Hailey Johnson
The roles of advising and issuing banks are crucial in facilitating international trade and ensuring secure payments. An issuing bank is responsible for issuing a letter of credit (LC) at the request of an applicant or on its behalf, while an advising bank acts as an agent for the exporter, facilitating smooth payment from the importer's letter of credit. The advising bank's primary role is to authenticate the letter of credit, scrutinize its terms, and advise the beneficiary (exporter) of its availability. Although the advising bank can assist in making changes, it cannot negotiate the main terms of the LC. The issuing bank, on the other hand, pays the specified amount in the LC at the national bank's exchange rate upon fulfillment of the conditions. Understanding the functions and obligations of these banks is essential for efficient trade financing and risk management.
| Characteristics | Values |
|---|---|
| Advising Bank | Notifies the beneficiary (exporter) about the letter of credit (L/C) |
| Authenticates the letter of credit to avoid fraud | |
| Not responsible for payment | |
| Usually located in the beneficiary's country | |
| Can be a branch of the issuing bank, correspondent bank, or a bank appointed by the beneficiary | |
| Issuing Bank | Issues a credit at the request of an applicant or on its own behalf |
| Pays the amount specified in the letter of credit at the national bank's exchange rate | |
| Issues a revocable letter of credit |
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What You'll Learn
The role of an issuing bank
An issuing bank is a critical component of the payments ecosystem, enabling and protecting your transactions. It is the bank that issued your credit or debit card and is responsible for paying the merchant account when you make a purchase. When a consumer initiates a transaction, the issuing bank is responsible for authorizing it. This involves checking that the consumer has the available credit or funds required for the purchase, as well as verifying account details and applying its own fraud and risk rules.
The issuing bank assumes primary liability for the consumer's capacity to pay off debts incurred with their card. In the case of credit cards, this includes extending credit to make purchases. The bank will assess the consumer's level of credit risk before issuing a credit card. This involves determining the likelihood of being repaid the amount of credit extended and setting a credit limit accordingly. If the cardholder is unable to pay off their credit card balance, the issuing bank must recoup those funds.
The issuing bank is also the bank to which a consumer will complain if they wish to dispute a transaction. If the bank sides with the cardholder, it will initiate a chargeback. The issuing bank shares liability for non-payment with the acquiring bank, according to rules established by the card association brand (e.g. Mastercard, Visa).
In summary, the issuing bank plays a vital role in ensuring the security and success of transactions by extending credit, authorizing purchases, managing risk, and resolving disputes.
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The role of an advising bank
An advising bank (also referred to as a notifying bank) is responsible for facilitating the smooth payment from the importer's letter of credit. It acts as an intermediary between the importer (consignee) and the exporter (supplier), ensuring the exporter is aware that a letter of credit has been opened by an issuing bank for the importer. The advising bank is usually located in the exporter's country and can be either a branch of the issuing bank, a correspondent bank, or a bank chosen by the exporter.
The primary role of an advising bank is to authenticate the letter of credit to prevent fraud. This involves scrutinising the letter for inconsistencies and errors and verifying the signature and coding system. By doing so, the advising bank ensures that the credit is genuine and originates from the issuing bank. This process is particularly important in manual letter of credit transactions, although the digital revolution has reduced the need for manual verification in recent times.
In addition to authentication, the advising bank communicates the terms of the letter of credit to the exporter. These terms outline the exporter's payment obligations and conditions that must be met for the issuing bank to release the specified payment. The advising bank may also assist in making changes to the letter of credit, although it cannot negotiate the main terms. It is important to note that the advising bank is typically not responsible for the actual payment of the credit.
The role of the advising bank is crucial in maintaining transparency and trust in international trade transactions. By authenticating the letter of credit and communicating its terms, the advising bank reduces the risk of fraud and ensures that all parties are aware of their obligations. While the digitalisation of logistics has simplified the verification process, the advising bank's role remains significant in facilitating smooth and secure trade operations.
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The issuing bank's payment obligations
An issuing bank's primary role is to issue a letter of credit (LC) to an applicant (importer) on behalf of the beneficiary (exporter). The advising bank, on the other hand, acts as an agent to facilitate smooth payment from the importer's letter of credit. It is important to note that the advising bank is not necessarily responsible for the payment of the credit. Instead, its main responsibility is to authenticate the letter of credit to prevent fraud.
In recent years, the International Chamber of Commerce (ICC) and SWIFT have introduced the concept of Bank Payment Obligation (BPO) as a middle ground between traditional Letters of Credit (LCs) and open account trade. A BPO is a payment instrument where the issuing bank guarantees payment to the seller on behalf of the buyer, provided the seller meets the specified terms and conditions. This creates a bank-to-bank payment obligation, where the recipient bank (the seller's bank) is the party entitled to payment.
The process typically involves the buyer providing data from the purchase order and payment conditions to their bank (buyer's bank). The seller then confirms the accuracy of the data and sends it to their recipient bank. If the banks agree that the data matches, the seller can proceed with shipping the goods or services as per the initial sales contract. This ensures that the seller receives payment promptly upon compliant presentation of documents.
It is worth noting that the Uniform Rules for Bank Payment Obligations (URBPO) provide additional flexibility. For instance, they allow for deferred payment, where the buyer's reimbursement obligation to the obligor bank is postponed. Furthermore, the URBPO enables the transfer of drawing rights by permitting a change in the identity of the recipient bank through an amendment to the "established baseline".
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The advising bank's payment obligations
An advising bank, also known as a notifying bank, plays a crucial role in facilitating international trade transactions by advising the beneficiary (usually an exporter) that a letter of credit (L/C) has been issued by the importer's bank (the issuing bank). While the advising bank is responsible for authenticating the letter of credit to prevent fraud, it is important to note that it is typically not responsible for the actual payment of the credit.
The primary obligation of the advising bank is to act as an intermediary, ensuring the smooth flow of information and payment from the importer's letter of credit to the exporter. This includes scrutinising the letter of credit for any inconsistencies and bringing them to the attention of the beneficiary. The advising bank can provide guidance and assist in making changes, but it cannot negotiate the main terms of the letter of credit.
In some cases, the beneficiary may request to specify their own bank as the advising bank in the L/C application, which can result in reduced bank charges and fees due to special relationships. This nominated bank, usually located in the beneficiary's country, has the option to act upon its nomination by paying, accepting, negotiating, or incurring a deferred payment undertaking. However, it is important to note that a nominated bank is not obligated to honour or negotiate unless it is also a confirming bank.
A confirming bank provides an additional layer of assurance by adding its confirmation to the credit, committing to honour or negotiate a complying presentation. This ensures timely funding for the beneficiary, even before the issuing bank completes its examination of the documents. The advising bank's role in this process is to facilitate communication and provide guidance to the beneficiary, helping to expedite the transaction and maintain transparency.
While the advising bank typically does not make the payment itself, it plays a crucial role in the payment process by authenticating the letter of credit and advising the beneficiary of its availability. This helps protect the beneficiary from fraud and ensures that the payment obligations outlined in the letter of credit are legitimate and enforceable. In the event that the nominated bank refuses to act on its nomination, the advising bank can still facilitate reimbursement by the issuing bank upon compliance with the credit terms.
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The difference between issuing and advising banks
An issuing bank is a bank that offers payment cards, such as credit, debit, prepaid, and contactless cards, directly to consumers through card associations or networks. These cards are issued by "issuers", which are similar to acquiring banks that are members of card networks like MasterCard, Visa, and American Express. The issuing bank acts as a bridge between the customer and card associations, providing credit and other financial services to customers while managing risks and generating profits. They are responsible for authorizing transactions by verifying that the cardholder has sufficient funds and that the account complies with banking policies and regulations. Issuing banks also bear financial responsibility for the cardholder's actions and debts.
On the other hand, an advising bank (also known as a notifying bank) plays a role in facilitating international trade. It advises the beneficiary (exporter) that a letter of credit (L/C) has been opened by an issuing bank for an applicant (importer). The advising bank's primary responsibility is to authenticate the letter of credit to prevent fraud. They scrutinize the letter for inconsistencies and communicate any issues to the beneficiary. However, the advising bank is typically not responsible for the payment of the credit. It can be a branch of the issuing bank, a correspondent bank, or a bank appointed by the beneficiary, usually located in the beneficiary's country.
One key difference between issuing and advising banks is their involvement in payment processes. Issuing banks are directly involved in payment transactions, providing authorization and completing payments by transferring funds to acquiring banks. In contrast, advising banks are not directly responsible for payments but facilitate smooth payment processes by assisting with the letter of credit and ensuring its legitimacy.
Another distinction lies in their roles within the trade and logistics domain. Advising banks are often involved in international trade, ensuring the smooth flow of payments between importers and exporters. They help process and deliver letters of credit, providing transparency and verification in manual letter-of-credit transactions. However, with the digital revolution, the role of advising banks in trade operations has diminished as electronic documents and digital processing have streamlined the verification process. Issuing banks, on the other hand, are less commonly associated with trade operations and are more focused on providing payment cards and related financial services directly to consumers.
In summary, issuing banks and advising banks have distinct roles and responsibilities. Issuing banks offer payment cards, authorize transactions, and bear financial responsibility for cardholder actions. They are directly involved in payment processes. Advising banks, on the other hand, facilitate international trade by authenticating and processing letters of credit, ensuring smooth payments between importers and exporters. Their role has evolved with the digital transformation of trade operations.
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Frequently asked questions
An issuing bank is a bank that issues a credit at the request of an applicant or on its behalf.
An advising bank (also known as a notifying bank) advises a beneficiary (exporter) that a letter of credit (L/C) has been opened by an issuing bank for an applicant (importer). Advising banks are responsible for authenticating the letter of credit to avoid fraud.
The advising bank is not responsible for making the payment. The issuing bank pays the amount specified in the letter of credit, subject to the fulfillment of the conditions specified in it.
