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.

What are the Differences Between Advising Bank and Issuing Bank?

On this article you can find not only the definition of an advising bank and an issuing bank, but also their differences in a typical letter of credit transaction.

Letter of credit is an international payment method. 

It is significantly different than other payment options in international trade, mainly because of the fact that letter of credit is governed by banks.

As a result it is a vital importance to understand banks, their roles and responsibilities in order to act correctly under a letter of credit transaction.

Advising Bank is the bank that advises the letter of credit to the beneficiary. 

Issuing bank, on the other hand, is the bank that issues a letter of credit at the request of an applicant or on its own behalf.

After making the definitions, we can now proceed to understand the key differences between advising banks and issuing banks.

Issuing Bank

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

Letters of credit transactions are started and ended by issuing banks.

An issuing bank negotiates with the applicant to draft the letter of credit, determines the conditions for payment, issues it in swift format and transmits it to the advising bank.

Advising bank, confirming bank, nominated bank are all selected by the issuing bank, as well. Additionally, payment or refusal decision is given by the issuing bank, at the end of the transaction.

Issuing bank sits on the core of letters of credit and today, we are going to understand, why.

Let me start my article with the definition of the letter of credit:

Issuing Bank

According to letter of credit rules, letter of credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

The same rules define issuing bank is the bank that issues a letter of credit at the request of an applicant or on its own behalf.

Advising Bank

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

Advising Bank is the bank that advises the letter of credit to the beneficiary. Advising banks act upon the request of issuing banks.

Generally, advising banks are located in the same country as beneficiaries. That is why issuing banks need their services.

Letters of credit are transmitted between banks via an online platform called Swift.

Swift platform is secure and fast, but it is expensive. That is why most of the exporters and importers do not have an access to the Swift platform.

In today's international trade world, letters of credit are transmitted from issuing bank to the advising bank via swift platform and afterwards advising banks advises the credits to the beneficiaries other means of telecommunication such as email attachments of .tif or .html files.

Important Note: You should keep in mind that swift is an authenticated teletransmission platform. A letter of credit or amendment transmitted via swift is deemed to be the operative, and any subsequent mail confirmation is not needed and shall be disregarded.

Letter of Credit Basics: Risks in Letters of Credit

Each international trade transaction carries a risk, lower or higher.

Some trade relationships might have been established for a long period of time between importers and exporters, whom are located in safe countries with sound financial backgrounds.

In such a scenario, we can talk about two professional partners, working for a win-win situation, both of them understanding its roles and responsibilities in order to complete the transaction in a good manner.

Concluding these kinds of transactions financially would not be a difficult task.

Now, I want you to think just an opposite scenario. Potential trade is about to initiate between an importer and exporter, whom has no enough knowledge about the counter party. Even more, at least one party is located in a politically unstable country.

What do  you think. Which payment method should be chosen to satisfy both parties under such extreme conditions?

Do you think that you can find a risk free payment method that you can rely on regardless of the surrounding conditions?

Above, I have tried to illustrate two different conditions effecting the payment selection decisions in international trade.

On this post, I will try to explain the risks associated with international payment methods in general.

Specifically, I will emphasize the risks in letters of credit for different parties perspectives.