International Payments

Why is bank involvement in a letter of credit transaction so important?

Bank involvement in a letter of credit transaction is critical because the issuing bank takes instructions from the applicant and passes these instructions in the form of an "encrypted" letter of credit to the advising or confirming bank.  The advising or confirming bank then "decrypts" the letter of credit, and conveys it to the letter of credit beneficiary, provided that the advising/confirming bank is convinced of the validity of the letter of credit. The encryption/decryption functions of the issuing and advising or confirming bank are key aspects of a letter of credit in that they insure the beneficiary of the letter of credit's validity. As a consequence, a letter of credit beneficiary should never act on any letter of credit received directly from a purported letter of credit applicant, unless the letter of credit also passes through banking channels.

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