What are the differences between confirmed and unconfirmed letters of credit?

Letter of credit is an irrevocable undertaking of the issuing bank to honour a complying presentation.

The beneficiary of the letter of credit must be ascertain that she/he will get the payment from the issuing bank as long as she/he comply with the terms of the credit.

From the beneficiary's perspective, complying presentation must be equal to payment, without any excuses. But in reality, sometimes things work differently.

There are many risks in letters of credit, and significant amount of them stem from the issuing bank or the country of its residence.

As a result, in some situations the beneficiary may not be %100 sure that the issuing bank will make the payment under complying presentations.

What are the differences between confirmed and unconfirmed letters of credit?
What are the differences between confirmed and unconfirmed letters of credit?
For those instances, the beneficiary may seek another bank's payment undertaking added to the letter of credit, in addition to that of the issuing bank's.

The process is known as confirmation and the bank adding its confirmation to the credit is called as confirming bank.

If a letter of credit possesses a confirming bank's confirmation, then the credit becomes a confirmed letter of credit.

If a letter of credit reaches to the beneficiary with only issuing bank's payment undertaking, without confirmation added by another bank, then the credit becomes an unconfirmed letter of credit.

In today's post, you can find the main differences between a confirmed letter of credit and an unconfirmed letter of credit.

Unconfirmed Letter of Credit:


Under an unconfirmed letter of credit, the issuing bank is the main institution that gives the irrevocable payment undertaking.

Confirmed Letter of Credit:


Under a confirmed letter of credit, irrevocable payment undertaking comes from not only from the issuing bank, but also from the confirming bank as well. These payment undertakings are separate from each other.

Main Differences Between a Confirmed Letter of Credit and an Unconfirmed Letter of Credit:


Payment Undertaking:


  • Unconfirmed Letter of Credit: Only the issuing bank gives irrevocable payment undertaking.
  • Confirmed Letter of Credit: Both the issuing bank and the confirming bank give separate irrevocable payment undertakings.

Costs:


  • Unconfirmed Letter of Credit: Less costly comparing to a confirmed letter of credit as no confirming bank charges apply.
  • Confirmed Letter of Credit: Either the beneficiary or the applicant must pay the confirming bank charges.

Letter of Credit Corrections:


  • Unconfirmed Letter of Credit: Only the beneficiary checks the letter of credit and requests amendments if necessary. The beneficiary is expected to get in touch with the applicant to make the corrections, not the issuing bank.
  • Confirmed Letter of Credit: In addition to the beneficiary, the confirming bank may also checks the credit and demands for corrections from the issuing bank. The confirming bank can contact the issuing bank direct.


Bureaucracy:


  • Unconfirmed Letter of Credit: Operation-wise, unconfirmed letter of credit is much more straight forward and less bureaucratic.  
  • Confirmed Letter of Credit: Comparing to unconfirmed letters of credit, confirmed letters of credit are tend to more bureaucratic and time consuming.

Reimbursement Authorization:


  • Unconfirmed Letter of Credit: Mostly no reimbursement authorization is seen.
  • Confirmed Letter of Credit: Confirming banks demand reimbursement authorization from issuing banks.
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