Introduction

A Documentary Letter of Credit (DLC) is a cornerstone of international trade finance, providing payment assurance to exporters while protecting importers from delivery risks.

The successful execution of an LC relies heavily on the coordinated roles of multiple banks. Each bank — issuing, advising, confirming, and reimbursing — plays a specialized function in ensuring secure, compliant, and timely settlement of trade transactions.

Keywords: issuing bank, advising bank, confirming bank, reimbursement bank, SWIFT messaging
Related terms: LC workflow, interbank settlement, MT700, MT740, MT799, trade finance compliance

I. Issuing Bank

The issuing bank is the importer’s bank, responsible for:

• Opening the LC in favor of the exporter

• Ensuring the LC terms align with the sales contract

• Performing credit assessment and KYC/AML checks on the applicant

• Committing to honor payment upon presentation of compliant documents

Key Responsibilities:

• Review the applicant’s trade and credit profile

• Draft the LC in line with UCP 600 or ISP98 rules

• Coordinate with advising and confirming banks to transmit the LC securely

II. Advising Bank

The advising bank is usually located in the exporter’s country. Its main duties are:

• Authenticating the LC received from the issuing bank

• Advising the exporter of the LC terms without assuming payment obligation

• Ensuring the LC is genuine and complies with instructions

Strategic Note:
While the advising bank does not guarantee payment, it acts as the first point of verification and communication, reducing fraud risks in cross-border trade.

III. Confirming Bank

A confirming bank provides an additional layer of payment assurance. Key features include:

• Adding its irrevocable commitment to pay the exporter if the issuing bank defaults

• Performing independent document and compliance checks

• Ensuring that the exporter can secure immediate or guaranteed payment

Use Case:
Particularly valuable when the exporter doubts the creditworthiness of the issuing bank or operates in a high-risk jurisdiction.

IV. Reimbursing Bank

The reimbursing bank is authorized to honor payment claims on behalf of the issuing bank. Responsibilities include:

• Receiving MT740 Authorization to Reimburse from the issuing bank

• Paying the claiming or negotiating bank under the LC

• Maintaining proper accounting and settlement records

• Ensuring funds are debited from the issuing bank after payment

Operational Note:
The reimbursing bank streamlines fund flow and ensures that payment is executed promptly and accurately.

V. Interbank Communication via SWIFT

SWIFT messaging is the primary communication channel among banks in LC transactions. Typical messages include:

Best Practice:
All banks must ensure accurate and secure SWIFT messaging to prevent delays, miscommunication, or fraud.

VI. Common Risks and Mitigation Strategies

While banks enable safe trade, certain risks exist:

• Fraud Risk: Fake LCs or altered documents

  • Mitigation: Advising bank authentication and SWIFT verification

• Payment Risk: Issuing bank default

  • Mitigation: Confirming bank guarantees

• Operational Risk: Delayed or incorrect messaging

  • Mitigation: Automated SWIFT validation and STP systems

• Compliance Risk: KYC/AML violations

  • Mitigation: Rigorous internal checks and centralized compliance protocols

VII. Strategic Importance of Bank Roles

Properly defined bank roles:

• Enhance trade security for both exporters and importers

• Reduce operational and credit risk across the supply chain

• Ensure regulatory compliance under UCP 600, ISP98, and local laws

• Facilitate smooth, timely international payments

The collaboration of multiple banks ensures that global trade flows remain reliable, secure, and dispute-free.

Conclusion

Banks are the backbone of documentary credit operations, providing risk mitigation, compliance oversight, and payment assurance.
Each institution — issuing, advising, confirming, or reimbursing — plays a distinct yet interconnected role, ensuring that international trade transactions proceed seamlessly.

By understanding and leveraging these roles effectively, exporters, importers, and financial institutions maximize security, operational efficiency, and trust in global trade finance.

FAQ — Role of Banks in LC Transactions

Q1 — What is the primary responsibility of the issuing bank?
To open the LC and commit to pay upon presentation of compliant documents.

Q2 — Does the advising bank guarantee payment?
No, it authenticates the LC and communicates it to the exporter without assuming financial obligation.

Q3 — Why is a confirming bank used?
To add an irrevocable guarantee for exporters when the issuing bank or jurisdiction poses higher payment risk.

Q4 — What function does the reimbursing bank serve?
It disburses funds to the claiming or negotiating bank under the MT740 authorization.

Q5 — How are SWIFT messages relevant in LC transactions?
They securely transmit instructions, confirmations, and payment authorizations between all banks involved, minimizing errors and fraud.