High banking commissions are one of the biggest problems in international trade finance that exporters have to face who would like to use letter of credit payment option in their business transactions.  

Letter of credit is a secure payment method in foreign trade. But this comfort of security comes with a price. Letters of credit are one of the most expensive international payment methods available on the market. As a result exporters find themselves in a dilemma when negotiating the terms of the business conditions. Question is simple but not easy to answer; either choosing an expensive but relatively secure payment method or choosing a risky but less expensive payment method.

What are the main letter of credit fees that exporters have to pay? 
It is realy hard to answer this question. Because what rules say is different than what the daily practice dictates. 
  • According to Rules : Issuing bank must pay all bank commissions as per UCP 600 which is the latest ICC rules of documentary credits.
  • Real Life Situation : Applicants pay the letter of credit issuance charges and all remaining l/c costs will be collected from the beneficiaries. 
Bank commissions that exporters normally have to pay can be grouped under these headings : 
  • Courier Fee / Postage Fee
  • Advising Fee
  • Discrepancy Fee
  • Handling Fee / Negotiation Fee
  • Amendment Commission
  • Confirmation Fee
  • Reimbursing Bank Charges                                                                         

Real life example : 
I would like to share a real life bank commissions example below. These bank fees were collected from a British exporter under a letter of credit transaction. As you can see they had to pay 487GBP to banks as letter of credit fees. Total transaction amount was only 1890GBP. Letter of credit fees are 25% of all transaction amount and this is unacceptable.

Figure 1 : Real life example of bank commissions under a letter of credit transactions.

Suggestions to eliminate high bank commissions under letters of credit transactions for exporter :

  • Suggestion 1 : Do not use letters of credit to low value transactions. As a general rule of thumb transaction amounts below 10.000USD to 15.000USD can be considered as a low value businesses. Try to use alternative payment methods instead of letters of credit on these occasions. 
  • Suggestion 2 : Try to convince your customer so that the letter of credit fees will be paid by the applicant. Remember letter of credit rules are on your side.
  • Suggestion 3 : The worst case scenario may be that you can not find an alternative payment option and your customer does not want to pay letter of credit charges except for the l/c issuance costs. If this is the situation than try to learn approximate bank commissions and make sure that you have included at least some of them on your price offer.

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Dealing with high banking commissions and charges under a letter of credit transaction
No matter how many advantages letters of credit have they have one big disadvantage. They are expensive. As a result you should understand your costs before finalizing a letter of credit deal. 

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  • Confirmation fee lc
  • Letter of credit fees and charges
  • Typical letter of credit fees
  • Bank letter of credit fees
  • Standby letter of credit fees
  • Transferable letter of credit fees
  • Additional fees of an lc
  • All bank fees and charges of confirming bank for beneficiary account
  • Deferred payment letter of credit fees

sample bank commission - real life example