Difference between Advising and Confirming Bank

When companies in different countries do business together, they often use letters of credit to ensure everyone gets paid. Letters of credit are special documents issued by banks. They basically say, “We promise the seller will get their money as long as they do what the letter of credit requires.”

The bank that gives the letter of credit to the seller is called the advising bank. The advising bank works with the buyer’s bank, which is known as the issuing bank. The advising bank’s job is to look at the letter of credit and make sure it’s real. They tell the seller that the letter of credit is legit.

Sometimes, the seller wants extra assurance that they’ll get paid. That’s where confirming banks come in. A confirming bank is a second bank that promises to reimburse the seller in addition to the issuing bank’s promise. The confirming bank has to pay the seller even if the issuing bank doesn’t transfer the money.

Critical roles of advising and confirming banks

The advising bank acts as a go-between for the issuing bank and the seller. Their main jobs are:

• Getting the letter of credit from the issuing bank
• Checking that the letter of credit is authentic
• Forwarding the letter of credit to the seller
• Handling documents, the seller submits under the letter of credit terms
• Sending those documents to the issuing bank

A confirming bank takes on more risk. In addition to the advising bank roles, a confirming bank also:

• Promises to pay the seller if the documents match the letter of credit terms
• Pays the seller even if the issuing bank doesn’t send money
• Can help the seller get paid faster by agreeing to pay as soon as documents are submitted properly

Why sellers might want a confirming bank

Sellers often prefer to have a confirming bank and an advising bank. Here are the main reasons why:

Extra payment assurance

With an advising bank, the seller has to trust that the issuing bank will pay up. But what if the issuing bank doesn’t transfer the money or goes bankrupt? The advising bank isn’t responsible for paying the seller.

A confirming bank gives the seller an extra layer of payment protection. Even if something goes wrong with the issuing bank, the confirming bank is still obligated to pay the seller (assuming the seller did everything right under the letter of credit). It’s like having a backup source of payment.

Quicker payment

Advising banks usually wait to pay the seller until they get money from the issuing bank. Depending on the banks involved, this could take a while. The whole process of collecting payment from an advising bank may drag on for days or even weeks.

With a confirming bank, sellers can often get paid much faster. Many confirming banks are willing to pay the seller as soon as they submit the right documents without waiting for money from the issuing bank. This is a big plus for sellers who want to get paid ASAP.

More confidence in unfamiliar banks

Sometimes, a seller isn’t entirely comfortable with the issuing bank, maybe because they haven’t worked with them before or the bank is in a country seen as higher risk. An advising bank can help reassure the seller that the letter of credit is valid, but some sellers want more certainty.

Adding a trusted confirming bank can give sellers more confidence. The seller may have an existing relationship with the confirming bank or feel better that a second bank is backing up the payment obligation. This can be especially important when doing business in a new market.

Potential downsides of using a confirming bank

While there are clear benefits to having a confirming bank, it’s not always necessary or practical. Here are some reasons a seller might choose to just stick with an advising bank:

Higher costs

Confirming banks take on more risk by promising to pay sellers even if they don’t get reimbursed by the issuing bank. They also do extra work validating letters of credit and vetting documents submitted under the L/C.

As a result, confirming banks charge extra fees – and those fees can add up. Sellers have to decide if the benefits of a confirming bank justify the added cost. Paying confirmation fees might not make sense for smaller deals or working with a trusted issuing bank.

Slower process overall

In some cases, having a confirming bank can slow things down. The confirming bank has to conduct its own review of the letter of credit and documents submitted under it, which adds an extra step compared to just using an advising bank.

If the confirming bank spots an issue with the letter of credit or documents, it’ll bounce it back to the seller to address. The seller then has to resolve the discrepancy and resubmit, which takes more time. An advising bank handles document examination, too, but any issues can usually be resolved faster with the issuing bank.

It doesn’t permanently eliminate risk.

Using a confirming bank reduces risk for the seller but doesn’t eliminate it. The confirming bank still has to pay the seller “only if” the documents strictly comply with the letter of credit terms. If the seller makes a mistake or the L/C terms are very complex, the confirming bank could refuse to pay due to discrepant documents.

Confirming banks can also refuse to pay if fraud or other illegal activity is involved in the transaction. So, while a confirming bank provides an extra payment guarantee, sellers still face some risk of not getting paid if something goes very wrong with the deal or their paperwork.

The key differences summarized

Now that we’ve looked at how advising banks and confirming banks work, let’s recap the main differences:

1. Payment obligation: An advising bank passes on the issuing bank’s payment promise to the seller but doesn’t guarantee payment. A confirming bank directly promises to pay the seller and the issuing bank.
2. Risk taken on: An advising bank mainly acts as a messenger and document checker without any payment risk if the issuing bank defaults. A confirming bank takes on the risk of paying the seller even if they don’t receive funds from the issuing bank.
3. Fees charged: Because they take on less risk and do less work, advising banks charge lower fees than confirming banks. Confirmation fees can get pricey, so the seller has to compare the costs and benefits.
4. Typical payment speed: Advising banks usually wait until they get paid by the issuing bank before releasing funds to the seller. Confirming banks often pay the seller immediately upon receipt of compliant documents without waiting to issue bank funds.
5. Reasons to use: Advising banks make sense for smaller, lower-risk deals or when the seller fully trusts the issuing bank. Confirming banks helps when the seller wants extra peace of mind, faster payment, or a backup if the issuing bank doesn’t pay.

The bottom line on confirming and advising banks

Sellers need to understand the difference between advising banks and confirming banks so they can pick the best option for each deal. Advising banks is essential to ensure the letter of credit is legitimate, and the documents get where they need to go, but it doesn’t guarantee the seller will get paid.

Confirming banks, on the other hand, provide extra payment protection by promising to pay sellers even if something goes wrong with the issuing bank. They also often pay faster when the seller turns in compliant documents. These benefits provide more assurance for the seller – but at a cost.

For big deals or when working with less familiar banks, sellers may find a confirming bank well worth the extra fees. When doing more routine transactions with trusted partners, an advising bank may meet the seller’s needs just fine. It all comes down to the seller’s risk tolerance, cash flow needs, and cost sensitivity.

What’s clear is that in today’s global trade environment, understanding the roles of advising and confirming banks—and how they differ—helps sellers make smart choices about how to get paid. Savvy sellers see picking the right banking setup as key to successfully (and profitably) closing cross-border sales. The more you know, the better you can protect your company while growing your international business.