What is Confirmation? What are the Advantages of a Confirmed Letter of Credit?

Letter of credit is a payment method in international trade. I have been writing articles covering a variety of topics of letters of credit.

So far, I have defined what letter of credit is and explained its types, parties involved in and their roles and responsibilities, transaction steps and risks associated with different involving parties.

Additionally, you can find detailed information regarding issuing bank, confirming bank, nominated bank and advising bank on my previous posts.

Today, I explain the concept of confirmation as well as its main advantages to exporters.

What are the Differences Between Confirming Bank and Nominated Bank?

In theory, it is possible that a nominated bank and a confirming bank are present as two separate banks in a letter of credit transaction.

But in reality it occurs very seldom, mainly because of the fact that confirming banks do not add their confirmations to letters of credit, which are not available by themselves.

The roles and responsibilities of the nominated bank and the confirming bank are significantly different. For this reason, exporters and importers need to understand the key distinctions between these two banks.

On this post, you can find not only the definition of a nominated bank and a confirming bank according to letter of credit rules, but also how they differ from each other.

Confirming Bank

On this article you can find the definition of a confirming bank, its roles and responsibilities in a typical letter of credit transaction.

Confirming bank means the bank that adds its confirmation to a letter of credit upon the issuing bank's authorization or request.

In some situations, issuing banks' payment undertakings would not be sufficient for beneficiaries. This is especially true, when letters of credit are opened from one of the high political and financial risk possessing countries.

If the beneficiary figured it out that the issuing bank or issuing bank's country is not reliable enough, then the beneficiary may seek another bank's payment guarantee added to the letter of credit in addition to issuing bank's payment undertaking.

Confirming Bank

The process as explained above is called confirmation and the bank which adds its confirmation to the letter of credit is known as the confirming bank.

Letter of Credit Basics: Parties to Letters of Credit

Letter of credit is a payment method in international trade. It is usually shortened as L/C or DLC. DLC means Documentary Letter of Credit or Documentary Credit. 

As of yesterday, I have started to write down a new series of articles regarding letters of credit. The 1st article was about the definition and types of letters of credit.  

Today, on this article, I will try to introduce you the parties to a simple letter of credit transaction. Each L/C party will be presented briefly and its role will be explained with the help of the graphic images. 

In a typical letter of credit transaction, one should expect to see following parties: applicant, beneficiary, issuing bank, confirming bank, nominated bank and reimbursing bank.

Let us start understanding these parties along with their roles and responsibilities one by one below.