What it means
A plain letter of credit already replaces the buyer's credit risk with a bank's. The exporter ships the goods, presents the documents specified in the credit, and the issuing bank pays regardless of whether the buyer wants it to.
Confirmation adds a second, independent obligation on top. The exporter's own bank examines the credit, decides it is willing to take the issuing bank's risk, and adds its own undertaking to pay against compliant documents.
The reason exporters ask for confirmation is rarely distrust of the individual bank. It is country risk: currency controls, sanctions, war or a banking crisis can all stop a perfectly solvent issuing bank from transferring funds abroad.
Confirmation is not free, and the price is a direct read on how the market views the issuing bank and its country. Fees might be a fraction of 1% a year for a strong bank in a stable market, and several per cent for a weak bank in a fragile one.
The practical trap is documentary, not financial. Banks pay against documents, not against goods, so a single mismatch between the invoice and the credit, or a bill of lading presented a day late, can turn a guaranteed payment into a discrepant presentation that the exporter must ask the buyer to accept.
In practice
Real-world examples.
Example
A grain trader wins a first order from a new buyer in a country with active currency controls. The trader agrees the deal only on a confirmed letter of credit, so that if the central bank blocks the transfer the confirming bank in the trader's home market still pays.
Example
A specialist pump manufacturer takes a $4,000,000 order with an eighteen month build time. Confirmation is priced high because of the long exposure, so the parties split the credit into three shipments and confirm each one separately as it approaches.
Example
A textile exporter presents documents two days after the shipment date allowed in the credit. The confirming bank flags the discrepancy and holds payment until the buyer waives it, which turns a guaranteed payment into a negotiation and delays cash by three weeks.
Formula
Calculation
Confirmation fee = shipment value x confirmation rate per annum x (days of exposure / 360)
An exporter ships $2,000,000 of machinery under a letter of credit issued by a bank in a higher risk market. The exporter's own bank agrees to confirm at 1.5% a year, and the credit runs for 120 days from issue to final payment.
Confirmation fee = $2,000,000 x 1.5% x 120 / 360 = $2,000,000 x 0.015 = $30,000 for a full year, and one third of that for 120 days, so $10,000.
Adding the other bank charges: an advising fee of $500 and a document negotiation fee of 0.125% of the shipment value, which is $2,000,000 x 0.00125 = $2,500. Total cost is $10,000 + $500 + $2,500 = $13,000, or $13,000 / $2,000,000 = 0.65% of the shipment value. Against the alternative of losing the sale or shipping on open account into an uncertain market, most exporters treat that as cheap insurance.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Selby Loom Works, an invented weaving machinery maker, was offered a $2,000,000 order from a first-time overseas customer. The customer's bank was willing to issue a letter of credit, but Selby's finance director had no way to judge the bank's standing and no realistic route to enforcement if payment stalled.
Selby asked for confirmation and its own bank quoted 1.5% a year over the 120 day life of the credit, a fee of $10,000, plus $3,000 of advising and negotiation charges. On a contract with a gross margin of 28%, or $560,000, the $13,000 total absorbed about 2.3% of the margin and the invented board approved it without much argument.
The confirmation was never called on: the issuing bank paid on presentation. What the exercise did produce was a documentary discipline the fictional company kept, since preparing a compliant presentation forced it to reconcile invoice wording, packing lists and shipping documents before dispatch rather than after a rejection.
Watch out
Common mistakes.
- Assuming any letter of credit is as good as cash, when an unconfirmed credit still leaves the exporter exposed to the issuing bank and its country.
- Treating the confirmation fee as a pure cost rather than pricing it into the contract, so the margin quietly shrinks on every confirmed sale.
- Focusing on the goods and neglecting the documents, when banks pay strictly against documents that comply with the credit's wording.
Questions
People also ask.
Who pays for confirmation?
It is negotiable, but the exporter usually pays because the exporter is the party who wants the extra protection, and the cost is normally built into the price quoted.
Can a bank refuse to confirm a credit?
Yes, and a refusal is useful information in itself, because it means the confirming bank is unwilling to take that issuing bank or country risk at any sensible price.
What is a silent confirmation?
It is a guarantee an exporter buys from its own bank without the issuing bank's involvement or knowledge, used when the issuing bank will not authorise a formal confirmation.
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