp/security/paypal-funds-availability> [Accessed on 22 July 2013]
45
Figure 6
Figure 6,178 summarises the dispute settlement procedure in PayPal. PayPal
advises its users to open a dispute within 45 days from the payment date.179
Once the dispute is opened the seller and buyer have 20 days to resolve the
dispute.180 The funds are placed on hold until the case is resolved. If the dispute
is not resolved within 20 days it is escalated to a claim where PayPal investigates
the case.181 PayPal asserts that cases are normally solved within 30 days;
however complex cases may require longer time to investigate.182
After thorough investigation PayPal decides on the case and delivers its final
decision. If any party is unhappy out the decision they can appeal the case
against PayPal.183 The governing law and jurisdiction depends upon the users
178
PayPal, ‘How to dispute a transaction’ (PayPal, 2013) < https://www.paypal.com/uk/cgi-bin/webscr?cmd=xpt/CaseManagement/customerservice/EducationBuyerFileDispute> accessed on 4 June 2013 179
ibid safety 180
Ibid n safety 181
PayPal, ‘How to dispute a transaction’, Available from: <https://www.paypal.com/uk/cgi-bin/webscr?cmd=xpt/CaseManagement/customerservice/EducationResponseReview> [Accessed on 25 June 2013] 182
PayPal, ‘How to dispute a transaction: Step 4 We investigate and resolve the claim’, Available from: <https://www.paypal.com/uk/cgi-bin/webscr?cmd=xpt/CaseManagement/customerservice/EducationResponseReview> [Accessed on 25 June 2013] 183
ibid n User agreement article 14.3
46
account. For example if the user has a PayPal account in United Kingdom then
the case will be governed by the English law.184
PayPal’s future:
This section will look at the PayPal’s proposed plans for the future. EBay
(PayPal’s parent company) has mentioned about its upcoming plans for PayPal
and other subsidiaries in its annual reports.185 Additionally this segment will study
the recent news about PayPal in order to see where they are heading.
In last two years eBay has acquired 3 different companies: Zong, Billsafe and
GSI.186 Zong specialises on mobile payments and purchasing goods through
mobile devices.187 Billsafe is a dedicated online payment provider in Germany
which allowed merchants to pay after receiving the goods and the invoice
receipt.188 Similarly, GSI is leading interactive marketing service provider and
also deals with ecommerce.189 EBay claims that GSI’s services are used by
some of the leading businesses around the world. All of these companies that
eBay acquired are specialised in online payment and e commerce. Hence it is
clear that eBay plans to grow stronger within this area. In addition to this it is
mentioned the annual report the expertise gained from new subsidiaries would
enhance PayPal in order to grow and diversify its services.190
In recent years PayPal also seems to be interested in offline market i.e. general
retail stores.191 The initial plan was to enter offline market was there since 2007,
however without any breakthrough.192 Nonetheless since 2011, PayPal seems to
184
ibid 185
EBay Inc, 2012. Annual Report 2011-2012. [Online] Available at:< http://files.shareholder.com/downloads/ebay/2638711281x0xS1065088-13-4/1065088/filing.pdf > [Accessed on 29 June 2013] p6. 186
ibid 187
ibid 188
ibid 189
ibid 190
Ibid., p14 191
Bensinger, Greg. "PayPal Works to Take Its Business Offline." Wall Street Journal - Eastern Edition, November 14, 2012., B5, Business Source Premier, EBSCOhost (accessed July 19, 2013). 192
"PAYPAL LAUNCHES PREPAID CARD IN THE UK." Cardline 8, no. 32 (August 8, 2008): 7. Business Source Premier, EBSCOhost (accessed July 19, 2013).
47
be putting some considerable efforts into it. In May 2012, PayPal announced
deals with two of the leading offline payment operators Equinox Payments and
Verifone.193 Equinox claimed that they reached an agreement with PayPal that
would allow their consumer payment terminals to accept payments through
PayPal.194 Similarly Verifone stated that the deal between them would enable
PayPal acceptance in large retailers. However, Verifone is more prominent in the
USA than in UK and Europe where it covers 80% of 200 largest stores.195
The biggest concern for PayPal would be whether or not the public would be
willing to accept PayPal offline. According to research carried out by ISO and
agent, most of the people would be willing to give a try and some of them thought
it would be safer and convenient.196 According to Beth Horowitz, (senior vice
president at Discover partnership) general public would require some time to
digest the concept of digital wallet, however in no time it should be up and
running smoothly.197
Conclusion:
This chapter demonstrated that PayPal started as an innovative concept of
‘digital wallet’ and soon flourished rapidly with time. Today PayPal has placed
itself as one of the safest and simplest payment method. The study also showed
that the evolution of PayPal has been full of mergers and acquisition. These
acquisitions have insured continuous improvement making PayPal one of the
leading payment providers. In the final segment it was seen that PayPal is keen
in diversifying further and hence getting involved in offline market.
However, it is yet to see what PayPal can offer in relation to international
commerce.
193
Savitz, Eric. "PayPal Cuts Deals With Verifone, Equinox For Offline Payments." Forbes.Com (May 24, 2012): 32. Business Source Premier, EBSCOhost (accessed August 19, 2013).
194 ibid
195 ibid
196 "How Does Public View PayPal Going Offline?." ISO & Agent 8, no. 37 (October 11, 2012): 13.
Business Source Premier, EBSCOhost (accessed August 19, 2013). 197
ibid
48
Chapter 3: International trade and LC in the electronic age
Chapter 3 is set to fulfil the second objective of the research which is to examine
the impact of electronic age on international commerce and LC. While doing so
firstly, this chapter will look at the effects of technology on international trade.
Moving on the impact of electronic records on LC will be studied; here the
provision of the eUCP will be dealt. In the final segment the chapter observes the
difficulty of proving electronic records in LC.
The digital age and its impact on the international commerce:
Slowly but surely the digital age is changing the way we do things and the way
we live. It has already changed the way we work, play and shop. According to
BBC ‘time spent in front of a screen’ is rapidly increasing and is predicted to
increase further.198 This phenomenon is not alien to one country and similar trend
is seen all over the world.199
Like everything else it has also affected the international commerce which is
eminent from the emergence of electronic commerce.200 The increasing use of
electronic documents in international trade has rather created a perplexing
situation that needs consideration by the merchants, bankers and above all the
policy makers. Technology has changed the extent and the nature of electronic
documents that is being used and demands sobering regularity.201 Most of the
communication in trade is done through emails and electronic documents are
often used.202
According to Davidson, parties in trade face a serious problem in a dispute
situation trying to prove the electronic records.203 He further adds that when
198
BBC News, 'Childhood 'screen time': Warning over TV and computers', (Published on 22 May 2012) Available from: <http://www.bbc.co.uk/news/health-18149510> [Accessed on 18 July 2013] 199
Linda Marie Harasim, 'Global Networks: Computers and International Communication', (Massachusetts Institute of Technology, 2012) p34 200
A Davidson, ‘ Electronic Records in Letters of Credit’, (UNCITRAL, 2010) Available from: <http://www.uncitral.org/pdf/english/colloquia/EC/UNCITRAL-paper_Feb2011-Alan-Davidson.pdf> [Accessed on 18 June 2013], p1 201
ibid 202
ibid 203
Ibid., p2
49
printouts (hard copy of the electronic document) are handed over to the court by
the trading parties there is serious risk of court rejecting the documents.204 The
courts do not accept printouts because of the fact that it is not really difficult to
manipulate the original document before printing it out.
Electronic records in LC:
LC has illustrious history205 where it has been used by several merchants,
Presidents and even Kings206. However, in the age of internet and electronic
commerce, the prestigious instrument (LC) has somewhat become vulnerable.
As discussed earlier the main problem with using the LC has been in disputes
while ‘proving the validity of electronic documents’.207
History suggests that it is not the law or the policy makers but the merchants who
develop new payment method in order to fulfil interest of various parties.208 The
law seems to follow the merchants into accepting and governing the practice.209
In case of UCP 500 (before 2007 and UCP 600), it was not suitable for paperless
transaction as it did not mention anything about it.210 Emergence of electronic
commerce and electronic communication in banking sector has had a direct
impact on LC.211 Davidson adds that this also has an effect on how parties fund
the financing of the trade.212 The efficiencies of computerisation and electronic
communication has led to rationalisation and streamlining of the credit
204
ibid 205
W McCurdy, "Commercial Letters of Credit", (1922) 35 Harvard Law Review p539. 206
F R Sanborn, Origins of the Early English Maritime and Commercial Law, New York, 1930, 347 207
Davidson n(167) p4 208
McCurdy n(172) p540 209
ibid 210
Davidson n(167) p6 211
C. Huck Yong, "International Trends in Documentary Transactions", (1993) 14 Sing L.R. 171, 212-216 212
Davidson n(167) p6
50
process.213 Sarna mentions that this caused a need for re-evaluation of LC and
put a question mark on its appropriateness.214
One of the other impacts of increasing use of electronic records in LC has been
on the advising banks and the negotiating banks. The rapid development and
use of electronic message has made it easier to communicate so the need for
advising bank and especially negotiating bank is decreasing.215 Nonetheless it
does not have an effect on the confirming bank as from a seller’s perspective a
reliable local bank is always needed. However, it would be fair to say that the
electronic age has definitely changed architecture of LC transaction.
The eUCP:
ICC realised the need to address the electronic trade in May 2002. The Banking
Commission addressed about the 'expanding gap' between the ever escalating
electronic practice and UCP 500. It also discussed about the electronic
presentation of the documents and the electronic LC. The banking commission
stated that the industry itself has expressed need for "guidance and rules like the
UCP for the electronic equivalents of paper credits".216
Consequently ICC undertook the revision of electronic commerce from May 2000
to May 2002.217 This has been the only time when ICC decided to provide with
the supplement to UCP.218 The supplement was coined as ‘eUCP’ which
commenced on from 1 April 2002.219 ICC in relation to eUCP stated that it was
"nothing less than a revolution in trade finance".220
213
ibid 214
Lazar Sarna, "Letters of Credit: Electronic Credits and Discrepancies" (1990) 4 Banking and Finance Law Review 149, 154 et al. 215
Davidson n(167) p6 216
Notes from the ICC Banking Commission First Working Party Draft eUCP, 15 December 2000 and the Revised Working Party Draft eUCP. 217
Paul Todd, 'Bills of Lading and Bankers Documentary Credits', (British Library Cataloguing in Publication Data, 4th edn) p301 218
ibid 219
ibid 220
ibid
51
ICC also has hired and set aside a group of experts221 consisting of scholars with
different expertise such as electronic trade, UCP, international trade and other
related industries to prepare the supplement.222 Davidson puts that the main
objective of the working group was to analysis the ‘consequential effect and
substantive changes’ that needed to be addressed.223 The issues were mainly
‘the timing and nature of presentation, the effect on the preclusion rule,
examination and originals’.224
Today eUCP allows presentation of mixture of electronic and paper documents
or purely electronic documents.225 According to Davidson the articles of the
eUCP are fairly similar and consistent with UCP apart from when the documents
are completely electronic. Overall, it seems that banking commission has
addressed the raising issue of the electronic records.
However, some of the intellectuals are still not convinced of banking
commission’s work. One of them is Charles del Busto, who has mentioned that
despite the occasional claims suggesting UCP’s effort in aligning with
technological changes, UCP cannot cope with the ever changing pace of
electronic commerce.226 Similarly, Professor James Byrne, the reporter and chair
of the International Standby Practices Steering Committee (ISP98), put a
question mark on the survival of LC "in a world of ecommerce".227 One of the
other factors which support this statement is the fact that apart from providing
supplement the ICC has not mentioned it in the latest revision of UCP (UCP
600).
221
Referred to as “Working Group” 222
Todd n(184) p302 223
Davidson n(167) p7 224
ibid 225
ibid 226
Charles del Busto (editor), Case Studies on Documentary Credits under the UCP 500, ICC Publication number - 535, ICC Publishing SA, Paris, 1995, 3 227
James E Byrne “Overview of Letter of Credit Law & Practice in 2000”, 2001 Annual Survey of Letter of Credit Law and Practice, Institute of International Banking Law & Practice Inc, Montgomery Village, Maryland, 2001, 3, 3.
52
Scope of eUCP:
As mentioned earlier the article e1228 of eUCP states that “it accommodates
presentation of electronic records alone or in combination with paper
documents”.229 The other articles of eUCP cover the examination, the distinction
between copies and original, disclaimer aspects in relation to electronic records
and notice of refusal.230 The articles of eUCP rely on same principle that governs
UCP and allows some amendments to the credits.
The difficulty of proving electronic records in letters of credit:
As mentioned earlier in a dispute situation parties always a run a risk of courts
rejecting document when electronic documents are submitted. The first major
problem is the appropriateness of the law of evidence when it comes to
electronic records. Davidson states that despite the fact that electronic records
are accepted and considered as evidence by the court; ‘the weight attached’
varies considerable between two different legal systems.231 In addition to this he
further states that the pace of change in trade is too fast for the law to keep up
with it.232
Jurisdiction under common law categorise electronic records and electronic
message as “tangible” and thought to be similar as ‘telecommunications’ but in
past it has been witnessed that it is not enough ‘to make the transmissions
admissible at law’.233 Advocates like Yong have been vocal about this issue and
have mentioned that courts should not ignore the commercial advantages of
electronic communications and the fact that how common and well accepted it is.
228
The articles of eUCP uses “e” before article number to avoid confusion in citation 229
eUCP 600 Article, International Chamber of Commerce, Publication Number 600 (2007 Revision) 230
eUCP, International Chamber of Commerce, Publication Number 600 (2007 Revision) 231
Davidson n(167) p9 232
ibid 233
ibid
53
He further adds that it is no different than the telecommunications and ordinary
phone calls.234
Another problematic aspect of electronic communication has been the
authentication of the electronic messages involving financial transactions. It is
important for bankers, lawyers and traders, not only because of its financial
importance but also as evidentiary purposes.235 Nonetheless the court needs to
be satisfied with the evidence and may not consider “all aspects of email
communications”.236
Armstrong v Executive Office of the President demonstrated that courts were not
pleased with print outs and did not considered it as convincing evidence.237 It
was concluded that the printouts were missing key information like the date of
origin, the date of receipt, transmission date, linkage between messages and list
of recipients.238
Conclusion:
As demonstrated in this chapter it is clear that advancement in technology brings
new problems for LC. However, the Banking commission is not ignoring the
problem and has made considerable efforts to seal the widening gap with the
technology. The introduction of eUCP is ‘revolutionary to international trade’ (as
claimed by the ICC). But some of the advocates are not convinced and still
believe that LC is not keeping up with the technology.
Based on the analysis it would be fair to say that the electronic age has definitely
changed the architecture of LC transaction and it is likely to do so in the future.
234
Ch’ng Huck Yong, "International Trends in Documentary Transactions", (1993) 14 Sing L.R. 171, 213-4. 235
Alan Davidson, "Retaining Electronic Mail for Evidentiary Purposes", (1999) 6 Proctor 30. 236
ibid 237
Armstrong v. Executive Office of the President, 877 F. Supp. 690, 705-06 (D.D.C. 1995). 238
ibid
54
Chapter 4: Can PayPal actively perform in international
commerce? Where does it stand against LC?
Introduction:
In chapter 2 the evolution of PayPal was analysed and discussed. PayPal begin
its journey as two small virtual (online) companies and ended up as being one of
the most successful and reliable online payment systems. Chapter 2 also looked
at the PayPal’s strategy which was based on Kaizen (continuous
development).239 Throughout the history of PayPal it has been acquiring
businesses and growing bigger and better. This chapter will try to examine if
PayPal is capable of facilitating international trade and also compare PayPal with
LC.
PayPal: not just an ordinary online payment system:
PayPal is a popular name and “people’s choice of online payment system”240.
Even though the image of PayPal is built as an online payment system it is not
limited to it. In 2007, when PayPal made an entry in Europe it decided to be
governed as a “credit institution rather than as an electronic money issuer”.241
PayPal (Europe) has even got a banking license.242 It is appropriately licensed
under Article 2 of “Law of 5 April 1993 on financial sector as amended” as a
Luxembourg credit institution and is under supervision of ‘the Commission de
Surveillance du Secteur Financier’ (Luxemburg supervisory authority).243
Similarly, PayPal is registered as a financial service provider in most of the
239
T Smith, 'Dynamic Business Strategy: The Art of Planning for Success', (Tata McGraw-Hill Education, 1977) p23 240
EBay.Inc, ‘PayPal: People's Choice Award Voting Now Open!’, (EBay developers programme, 2013) Available from: <https://go.developer.ebay.com/developers/community/blogs/baldgeek/paypal-x-developer-challenge-peoples-choice-award-voting-now> [Accessed on 4 July 2013] 241
Robert Caplehorn, 'Paypal Europe: reasons for becoming a bank', E.C.L. & P. 2007, 9(6), 3. [Accessed on 3rd July 2013] 242
Catherine Holahan, 'The Bank of PayPal', (Bloomberg Business Week, 2007) Available from <http://www.businessweek.com/stories/2007-06-15/the-bank-of-paypalbusinessweek-business-news-stock-market-and-financial-advice> [Accessed on 5
July 2013]
243 PayPal n(157)., section 1.1
55
countries where it has set its footprint some of these countries includes
Singapore, India, Australia and Brazil.244
PayPal’s potential contribution to International Commerce:
In chapter 3 electronic records and its impact on LC and international trade were
analysed. It was also established that there were certain complications while
using electronic records in LC and perhaps rapid pace of technological change
was too much for LC to keep up with. PayPal on the other hand is a fruit of
technology and it has demonstrated that it is able to adapt to latest technological
changes. For example, PayPal successfully launched its business to mobile
devices (PayPal app) proving that it is capable of moving with technological
demand.
Using PayPal can also make the trade process less sophisticated. LC and other
popular instruments for trade involve network of contracts (as seen in chapter 1).
Although series of contract delegate’s responsibilities effectively and with legal
consequences attached to it, nonetheless it makes the process complicated.
PayPal completely eliminates the network of contracts. In addition to this PayPal
does not involve multiple banks which make the process simpler and cheaper.
‘New innovation brings new possibility’ that has been the case throughout the
human history. Similarly PayPal has opened a new dimension to international
trade by creating and enhancing the possibility of ‘direct trade’ between the
manufacturers and the end consumers. Today with help of PayPal and courier
companies, manufacturers can reach the end consumers directly without having
to deal with wholesalers, retailers or banks. Some manufactures already have
this feature in their website for example Fernandes Guitar (Guitar manufacturer
244
ibid
56
in US) claims to deliver its goods to customers all around the world as long as
they receive payment from PayPal.245
However for a direct trade to take place PayPal alone is not enough as it only
handles the payment. Hence courier companies are required who would not only
be able to deliver goods but also efficiently calculate taxes and release the goods
from the customs.
PayPal feasibility:
From the study carried out so far about PayPal it is fair to say that PayPal can be
very useful in facilitating international trade. However the biggest question
surrounding any new mechanism or instrument is its feasibility. In this section of
the chapter the feasibility of PayPal will be analysed.
The study in chapter 2 demonstrated that PayPal is a successful online payment
system and is available in 24 major currencies.246 This allows PayPal to be
globally accepted and not be limited by geography which is necessary for any
international trading instrument. Users can buy and sell goods from all around
the world.
Another factor that makes PayPal a viable option is the fact that it is fairly easy to
get use. PayPal does not charge to open a new account and only thing required
is a valid email address and a bank account or debit/credit card. After that
sending payment is as like sending an email.
The general stereo type might be that since PayPal is currently providing its
service to mostly end consumers with small transactions, it would not be able to
handle huge business to business transaction. However, the founders of the
245
Fernandes Guitars, 'About Us', (2013) Available from: <www.fernandesguitarshop.com/content/4-about-us> [Accessed on 23 July 2013]
246 PayPal, ‘Multiple Currencies’, (PayPal, 2013) Available from: <https://www.paypal.com/uk/cgi-
bin/webscr?cmd=p/sell/mc/mc_intro-outside> [Accessed on 2 June 2013]
57
PayPal had proved authorities wrong when they had similar argument against
PayPal. 247 In 2000, PayPal in an experiment successfully transferred $4.5 million
transaction.248 Since then PayPal developed its own slogan stating: "If you can
beam $10, then why can’t you beam $4.5 million?"249
One of the factors that make PayPal viable is the fact that it does not rely on the
card networks like MasterCard and Visa to facilitate its payment.250 PayPal’s
payment is rather processed by mostly banks and sometimes by other payment
processors. According to eBay’s annual report the card networks usually charge
a high fee for its services in developing countries, which makes it less feasible.
As a result by using other payment processors such as banks, PayPal is not
restricted by the card network.
In order to carry out trade especially with new traders a trust worthy party is
required in between who could provide assurance. Based on the analysis of
chapter 2 it is fair to say that PayPal has built a good reputation as a reliable
payment method. Hence like LC PayPal is also capable of creating possibility to
trade with new traders.
Cost comparison between letters of credit and PayPal:
In this section of the chapter the cost comparison is done between PayPal and
LC. The analysis of the cost will help in accessing the viability of PayPal if it is
used as a trading instrument in international commerce. Firstly, the cost of using
LC will be looked upon. After evaluating the cost of LC, the cost of using PayPal
will be considered.
For the purpose of the study the rates provided and used by a bank will be
analysed. Since it is not quite possible to analyse the cost of using LC in many
countries, only one country will used for the purpose of the study. In this case
United Kingdom is chosen to give an overview of the cost of LC. Ward in his
247
PayPal n(124) 248
ibid 249
ibid 250
PayPal n(179) p17
58
book puts that the fierce competition between banks have made the cost
relatively similar amongst the banks.251 Hence the rates of Lloyds Bank should
be very close to the general market price in United Kingdom.
Figure: 4
Figure 4 is extracted from Lloyds Bank’s website which shows the list of general
cost involved in an export LC transaction.252 Lloyds Bank here acts as the
advising and reimbursing bank because it is an export letter of credit transaction.
The above table shows all the fixed and variable cost involved in this transaction.
The fixed cost involves pre-advising and advising charges, totalling £85.00, these
charges apply every time the service is used.253 There is also a charge of £50.00
deducted for each set of documents submitted.254 The seller needs to pay
additional £50.00 each time if the documents are rejected. Hence there is always
251
T Ward, 'Letters of Credit and Documentary Collections: An Export and Import Guide', 2009, 2nd edn (Xlibris Corporation, 2009) 252
Lloyds TSB, ‘Trade Tariffs’, (Published on 9 January 2012) Available from: <http://www.lloydstsbbusiness.com/media/lloydstsb2004/business/pdfs/trade_tariff_brochure.pdf> [Accessed on 4 August 2013]., p3 253
ibid 254
ibid
59
a risk of bank not being satisfied with the documents and charging the seller.
There might be other charges as well like cancellation charges and third party
proceeds charges.
Apart from these fees other cost fall under variable cost which is usually charged
as some percentage of the total transaction. These charges include checking and
paying of drawings fees of 0.125%, Acceptance/Deferred Payment/ Negotiation
charges (subject to arrangement) and transfer fee of 0.5%.255 As discussed in
chapter 1 the Advising bank can add its confirmation to the credit and become
the confirming bank, however there is an additional fee for this service. Same is
the case with Lloyds Bank where the charges are based on the ‘total period at
risk’, issuing bank risk, value of credit, country risk and validity period.256
Although, Lloyds Bank has not provided any estimate for these charges, Kevin in
his book mentions that the banks have started setting minimum fees of £250.00
per transaction for adding their confirmation.257
If an exporter had to trade goods worth £100,000.00 the cost would be break
down as following:
Tariffs Amount
Pre-Advising charges £35.00
Advising charges £50.00
Checking and paying of drawings
charges (0.125% of the total amount or
minimum £60 and maximum £200) £125.00
Presentation of documents (assuming
documents does not have to be
resubmitted) £50.00
Transfer charges (0.5% of the total £500.00
255
ibid 256
ibid 257
Kevin Shakespeare, 'Trade for Good - The Essential Guide to Business and Finance in UK and International Trade', ( ecademy, 2011), p216
60
amount)
Acceptance/Deferred Payment/
Negotiation N/A
Confirmation charges £250.00
Total £1010.00
Figure: 5
Figure 5 is also extracted from Lloyds Bank’s website which shows the list of cost
of for an import LC transaction.258 In this scenario Lloyds TSB would be acting as
the issuing bank because it is an import letter of credit transaction. The table
above shows all the fixed and variable cost involved in this transaction. The fixed
cost involves charges on presentation of documents and delivery order charges,
totalling £150.00, these charges apply every time when the service is used.259 In
addition to this there is charge of £50.00 for cancellation.260 There is also another
258
Lloyds TSB, ‘Trade Tariffs’, (Published on 9 January 2012) Available from: <http://www.lloydstsbbusiness.com/media/lloydstsb2004/business/pdfs/trade_tariff_brochure.pdf> [Accessed on 4 August 2013]., p2 259
ibid 260
ibid
61
charge of £50.00 deducted if any amendments have to be made in the LC
regarding the amount and time.261
Likewise, there are variable charges which include checking, handling and
paying charges of 0.125% and Acceptance/Deferred Payment/ Negotiation
charges (subject to arrangement).262
If an importer had to trade goods worth £100,000.00 the cost would be break
down as following:
Tariffs Amount
Checking, handling and paying of
drawings charges (0.125% of the total
amount or minimum £60 and maximum
£200) £125.00
Presentation of documents £50.00
Amendments (assuming no
amendments were made) £0.00
Acceptance/Deferred Payment N/A
Confirmation charges £250.00
Delivery order £100.00
Cancellation (assuming no cancellation
were made) £0.00
Total £525.00
According to the calculations above the total cost of using LC would be
£1,535.00,263 which is 1.54% of the total value of goods traded. However, it is
important to note that this does not include acceptance and deferred payment
fees which is subject to arrangement and is taken at the beginning of the
261
ibid 262
ibid 263
Adding both the figure for both export letters of credit and import letters of credit: £1010.00 + £525.00 = £1535.00
62
process. Likewise the calculations also holds several assumptions like no
amendments were made, no third party involvement and documents submitted
by the seller to the bank were accepted in first attempt. In reality some or all of
these costs may have been incurred.
Figure 6
Figure 6 is taken from PayPal’s website264 where the merchant rate is illustrated.
Unlike bank charges in LC, PayPal’s charges are straight forward and are not
break down into several types of cost. PayPal has 5 different types of tariffs
based on the amount of the transaction. For example the transactions of £0.00 to
£1,500.00 are charged 3.4% + £0.20 per transaction (as seen in figure 6). It is
important to note that these charges apply to businesses (sellers) whereas the
buyer does not have to pay for the service.
PayPal claims to have no hidden cost and extra cost for using the service. Hence
using PayPal would be mean less hassle for the traders. In addition to this
opening the accounts is free in PayPal (as seen in chapter 2). However, once the
seller starts using the service PayPal requires the seller to maintain minimum
balance of £1,500.00 in its business account which is linked to the PayPal
264
PayPal, 'Merchant Rate', Available from: <https://www.paypal.com/uk/cgi-bin/?cmd=_fees-rate-about-outside+> [Accessed on 12 June 2013]
63
account. Apart from this requirement there is no requirement to open and
maintain a PayPal Seller Account (Merchant Account).
Using same example as for LC, if £100,000.00 worth of goods is traded using
PayPal the cost for the service would be 1.4% + £0.20 GBP265, which would give
£1,400.20, which is 1.40%.
Analysing the costs:
So far cost for trading goods worth £100,000.00 has been analysed individually
using both for LC (Lloyds TSB Bank's rate) and PayPal's Seller Account. The
calculations showed that the cost using LC would be £1,535.00 and using PayPal
would be £1,400.20. The difference is £135.80 which is not a lot, however there
are few important points that need to be considered which is discussed below.
One noticeable difference is the fact that the cost for using PayPal service is paid
by a single party (seller), where as in LC it was seen that both the seller and
buyer were charged by their banks. With PayPal the seller bears the cost of
using the service where as buyer is a free rider and does not have to pay for the
service.266 Similar is the case even if the transaction takes place across different
countries and there is no additional cost involved.267
The charges itself is one off in PayPal and is not divided like in LC. In LC it was
demonstrated that the seller was charged seven different types of cost in total,
similarly the buyer was charged six different types of cost. From a traders
perspective it generally better if the cost is a one off charge rather than several
different types. It makes it relatively difficult to understand and hence challenging
to forecast the actual cost.
265
as show in figure number 6 the amount £100,000.00 is greater than £55,000.00, therefore the tariff of 1.4% + £0.20 is used 266
PayPal n(246) 267
ibid
64
It was also demonstrated that the LC had some fixed cost which would be
charged every time the service is used. The seller and buyer paid £385.00 and
£400.00 respectively as fixed cost, totalling £785.00. In case of PayPal it was
seen that there was no fixed cost. Hence if traders were to make frequent
purchases then they would be losing more while using LC. Nonetheless with
PayPal if the traded goods are less than £55,000.00 then the cost would have
been higher as different tariff with different cost would have been applied (as
shown in figure no. 6).
When calculating the cost for using LC several assumptions were made such as
documents were accepted by the bank at the first instance which is not always
the case.268 Similarly it was also assumed that there were no amendments
however in reality it is argued that traders usually have to make amendments due
various reasons like the seller not being able to provide the agreed quantity of
goods, discounts given after negotiation etc.269
Benefits of LC over PayPal:
So far this chapter has analysed the monetary cost of using LC and PayPal.
From the analysis above it was demonstrated that PayPal is relatively cheaper
and less complicated to use. However for the purpose of the study undertaken in
this paper it is necessary to look at advantages or benefits that LC has over
PayPal. The advantages will be drafted on basis of the analysis carried out so
far.
One of the benefits that LC has is it can provide possibility of temporary
financing. As seen in chapter 2 if there is an agreement between the issuing
bank and the buyer, the issuing bank can allow buyer to release goods and pay
after selling those goods. Similarly, LC also has option of ‘deferred payment’
268
Pawlowic n(48) p10 269
ibid
65
where the seller allows a grace period which is almost like seller financing the
buyer.270
In LC a seller can make a claim on basis of sales contract if the transaction does
not take place. Once the sales contract is signed it allows the seller to claim for
the losses if the trade does not take place. In other words in any case after
signing the sales contract the seller does not lose. LC also allows transfer of
benefits where multiple sellers can receive the payment by using the same LC.
Similarly LC can also serve as security.
Can PayPal mirror some of these advantages?
The possibility of deferred payment could be vital for many businesses, as of now
PayPal does not have any such feature. Nonetheless, eBay’s recent acquisition
‘Billsafe’ is a dedicated and leading online payment provider in Germany which
allows merchants to pay later (also discussed in chapter 2).271 If PayPal were to
work closely with Billsafe, it is likely that this option of deferred payment might be
available with PayPal.
One of the other areas where PayPal lacks compared to LC is the prospect of
claiming on the basis of the sales contract. As seen in chapter 2 PayPal’s
‘commit to buy’ (‘equivalent to sales contract in LC) does not offer this possibility.
However, the main purpose of this function is to make sure that the trade takes
place and the seller does not losses. PayPal can serve the purpose of this
function by making sure that buyers do not opt out after committing to buy.
PayPal already has a mechanism in place to prevent these situations under
‘PayPal Seller Protection Policy’.272 PayPal classifies this as ‘fake buyers’ and
270
S Padmalatha, 'Management Of Banking And Financial Services', (2nd edn, Pearson, 2011)., p474 271
Business Wire, 'eBay Inc. Acquires BillSAFE', (22 Dec 2011) Available from: <www.businesswire.com/news/home/20111222005130/en/eBay-Acquires-BillSAFE> [accessed on 13 June 2013] 272
PayPal, ‘Seller Protection', (PayPal, 2013) Available from: <https://www.paypal.com/uk/webapps/mpp/seller-protection> [Accessed on 12 August 2013]
66
permanently removes the buyer account if found guilty.273 Banning these
accounts will surely reduce such occurrence in future. Hence this feature of
PayPal should fulfil the purpose nonetheless it would be fair to say that it is not
as secure as LC where compensation for the loss is provided.
When it comes to transfer of benefits in LC, PayPal does not have such function
however, PayPal allows transfer of funds amongst its users therefore, if a buyer
wants it can transfer the funds received from the seller to other beneficiaries.
Hence PayPal can serve the purpose nonetheless it is not exactly similar to LC.
Advantages of using PayPal over LC:
Elimination of network of contracts: Unlike LC, PayPal does not involve
network of contracts. In chapter 1, figure 2 showed that a typical LC transaction
could have up to five legally binding contracts. This makes LC more prone to
disputes. Elimination of contract not only avoids dispute but also makes the
overall process simpler.
No banks involved: LC completely relies on banks, as seen in chapter 1 more
than two banks could be involved in a LC transaction. This increases the cost
and also makes it time consuming. PayPal on the other hand does not rely on
banks.
Easy and Fast transaction: Since PayPal is an online interface it is convenient
and payment is done in a click of a button whereas in LC one needs to fill
numerous forms and sign various contracts. Likewise in chapter 2 it was also
seen that it is relatively easy to get started with PayPal.
Conclusion:
This chapter showed that PayPal has all the attributes needed to participate and
facilitate international trade. In fact it was also demonstrated that PayPal can
make the trade process simpler and faster. In addition to this PayPal can also
273
PayPal, 'How do I report PayPal fraud or a PayPal Scam?', (PayPal, 2013) Available from: <https://www.paypal.com/cgi-bin/webscr?cmd=xpt/Help/general/TopQuestion4-outside> [Accessed on 12 August 2013]
67
create a possibility of direct trade. The result of the cost comparison showed that
PayPal is highly likely to be cheaper than LC.
The chapter also looked at some the benefits of LC that were unique to it such as
possibility of temporary financing, defer payment, prospect to make a claim on
the sales contract and transfer of benefits. It was also seen that even though
PayPal does not exactly provide these ‘unique’ functions of LC it is certainly
capable of fulfilling the purpose in most of the cases.
To summarise the straightforward framework of PayPal makes it relatively easy,
fast and simple to use compared to LC.
68
Chapter 5: Challenges ahead of PayPal
Introduction:
In this chapter potential challenges faced by PayPal in becoming an effective
trading instrument in international commerce will be analysed. At present PayPal
is mostly involved in b2c transactions and there are only few b2b transactions
between countries. As seen in beginning of chapter 1 international trade is a
complicated process not only because of large volumes of transactions but also
because of different trade practices and conflicts of law. This chapter will study
challenges faced by PayPal and will try to recommend how PayPal can tackle it.
Disputes in international commerce:
One of the biggest challenges for PayPal while facilitating international
trade would be dispute and dispute settlement mechanism. Since core business
of PayPal is limited to b2c the disputes are relatively less complicated and hence
easy to solve. With b2b in international commerce that is not always the case,
the transactions will be comparatively huge and the disputes will be more
complex. As seen in chapter 2 if there is any dispute while using PayPal, the
funds are frozen until PayPal decides the outcome of the case and accordingly
reimburses or pays the traders.
It is arguable that using PayPal might actually reduce the number of disputes
compared to LC. One of the main reasons behind disputes in LC is the fact that it
involves several contracts and banks. PayPal on the other hand does not involve
any third party apart from the buyer and seller. Hence the framework of PayPal is
much simpler. Therefore it is fair to say that PayPal will avoid disputes that are
initiated by several contractual agreements.
In eBay’s annual report it claimed that over the past few years significant effort
has been put in order to enhance the buyer and seller protections.274 As a result
last year PayPal had only 0.21% of its net total payment volume in dispute, which
274
EBay Inc n (179) p24.
69
is very insignificant figure.275 EBay also claims that continuous effort has been
put to further reduce the disputes. Hence it could be argued that PayPal has an
effective dispute settlement mechanism and hence it is likely to manage disputes
even in international trade.
Differences in Law:
PayPal’s global payment business is subject to different regulations depending
on where it operates. According to their annual report PayPal is subject to
various laws governing banking, electronic funds transfers, money transmission,
money laundering, consumer protection, terrorist financing and lending.276
PayPal admits that despite continuous effort and significant resource been
deployed it is impossible to avoid some enforcement actions or fines in one or
more jurisdictions.277 Hence PayPal is sometimes left with no option but to
change its business practice in certain jurisdictions. This also has a negative
impact on PayPal’s growth as it is limited by these restrictions.
The differences in law at sometimes are so huge that it forces PayPal to operate
in a very different manner compared to its existing business practice. For
example in China PayPal is associated to Shanghai Wangfuyi Information
Technology Ltd.278 Without the affiliation PayPal cannot receive licenses that
would allow it to operate in Chinese currency.279
In market place other than the USA, EU, China, Australia and Brazil, PayPal
serves as PayPal Private Ltd which is based in Singapore.280 PayPal Private Ltd
is a wholly owned subsidy by PayPal and is regulated under Singaporean Law.
275
ibid 276
EBay inc n (179) p15 277
EBay inc n (179) p16 278
ibid 279
SEC.GOV, 'Form 10K - eBay Inc', (26 April 2012) Available from: <www.sec.gov/Archives/edgar/data/1065088/000106508812000006/ebay2011q4_10k.htm> Accessed on [12 August 2013] 280
EBay Inc n (179) p17.
70
However, in some cases it is not clear whether Singaporean Law applies or the
local law.281
Similarly most of the developing countries often have strict policies regarding
foreign currency trading in order to protect their economy.282 These countries
require businesses like PayPal to rely on partnership with local banks in order to
carry out their business.283 It could be time consuming and expensive to form a
partnership with foreign companies.
Unlike LC which is governed by UCP, PayPal does not have standardised set of
rules, this is because of the fact that countries have different regulation for
companies like PayPal. In fact even the user agreement of PayPal differs
according to the jurisdiction. Hence the outcome of the case might be different
depending upon the jurisdiction. It is clear that one of the key ingredients that is
lacking in PayPal is uniformity of regulation. It is crucial for any trading instrument
to have uniformity. As seen in chapter 1 ICC was the catalyst that standardised
LC through UCP.
Unpredictable nature of foreign countries:
As seen earlier in this chapter PayPal’s foreign business is subject to local law
and sometimes in order to carry out its business PayPal needs to ally with a local
business (mostly local bank). However, sometimes affiliation with a local
company is not end of the problem. Some countries, especially developing
economies are at times politically unstable which affects both local and foreign
businesses. However, it would be fair to say that foreign company would find it
harder as it would be new for them.
281
ibid 282
B Pieter & J Godfrey. 1992. "Foreign Currency Accounting Regulation in Australia: Responses of the Resources Sector." Accounting & Business Research (Wolters Kluwer UK) 22, no. 87: 195-205. Business Source Premier, EBSCOhost (accessed July 25, 2013) p198 283
EBay Inc n (179) p17.
71
One of the cases that demonstrate the impact of uncertainty faced by PayPal
was witnessed in India. In January 2010, PayPal’s processing bank was directed
by the Reserve Bank of India to suspend withdrawals for all PayPal user
accounts (including both seller and buyer accounts).284 This was done to prevent
currency problem as the Indian Rupee at that time was depreciating. 285 It was
only in November 2010 after series of hearing Reserve Bank of India decided to
allow PayPal to operate with limitation of $500.00 (which was later increased to
$3000.00 in October 2010).286 PayPal had heavily invested in India to capture the
growing market, according to MarketWatch PayPal had appointed 3,500 IT
specialist and 1,000 other full time employees.287 The investment was almost on
verge of collapsing if the decision had not gone in PayPal’s favour.
PayPal’s nature of the business makes it vulnerable against uncertain actions
taken by the reserve bank and the government. The fact that online payment
business is fairly a new concept especially in developing country makes the
government more critical about it and hence at times show lack of trust and
restricts PayPal’s activity.
Conclusion:
The chapter showed that one of the biggest problems for PayPal in international
commerce would be the dispute settlement. PayPal has been able to maintain
low dispute rate in its current operations nonetheless same cannot be said if it
actively participates in b2b across countries. However PayPal is not complicated
like LC, hence it is likely to have fewer disputes. Having said so, PayPal should
continue its effort to reduce disputes and build a better mechanism to tackle
them. In chapter 2 it was seen that PayPal takes disputes seriously and is
investing further to tackle these problems.
284
ibid 285
"PayPal suspension in India threatens to become PR disaster." Marketwatch: Global Round-Up 9, no. 3 (March 2010): 133-134. Business Source Premier, EBSCOhost [Accessed June 26, 2013] p133 286
ibid 287
ibid
72
Another barrier for PayPal is the differences in law and the difficulty to meet
them. From the analysis it was demonstrated that PayPal perhaps requires a
‘catalyst’ or mechanism that would standardise the law, something very similar to
ICC’s contribution to LC. If there is a standardised mechanism PayPal could also
possibly avoid some of the unpredictable actions taken in various jurisdictions.
73
Chapter 6: Conclusion
Chapter 1 demonstrated that LC is highly regarded by some of the scholars and
despite the barriers in international trade LC is largely an effective instrument.
However, a deeper analysis further in preceding chapters suggested that LC was
lacking the pace to move along with technology. One of the major issues with LC
was the acceptance of electronic records. Although the problem is not completely
ignored by the Banking Commission and steps such as introduction of eUCP
have been taken, it has not convinced some of the advocates who believe that
more could be done (as seen in chapter 3).
PayPal on the other hand is the fruit of technology and innovation, hence it has
been able to adapt well with the pace of technology. Moreover PayPal’s evolution
has been full of mergers and acquisitions, which has helped PayPal to develop
continuously and establish itself as a reliable payment method. First part of the
chapter 4 demonstrated that PayPal has all the attributes needed to participate
and facilitate international trade. It was also found that PayPal could even create
a new possibility of ‘direct trade’ by enabling manufacturers to trade directly with
the end consumers. However, at present only handful of companies practices
this nonetheless the possibility cannot be ruled out. While comparing PayPal with
LC in the second part of chapter 4, the cost comparison showed that PayPal
could be a cheaper option than LC. It was found that LC involved various types of
charges. Some of the charges were fixed which was charged every time LC was
used. Similarly it was also demonstrated that in LC both the parties had to pay for
the service unlike PayPal. These factors made LC more expensive compared to
PayPal. In addition to this the findings also suggested that PayPal can offer
faster and easier way to trade.
Nonetheless, there are some distinct advantages unique to LC such as possibility
of temporary financing, defer payment, prospect to make a claim on the sales
contract and transfer of benefits. Although PayPal did seem to ‘fulfil the purpose’
to some extent and in future might be able to provide these features to the fullest,
at present it does provide a clear substitute. As discussed these features might
74
be absolute necessity for some businesses and hence would prefer to use LC
despite PayPal providing a faster, cheaper and easier option.
Therefore, based on these arguments it would be fair to say that even in the
modern world some of the needs remain the same and unless an exact
substitute is provided LC cannot be completely written off. Similarly, sometimes
businesses do not like changes and hence might prefer to keep using the
instrument which they are use to.
However, in near future which instrument will prevail will largely depend on what
the traders want from the instrument. For example if a trader is looking for a fast,
cost effective and easy method then it is highly that the trader will chose PayPal.
Likewise if one of the ‘unique features’ of LC is the requirement then the trader
has to go with LC.
The findings of chapter 5 demonstrated that there are some challenges ahead of
PayPal before it can establish itself as a leading global b2b payment provider.
The challenges that were highlighted were settling disputes in international
commerce, managing the differences in law and avoiding unpredictable actions
taken in some foreign countries. When it comes to dispute, the findings
suggested that PayPal is efficient in managing disputes and it has been investing
on better dispute settlement mechanism. However, the problem of differences in
law appeared to be more serious for PayPal. It was also established that PayPal
might require a ‘catalyst’ that could standardise the law. This would not only help
to tackle with the differences in law but also avoid unpredictable actions taken by
foreign jurisdictions to large extent.
Nonetheless at present PayPal is definitely capable of facilitating trade in most of
the developed countries. With the likes of parent company like eBay, undertaking
huge investments and diversifying is not a major problem for PayPal. Although
the current focus for PayPal has been the offline market, based on this research
the possibility for PayPal to be heavily involved in facilitating international trade in
near future cannot be denied.
75
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