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.

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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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