Confirmed letter of credit
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A second bank adds its own promise to pay the exporter, on top of the promise from the buyer's bank.
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01 · In plain words
A second bank promises to pay you if the buyer's bank cannot
A , or LC, is a promise from the importer's bank to pay the exporter against the right documents. A adds a second promise. A second bank, the , promises to pay as well (ICC Academy).
This added promise is called . Under the ICC rules, it is a definite promise by the confirming bank, in addition to the importer's bank, to pay against documents that match the LC (ICC Academy). The second bank is often the , which passes the LC to the exporter (US International Trade Administration).
Why add it? The exporter may worry about three things: whether the importer's bank can pay, whether the importer's country will let money leave, and whether the documents will be accepted (ICC Academy). Confirmation covers the first two. The documents must still match the LC.
Who is involved
- The importer, called the , asks its bank for the LC.
- The exporter, called the , normally asks for confirmation when agreeing the sale.
- The importer's bank, the , opens the LC and asks a second bank to confirm it.
- The adds its own promise to pay. It is often also the advising bank, which passes the LC to the exporter.
02 · How it works
Eight steps take the deal from the sale agreement to the importer collecting the documents
Figure 1 · Interactive
A confirmed letter of credit, step by step
Read down the steps. The confirming bank pays the exporter, then claims the money back from the importer's bank.
Source: ICC Academy, Types of documentary credit: a comprehensive guide; US International Trade Administration, Trade Finance Guide, July 2022, Chapter 4; step 7 as in Deutsche Bank v CIMB, 2017.
03 · What it means for you
The exporter gains a second bank's promise to pay, and the importer still deals with its own bank
Figure 2 · Interactive
What a confirmed LC means for each side
Choose your side of the trade.
04 · Worked example
On a $1 million confirmed sight LC, illustrative fees add up to $8,500
This example uses round, made-up numbers to show how the fees build up. The LC pays at sight and stays open for 180 days. The confirmation fee is 0.15% of the LC amount for every 90 days. Real fees vary by bank, country and deal.
Figure 3 · Illustrative
Fees on a $1,000,000 confirmed sight LC open for 180 days
Illustrative inputs. The total is highlighted.
Made-up rates, worked out by our checking script. Your bank's fees will differ by bank, country and deal.
05 · When to use it
A confirmed LC suits exporters who doubt the buyer's bank or the buyer's country
Good fit when
- You have doubts about whether the buyer's bank can pay (ICC Academy).
- You worry that the buyer's country may stop money leaving, its country risk (ICC Academy).
- You want a second bank to promise payment as well as the buyer's bank (US ITA).
Another tool may suit better when
- You are already satisfied that the buyer's bank can pay. A plain sight letter of credit may be enough (US ITA).
- Both sides want low cost. An LC is relatively expensive, and confirmation adds a fee. Look at open account or cash in advance.
- The buyer needs time to pay. Use a confirmed usance LC, which pays at a set later date.
06 · Rules and a real case
UCP 600 defines confirmation, and a court has upheld a confirming bank's claim
When an LC says it follows , those ICC rules apply. They have been in force since July 1, 2007, and define confirmation and the confirming bank (ICC). Under them, a confirming bank must pay, or buy the documents, when they match the LC. Banks check documents using , 2023 edition (ICC). The , version 2.1, covers documents sent electronically (ICC).
Silent confirmation. In a , the exporter and the advising bank agree privately that the bank will add a conditional guarantee of payment. The importer's bank does not know. This private deal sits outside UCP. The importer's bank did not ask for it, so it has none of the usual duties to this bank (ICC Academy).
A real case. In Deutsche Bank v CIMB, decided on December 14, 2017, Deutsche Bank had confirmed LCs used to finance Indian cotton trades. As confirming bank, it claimed its money back from CIMB, the issuing bank. The High Court of England and Wales held for Deutsche Bank and gave judgment for $9,959,452.57 (High Court judgment).
Summary
A confirmed LC gives the exporter a second bank's promise to pay
The confirming bank promises to pay the exporter, on top of the importer's bank. That covers the risk of the importer's bank and its country. The exporter must still present documents that match the LC, and confirmation adds a fee.
Related guides: Letters of credit; Buyer, country and performance risk; The payment terms spectrum. Related cards: Letter of credit (sight); Letter of credit (usance, acceptance, deferred payment). Every term is in the Trade Finance Glossary.
Sources
- ICC Academy (David Meynell, ICC Banking Commission), Types of documentary credit: a comprehensive guide, October 21, 2024. Supports: definition of confirmation, the parties, why exporters ask for it, silent confirmation
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), Chapter 4, July 2022. Supports: greater protection from a second bank, when an LC fits, costs and discrepancies, the step flow
- International Chamber of Commerce, UCP 600, Uniform Customs and Practice for Documentary Credits, in force July 1, 2007. Supports: the rules an LC can follow
- International Chamber of Commerce, International Standard Banking Practice (ISBP), 2023 edition, 2023. Supports: document checking practice
- International Chamber of Commerce, eUCP Version 2.1, June 29, 2023. Supports: electronic presentation
- High Court of England and Wales, Commercial Court, Deutsche Bank AG, London Branch v CIMB Bank Berhad [2017] EWHC 3380 (Comm), December 14, 2017. Supports: the real case and the reimbursement step
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