As a result you should understand your costs before finalizing a letter of credit deal.
Why letters of credit are expensive comparing to other payment methods?
Banks play a key role in letters of credit transactions. This is the main reason why letters of credit are so expensive comparing to other payment methods. Issuing banks open letters of credit for the account of applicants and in favor of the beneficiaries. Issuing banks have to bear certain amount of risks when they open letters of credit. They also let the applicants benefited from their credit worthiness. As a commercial institution issuing banks provide these services only for one reason. To earn more money, to make more profit. Similarly confirming banks collect fees from the letter of credit parties for the same reason. When confirming a letter of credit confirming banks may have to bear substantial amount of non-payment risk. As a result confirmation fees can sometimes climb to high values. As we have learnt that in a typical letter of credit transaction there are other banks may exist in addition to issuing bank and confirming bank such as advising bank, nominated bank, reimbursing bank. Every additional bank means additional fees and additional cost for either applicants or beneficiaries.
Who should pay bank charges in a letter of credit transaction?
We can answer this question by either looking at the rules or by looking at the real life situations because what rules say is not what is really happening on practice.
UCP 600's article related to charges of letters of credit is article 37 c: "A bank instructing another bank to perform services is liable for any commissions, fees, costs or expenses ("charges") incurred by that bank in connection with its instructions. If a credit states that charges are for the account of the beneficiary and charges cannot be collected or deducted from proceeds, the issuing bank remains liable for payment of charges."
In real life situations applicant pay only issuing bank's charges and remaining bank charges will be paid by the beneficiary unless beneficiary is very strong against applicant. We need to look at field "71B: Charges" in a letter of credit text issued by swift format to understand how bank charges will be paid by letter of credit parties.
Issuing bank charges will be paid by applicant and all other cherges will be paid by beneficiary : Field "71B: Charges : ALL BANKING CHARGES OUTSIDE BRAZIL ARE FOR BENEFICIARY'S ACCOUNT." This letter of credit issued by a Brazilian bank.
Field "71B : Charges and Fees: OTHER THAN THE ISSUING BANKS ARE FOR THE ACCOUNT OF THE BENEFICIARY. ISSUING BANK’S CHARGES ARE FOR THE ACCOUNT OF THE APPLICANT."
Who pays letters of credit fees? Letters of credit have certain advantages as an international payment method. If you have enough knowledge and expertise on letters of credit field then you can use them wisely to get paid where no other payment method works. No matter how many advantages letters of credit have they have one big disadvantage. They are expensive.