Payments Training Hub
Applicant: customer asks issuing bank PAYMENT OPERATIONS STARTED LIVE 01 Applicant - who asks the issuing bank to create ACTIVE 02 Applicant also - fee and provides any collateral the bank QUEUED 03 Act in good faith - must act in good faith and with reasonable care QUEUED 04 Late presentation or a missing document - can lose the right to be paid. QUEUED 05 Confirming bank - independent undertaking to pay QUEUED 06 Confirmation - into two. QUEUED The applicant is the customer who asks the issuing bank to create the standby. Step 1 of 6 Applicant: customer asks issuing bank STARTED Applicant who asks the issuing bank to create ACTIVE Applicant also fee and provides any collateral the bank QUEUED Act in good faith must act in good faith and with reasonable QUEUED Late presentation or a missing document can lose the right to be paid. QUEUED Confirming bank independent undertaking to pay QUEUED Confirmation into two. QUEUED The applicant is the customer who asks the issuing bank to create the standby.
Applicant also pays the issuance PAYMENT OPERATIONS IN PROGRESS LIVE 01 Applicant - who asks the issuing bank to create DONE 02 Applicant also - fee and provides any collateral the bank ACTIVE 03 Act in good faith - must act in good faith and with reasonable care QUEUED 04 Late presentation or a missing document - can lose the right to be paid. QUEUED 05 Confirming bank - independent undertaking to pay QUEUED 06 Confirmation - into two. QUEUED The applicant also pays the issuance fee and provides any collateral the bank requires. Step 2 of 6 Applicant also pays the issuance IN PROGRESS Applicant who asks the issuing bank to create DONE Applicant also fee and provides any collateral the bank ACTIVE Act in good faith must act in good faith and with reasonable QUEUED Late presentation or a missing document can lose the right to be paid. QUEUED Confirming bank independent undertaking to pay QUEUED Confirmation into two. QUEUED The applicant also pays the issuance fee and provides any collateral the bank requires.
Act in good faith PAYMENT OPERATIONS IN PROGRESS LIVE 01 Applicant - who asks the issuing bank to create DONE 02 Applicant also - fee and provides any collateral the bank DONE 03 Act in good faith - must act in good faith and with reasonable care ACTIVE 04 Late presentation or a missing document - can lose the right to be paid. QUEUED 05 Confirming bank - independent undertaking to pay QUEUED 06 Confirmation - into two. QUEUED It must act in good faith and with reasonable care, but it does not investigate the underlying dispute. Step 3 of 6 Act in good faith IN PROGRESS Applicant who asks the issuing bank to create DONE Applicant also fee and provides any collateral the bank DONE Act in good faith must act in good faith and with reasonable ACTIVE Late presentation or a missing document can lose the right to be paid. QUEUED Confirming bank independent undertaking to pay QUEUED Confirmation into two. QUEUED It must act in good faith and with reasonable care, but it does not investigate the underlying dispute.
Late presentation or a missing document PAYMENT OPERATIONS IN PROGRESS LIVE 01 Applicant - who asks the issuing bank to create DONE 02 Applicant also - fee and provides any collateral the bank DONE 03 Act in good faith - must act in good faith and with reasonable care DONE 04 Late presentation or a missing document - can lose the right to be paid. ACTIVE 05 Confirming bank - independent undertaking to pay QUEUED 06 Confirmation - into two. QUEUED A late presentation or a missing document can lose the right to be paid. Step 4 of 6 Late presentation or a missing document IN PROGRESS Applicant who asks the issuing bank to create DONE Applicant also fee and provides any collateral the bank DONE Act in good faith must act in good faith and with reasonable DONE Late presentation or a missing document can lose the right to be paid. ACTIVE Confirming bank independent undertaking to pay QUEUED Confirmation into two. QUEUED A late presentation or a missing document can lose the right to be paid.
Confirming bank adds its own PAYMENT OPERATIONS IN PROGRESS LIVE 01 Applicant - who asks the issuing bank to create DONE 02 Applicant also - fee and provides any collateral the bank DONE 03 Act in good faith - must act in good faith and with reasonable care DONE 04 Late presentation or a missing document - can lose the right to be paid. DONE 05 Confirming bank - independent undertaking to pay ACTIVE 06 Confirmation - into two. QUEUED A confirming bank adds its own independent undertaking to pay, on top of the issuing bank undertaking. Step 5 of 6 Confirming bank adds its own IN PROGRESS Applicant who asks the issuing bank to create DONE Applicant also fee and provides any collateral the bank DONE Act in good faith must act in good faith and with reasonable DONE Late presentation or a missing document can lose the right to be paid. DONE Confirming bank independent undertaking to pay ACTIVE Confirmation into two. QUEUED A confirming bank adds its own independent undertaking to pay, on top of the issuing bank undertaking.
Confirmation turns one bank promise PAYMENT OPERATIONS COMPLETE LIVE 01 Applicant - who asks the issuing bank to create DONE 02 Applicant also - fee and provides any collateral the bank DONE 03 Act in good faith - must act in good faith and with reasonable care DONE 04 Late presentation or a missing document - can lose the right to be paid. DONE 05 Confirming bank - independent undertaking to pay DONE 06 Confirmation - into two. ACTIVE Confirmation turns one bank promise into two. Step 6 of 6 Confirmation turns one bank promise COMPLETE Applicant who asks the issuing bank to create DONE Applicant also fee and provides any collateral the bank DONE Act in good faith must act in good faith and with reasonable DONE Late presentation or a missing document can lose the right to be paid. DONE Confirming bank independent undertaking to pay DONE Confirmation into two. ACTIVE Confirmation turns one bank promise into two.

Key points of this lesson, in order.

0:00 / 2:51 Step 1 of 6

Parties Involved and Their Roles

Standby Letter of Credit, Lesson 3 of 7, Narration 2:51, D06 Cross-border payments

What you will learn

Your objective. By the end of this lesson, you will be able to explain parties involved and their roles. The applicant is the customer who asks the issuing bank to create the standby.

Why it matters. The applicant is the customer who asks the issuing bank to create the standby.

Chapter objective: Learner explains what a standby letter of credit is, distinguishes it from a commercial letter of credit, and describes issuance, notification, drawing and expiry. Learner uses real examples with amounts, banks and message names to show how the topic works in practice.

Key learning points

  • Applicant: customer asks issuing bank
  • Applicant also pays the issuance
  • Act in good faith
  • Late presentation or a missing document
  • Confirming bank adds its own
  • Confirmation turns one bank promise

Key terms

Payment flow diagram showing Parties Involved and Their Roles.

Practise this lesson

Exercise

Work out what the beneficiary receives for a 750,000 dollars payment under OUR, SHA and BEN.

Use the charge arrangement rules in this lesson and the correspondent and beneficiary bank fees named in the lesson.

  1. What to do. Calculate the amount credited under each of the three arrangements and state who pays each fee.

Correct result. Under OUR the sender pays all charges and the beneficiary receives the full amount. Under SHA the sender pays the sending charges and the beneficiary pays the receiving charges. Under BEN the beneficiary pays all charges and receives the amount less all fees.

Why. The charge arrangement decides who pays and how much arrives. A customer who was promised the full amount and receives less will complain, and the complaint lands on the analyst.

Check your understanding

Practice question

Which of the following best describes parties involved and their roles?

Takeaway and next step

What to remember

Confirmation turns one bank promise into two.

Build a cross-border payment like the one in this lesson and watch the chain, the charges, and the final amount change.

Open the Cross-Border Payment Configurator →

Builds on "Standby vs Commercial Letter of Credit".

Transcript and full text

Show transcript

The applicant is the party that asks the issuing bank to issue the standby letter of credit, and on whose behalf the standby is issued. The applicant is normally the party that owes the obligation, for example the contractor who must complete the work, the tenant who must pay the rent, or the borrower who must repay the loan. The applicant applies to the bank, provides collateral or a credit facility, pays the issuance fee, and bears the risk that the beneficiary will draw the standby. The applicant is the party whose credit the bank relies on, and the bank will assess the applicant creditworthiness before issuing the standby. The beneficiary is the party in whose favour the standby is issued, and the party that can draw it. The beneficiary is normally the party to whom the obligation is owed, for example the project owner, the landlord, or the lender. The beneficiary holds the standby as security, and it draws on it by presenting a demand to the bank, stating that the applicant has defaulted. The beneficiary must present the demand before the expiry date, and must present the documents the standby requires. The beneficiary is the party the standby protects, and it is the party that decides whether to draw. The issuing bank is the bank that issues the standby, at the request of the applicant, in favour of the beneficiary. The issuing bank gives the payment undertaking, and it pays the beneficiary on presentation of a complying demand. The issuing bank is liable to the beneficiary, independently of the applicant, and it must pay even if the applicant disputes the default. The issuing bank charges the applicant an issuance fee, and it holds collateral or a credit facility from the applicant as security for the reimbursement. If the issuing bank pays the beneficiary, it will debit the applicant account or call on the collateral to reimburse itself. The advising bank is the bank that advises the standby to the beneficiary, on behalf of the issuing bank. The advising bank authenticates the standby, confirms that it is genuine, and delivers it to the beneficiary. The advising bank does not give a payment undertaking, unless it also confirms the standby. Its role is to transmit and to authenticate. The advising bank is normally a bank in the beneficiary country, and it is chosen by the issuing bank or by the beneficiary. The advising bank charges a fee for advising, and it is not liable to pay the beneficiary unless it confirms the standby. The confirming bank is a bank that adds its own payment undertaking to the standby, in addition to the issuing bank undertaking. A beneficiary asks for confirmation when it does not trust the issuing bank, or when the issuing bank is in a country with political or transfer risk. The confirming bank examines the demand and pays the beneficiary, and then claims reimbursement from the issuing bank. Confirmation costs a fee, and it is not automatic. The issuing bank must authorise the confirmation, or the confirming bank must agree to confirm without authorisation, which is called silent confirmation. A standby that is confirmed gives the beneficiary two banks to rely on, and it is safer than a standby that is only issued. The reimbursement flow is as follows. The beneficiary presents a complying demand to the issuing bank, or to the confirming bank if the standby is confirmed. The bank examines the demand, and if it complies, it pays the beneficiary. The issuing bank then debits the applicant account, or calls on the collateral, to reimburse itself. If the applicant account has insufficient funds, the bank enforces the collateral, which may be a cash deposit, a lien on assets, or a guarantee from the applicant parent company. The applicant bears the ultimate cost, and the bank is only an intermediary that pays on the strength of the documents. For a business analyst, the parties requirement must name each party, each bank, and the message that connects them. The requirement should state that the applicant applies to the issuing bank, that the issuing bank issues the standby by MT700, that the advising bank advises it to the beneficiary, that the beneficiary presents a demand to the issuing bank or the confirming bank, and that the issuing bank reimburses itself from the applicant account or the collateral. A system that cannot distinguish the applicant from the beneficiary, or the issuing bank from the advising bank, cannot process a standby correctly.

The applicant is the party that asks the issuing bank to issue the standby letter of credit, and on whose behalf the standby is issued. The applicant is normally the party that owes the obligation, for example the contractor who must complete the work, the tenant who must pay the rent, or the borrower who must repay the loan. The applicant applies to the bank, provides collateral or a credit facility, pays the issuance fee, and bears the risk that the beneficiary will draw the standby. The applicant is the party whose credit the bank relies on, and the bank will assess the applicant creditworthiness before issuing the standby.

The beneficiary is the party in whose favour the standby is issued, and the party that can draw it. The beneficiary is normally the party to whom the obligation is owed, for example the project owner, the landlord, or the lender. The beneficiary holds the standby as security, and it draws on it by presenting a demand to the bank, stating that the applicant has defaulted. The beneficiary must present the demand before the expiry date, and must present the documents the standby requires. The beneficiary is the party the standby protects, and it is the party that decides whether to draw.

The issuing bank is the bank that issues the standby, at the request of the applicant, in favour of the beneficiary. The issuing bank gives the payment undertaking, and it pays the beneficiary on presentation of a complying demand. The issuing bank is liable to the beneficiary, independently of the applicant, and it must pay even if the applicant disputes the default. The issuing bank charges the applicant an issuance fee, and it holds collateral or a credit facility from the applicant as security for the reimbursement. If the issuing bank pays the beneficiary, it will debit the applicant account or call on the collateral to reimburse itself.

The advising bank is the bank that advises the standby to the beneficiary, on behalf of the issuing bank. The advising bank authenticates the standby, confirms that it is genuine, and delivers it to the beneficiary. The advising bank does not give a payment undertaking, unless it also confirms the standby. Its role is to transmit and to authenticate. The advising bank is normally a bank in the beneficiary country, and it is chosen by the issuing bank or by the beneficiary. The advising bank charges a fee for advising, and it is not liable to pay the beneficiary unless it confirms the standby.

The confirming bank is a bank that adds its own payment undertaking to the standby, in addition to the issuing bank undertaking. A beneficiary asks for confirmation when it does not trust the issuing bank, or when the issuing bank is in a country with political or transfer risk. The confirming bank examines the demand and pays the beneficiary, and then claims reimbursement from the issuing bank. Confirmation costs a fee, and it is not automatic. The issuing bank must authorise the confirmation, or the confirming bank must agree to confirm without authorisation, which is called silent confirmation. A standby that is confirmed gives the beneficiary two banks to rely on, and it is safer than a standby that is only issued.

The reimbursement flow is as follows. The beneficiary presents a complying demand to the issuing bank, or to the confirming bank if the standby is confirmed. The bank examines the demand, and if it complies, it pays the beneficiary. The issuing bank then debits the applicant account, or calls on the collateral, to reimburse itself. If the applicant account has insufficient funds, the bank enforces the collateral, which may be a cash deposit, a lien on assets, or a guarantee from the applicant parent company. The applicant bears the ultimate cost, and the bank is only an intermediary that pays on the strength of the documents.

For a business analyst, the parties requirement must name each party, each bank, and the message that connects them. The requirement should state that the applicant applies to the issuing bank, that the issuing bank issues the standby by MT700, that the advising bank advises it to the beneficiary, that the beneficiary presents a demand to the issuing bank or the confirming bank, and that the issuing bank reimburses itself from the applicant account or the collateral. A system that cannot distinguish the applicant from the beneficiary, or the issuing bank from the advising bank, cannot process a standby correctly.

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