Year: 2018

Confirmation Fee

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confirmation fee

Confirmation fee can be defined as charges collected by the confirming banks, against the risks they will be having to posses by confirming the letters of credit.

As I will be explaining below a confirming bank undertakes two main risk factors by adding its confirmation to the letter of credit: default risk of the issuing bank and political risk of the issuing bank’s country.

Basically, the confirmation fee is the ‘risk fee’ taken by the confirming bank.

Understanding the Confirmation Process and Confirmation Fee Reasoning:

Confirmation, is defined as an undertaking from a bank, in addition to the undertaking provided to the beneficiary by the issuing bank.

Beneficiary, by having the letter of credit confirmed to a bank which is located within the same country of himself, would like to eliminate the default risk of the issuing bank as well as political risks of the issuing bank’s country of domicile.

A confirming bank takes the default risk of the issuing bank; as well as non-payment risk of the letter of credit originated from the political risks of the issuing bank’s country.

The confirming bank, irrevocably bound himself to make a payment to the beneficiary against a complying presentation from the moment it has added its confirmation to the letter of credit.

Even if the confirming bank could not receive any reimbursement from the issuing bank, he has to make payment to the beneficiary against a complying presentation under the letter of credit which he has confirmed.

By the way, it is beneficial to remind my readers that a confirming bank could only honour or negotiate a complying presentation.

As a result, the beneficiary has to present complying documents in order to obtain funds under the letter of credit, either from the issuing bank or the confirming bank.

For this reason, the complying presentation is the key for reaching out the payment under both confirmed and unconfirmed letters of credit.

You might be wondering, why a confirming bank would take such risks to confirm a letter of credit.

The correct answer is very simple and straight forward; to make more profit.

Determinants of a Confirmation Fee:

The confirmation fee is subject to arrangement and based on the following:

  1. Issuing bank isk
  2. Country risk
  3. Value of the letter of credit
  4. Validity period of the letter of credit

The confirmation fee is usually difficult to quantify in advance, unless you have managed to establish which bank is to confirm and they have provided the information to you in advance. (1)

Examples of Confirmation Fees:

Confirmation Fee Format 1:

Exporters First Help Bank of New York confirms this credit and hereby undertakes to honor all drafts and documents presented in strict compliance with the credit terms.

Our confirmation charges USD3.120,48.

Confirmation Fee Format 2:

We shall charge our confirmation commission of 4,000000 PCT p.a., min. EUR 200.00 p.q.

p.a. : per annum (12 months or 360 days)
p.q. : per quarter (3 months)

Who should pay confirmation fees?

According to letter of credit rules all fees and charges related to credits should be paid by the applicants.

But we have learned long ago that this perfect world indication is not valid under real life situations.

In most cases applicants pay only letter of credit issuance charges and let the banks collect all the remaining fees from the beneficiaries.

As a result confirmation fees will be paid by the beneficiaries in most cases.

Sources: 1: A Guide to Letter of Credit Charges,  the Institute of Export & International Trade, Reached : 24.Jan.2018

Advising Fee

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advising fee

The act of informing the details of a credit or an amendment to the beneficiary is known as advising under documentary credit transactions.

By advising the credit to the beneficiary, an advising bank certifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received.

Charges, that the advising bank demands in exchange for its advising services, is defined as an advising fee. Advising fee is a part of letter of credit fees.

On this post I would like to write about the advising fee.

Why Banks Apply Advising Fees?

Letter of credit is a payment method, which is mainly used in international trade.

As a result of its international character, letter of credit parties, in particular the issuing bank and the beneficiary, are mostly located in different countries.

For this reason, the issuing bank has to use another bank’s services to transmit the credit to the beneficiary.

An advising bank, that advises the credit to the beneficiary, is located in the same country as beneficiary.

The advising bank receives the documentary credit from the issuing bank via swift platform and sends it to the the beneficiary mostly other means of communication.

According to the letter of credit rules, advising bank’s role is simple and its responsibilities are very limited.

By advising the credit to the beneficiary, an advising bank certifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received.

Advising fees are originated from above mentioned services, that advising banks perform under the letters of credit transactions.

Who Should Pay the Advising Fee?

According to the letter of credit rules, the issuing bank has to pay the advising fee, but in practice, most of the time, advising fees are being paid by the beneficiaries.

Amendment Advising Fee:

It must be stressed here that not only actual letters of credit, but also any subsequent amendments are subject to advising fees.

Many advising banks charge relatively smaller fees for advising amendments comparing to advising fees related to advise of actual letters of credit.

L/C Advising Commission Samples:

  • Bank of China Singapore : USD 40,00
  • Citibank UAE : AED 150,00
  • Commerzbank Germany : Around EUR 100,00

Letter of Credit Fees

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Letter of credit fees

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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.

As a result, you should understand your costs, before finalizing a letter of credit deal.

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Confirmation and Confirmed Letter of Credit

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Confirmation and Confirmed Letter of Credit

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When an irrevocable letter of credit is issued, the risk of payment rests with the issuing bank. This type of letter of credit is defined as an unconfirmed letter of credit.

However, in certain circumstances, the exporter may find the issuing bank not fully trustworthy and/or the country where it is located has high political or economic uncertainty.

In this situation, the exporter should consider requesting a confirmed letter of credit.

Confirmation is a security tool for the exporters. Confirmation eliminates country risks and insolvency risks of the issuing bank.

With a confirmed letter of credit, another bank, the confirming bank, usually located in the same country that the exporter is located, will add its confirmation to the letter of credit.

By adding its confirmation, the confirming bank undertakes to honour the exporter’s claim under the letter of credit, provided all terms and conditions of the letter of credit are met. (1)

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Availability of Letters of Credit

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payment types in a letter of credit transaction

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Letters of Credit are flexible instruments because they incorporate various payment options.

According to letter of credit rules, a credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. (UCP 600 – Article 6- b)

The credit must explicitly indicate its availability as: (i) immediate payment (sight), (ii) payment at a future determinable date (deferred), (iii) acceptance of a time draft drawn on the issuing, nominated bank, or confirming bank, or (iv) negotiation with or without recourse to the beneficiary.

Sight payment ensuring prompt payment upon document compliance. Deferred payment, allowing for payment at a future date. Acceptance LCs involve the bank’s commitment to pay at a later date via draft acceptance. Negotiation LCs offer the possibility of receiving early payment by discounting drafts.

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Letter of Credit Transaction

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letter of credit transaction

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A Letter of Credit (L/C) is a payment method in international trade that ensures secure payment and delivery of goods between exporters and importers.

It relies on collaboration between banks, logistics providers, the exporter, and the importer to reduce risks and enable smooth cross-border transactions.

On my previous posts, I have not only made a definition of a letter of credit but also clarified its types and parties that involved in it.

You can also check the risks associated with letters of credit and sample letters of credit from my past posts.

On this post, I will try to explain letter of credit process in a very simple way.

After reading this article, you should understand the working mechanism of letter of credit payment in general terms.

Please click to download our article “Letter of Credit Transaction” as a PDF.

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Risks in Letters of Credit

Ozgur Eker (CDCS) Letter of Credit Basics
letter of credit risks

Although letter of credit is a balanced payment method in terms of risk issues for both exporters and importers, each letter of credit party bears some amount of risk; higher or lower.

For the seller, the primary concern lies in the financial stability and trustworthiness of the issuing bank, often located in a distant country and potentially unfamiliar to them.

Conversely, the buyer faces the risk of paying for goods that may be unsatisfactory, substandard, or even non-existent, as well as uncertainties surrounding the documents presented.

As I have explained on my previous post, letters of credit transactions are handled by banks, which make banks one of the parties that bears risks in l/c transactions in addition to exporters and importers.

Risks in letters of credit can be discussed under four groups: general risks, risks to the applicant, risks to the beneficiary and risks to the banks.

On this post each risk group will be examined in detail with real life examples.

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Parties to Letters of Credit

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parties to letter of credit

This page discusses the parties involved in a letter of credit. Each L/C party will be presented briefly, and its roles and responsibilities will be explained with the help of the graphic illustrations. A video on this topic is also available.

A Letter of Credit (LC) is a financial instrument in international trade that guarantees payment to the seller (beneficiary) as long as the agreed-upon terms and conditions are met.

It involves multiple parties, each playing a distinct role.

The key parties in an LC transaction include the beneficiary (seller), applicant (buyer), issuing bank, advising bank, confirming bank, nominated bank, and reimbursing bank. Understanding the roles and responsibilities of these entities ensures smooth and hassle-free letter of credit operations for businesses.

youtube video link image for Parties to Letters of Credit
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Types of Letters of Credit

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Types of Letters of Credit

From their origins in 18th-century traveler’s credit systems to today’s cornerstone role in international commerce, letters of credit (LCs) have transformed into all-round, secure financial instruments critical for mitigating risk in cross-border transactions.

These tools are broadly categorized into commercial letters of credit—the go-to payment method for facilitating trade deals—and standby letters of credit, which act as safety nets for contractual obligations.

Beyond these core types, specialized variations like red clause, confirmed, transferable, and back-to-back letters of credit offer tailored solutions to meet the unique demands of buyers and sellers.

In this post, we break down the different types of letters of credit and how they secure global transactions.

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What is a Letter of Credit

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what is al letter of credit

Letter of credit, in a broad perspective, is one of the payment methods in international trade.

The letter of credit is distinguished itself from other payment methods in international trade by its complex structure and detailed rules.

A documentary credit, also known as a letter of credit, is a written guarantee issued by a bank (issuing bank) on behalf of a buyer (applicant) to pay the seller (beneficiary) a specified amount, either at sight or on a future date.

This payment commitment is subject to the beneficiary’s compliance with the terms and conditions outlined in the credit and is fulfilled through a ‘complying presentation’.

According to the Uniform Customs and Practice for Documentary Credits (UCP 600), a complying presentation must meet three key requirements:

  • Documents must strictly adhere to the terms and conditions of the documentary credit.
  • If the credit is governed by UCP 600, documents must align with its applicable articles and sub-articles.
  • Documents are reviewed based on latest version of international standard banking practices, ISBP 821 (International Standard Banking Practice for the Examination of Documents under UCP 600).

Understanding these principles ensures smooth international trade transactions and minimizes payment risks.

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