Letter of Credit Confirmation Making Trade Reliable and Secure for International Trading

A letter of credit is a document issued by a bank to another bank that guarantees the buyer’s payment to the seller in international trade. The document acts as a means of security to the seller, when the seller complies with the terms of payment, assuring that the seller will receive the payment from the issuing bank. The rise in international trade over the years has been the driving factor for the growth of the global letter of credit conformation industry. Moreover, increased risk of non-payment between importers and exporters is one of the major reasons for the market growth.

According to Allied Market Research, the global letter of credit confirmation market is expected to grow at a CAGR of 3.18% from 2020 to 2027. Increase in business operations and global trading among small and medium enterprises are likely to open new opportunities for market players in the market. Furthermore, improving technologies such as distributed ledger technology and blockchain would unlock new opportunities in a real-time digitalized letter of credit confirmation, auto notification alerts, and business efficiency. However, the online procedures of letter of credit confirmation carry a risk of cyber-attacks and frauds that cause loss of huge trade amounts and confidential data leakage.

Types of letters of credit:

Based on the purpose of the letter of credit, it is classified into various types.

• Commercial letter of credit- It is a standard letter of confirmation, also called as a documentary credit, used as a contractual agreement between buyers and sellers.
• Export/Import letter of credit- Depending on the person using or issuing the letter, it becomes either an export letter of credit or an import letter of credit. Importers' letter of credit gives an assurance to the exporter that the issuing bank will honor the payment and vice versa.
• Transferable letter of credit- The holder of a transferable letter of credit has the power to further transfer all or part of the payment to one or more beneficiaries.
• Revocable letter of credit- This type of credit letter can be altered by the issuing bank at any time without notifying the beneficiary.
• Irrevocable letter of credit- The issuing bank cannot alter the credit letter and hence, the beneficiary is more secured as compared to the revocable letter of credit.
• Standby letter of credit- If the assured payment is not made and the beneficiaries prove that they have not received the assured payment, the bank makes the payment to the beneficiaries.
• Red clause letter of credit- The buyer allows an unsecured loan to the seller to manufacture or ship products.

Along with several other types of letters of credit, these are the most used types based on the security provided to both the buyer and the seller. The use of the letters makes the expansion of the business internationally safe. Moreover, it is quick to execute for creditworthy parties, and payment is assured indisputable transactions.

With increasing international trade practices, the letter of credit confirmation would earn the utmost importance. Moreover, considering the various types of letters of credit, clients would make sure to utilize a letter of credit confirmation over the cast collaterals.

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