Documentary Credit with a Confirming Bank

A confirming bank is a bank, usually in the exporter country, that adds its own independent undertaking to pay the beneficiary when complying documents are presented. Confirmation is requested by the applicant or the beneficiary and is given at the request of the issuing bank, and the confirming bank charges a fee for the risk it takes. The key point is that the exporter now has two bank promises, one from the issuing bank and one from the confirming bank, and it can claim payment from the confirming bank without waiting for the issuing bank. This matters when the issuing bank is in a country with political risk, transfer risk, or a weak credit rating, because the exporter can rely on a bank it knows and trusts. Confirmation is different from advising, and confusing the two is a common error. An advising bank only tells the beneficiary that the credit has been issued and checks that the message looks authentic, but it makes no promise to pay. A confirming bank makes a full payment promise, and it must pay against complying documents even if the issuing bank later refuses or fails. The confirming bank takes on the issuing bank credit risk and the country risk, and it prices that risk in its fee. A credit that is confirmed is therefore safer for the exporter and more expensive for the applicant, who usually pays the confirmation fee, and the sales contract should state who bears that cost. The confirmed credit flow starts like any documentary credit, with the importer asking its bank to issue the credit. The issuing bank sends the MT700 to the advising bank and asks it to add confirmation. The advising bank, now acting as confirming bank, checks the issuing bank credit standing, checks its own limits, and adds its confirmation, then advises the credit to the exporter. The exporter ships the goods, prepares the documents, and presents them to the confirming bank. The confirming bank checks the documents under UCP 600, and if they comply, it pays the exporter at once, without waiting for the issuing bank. It then sends the documents to the issuing bank and claims reimbursement. The system must show the confirmation fee before the user commits and record which bank confirmed and on what date. If the documents do not comply, the confirming bank must refuse them, just as any nominated bank would, and it must tell the presenter why, listing each discrepancy. It may ask the issuing bank whether the applicant will waive the discrepancies, and if the waiver is given, it may then pay. If the issuing bank fails to reimburse the confirming bank after it has paid against complying documents, the confirming bank has a claim against the issuing bank under the credit, and the dispute is a bank to bank matter that does not involve the exporter. A business analyst should note that the system must track the confirmation status, the fee, the reimbursement claim, and the time limits for each step, because each one has a UCP 600 deadline. For example, an exporter agrees to sell goods worth EUR 80,000 to an importer whose bank is in a country the exporter considers risky. The exporter asks for confirmation, so a bank in the exporter country adds its own promise to pay EUR 80,000 against complying documents, charging a fee of EUR 400 for the risk. The exporter ships with confidence, because it can claim payment from the confirming bank it trusts, even if the issuing bank later fails to pay.