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?

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.

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.

What are the Differences Between Advising Bank and Nominated Bank?

In most cases, the advising bank and the nominated bank is the same institution in a typical letter of credit transaction.

Only in rare occasions, these two banks are apart from each other.

Because, there are significant differences exist between the advising bank and the nominated bank, each side of the transaction, both exporters and importers, should understand the roles and responsibilities of these two banks very well.

On this post, you can find not only the definition of advising bank and nominated bank according to letter of credit rules, but also the main differences between these two banks.

Differences Between Advising Bank and Nominated Bank

Nominated Bank

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

Definition: According to current letter of credit rules, UCP 600, nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.

Nominated bank has two main functions under a letter of credit transaction.

Firstly, a nominated bank is the presentation point of the documents. As a result, a beneficiary complete its presentation by submitting documents to the counter's of the nominated bank within the time frame indicated in the letter of credit.

Secondly, a nominated bank may act as a discounting bank by purchasing a time draft or documents that have been submitted by the beneficiary and found to be complying by the nominated bank.

Nominated Bank

After briefly defining what nominated bank is and explaining its functions, now we can look further into different aspects of nominated bank.