Question

Discuss the following aspects in detail and give an example:

Issuing banks vs Confirming banks and global business

Answer 1

Issuing bank – is also known as issuer. It is the bank of the consumer and also is responsible for paying th merchant bank for the purchase (goods and services) made by the consumer. The acquiring or the merchant bank passes the merchant (consumer) purchases or transactions to the issuing bank in order to get the payment.

Confirming bank- This is one of the parties in the letter of credit (LOC). Confirming bank is the party to LOC and it confirms and guarantees to assure to take responsibility for payment. This confirming bank takes up the responsibility of negotiation acceptance also under the LOC. This issuing bank’s request is heeded upon and thus the bank provides its confirmation to a credit.

In using the LOC, the correspondent bank (confirming bank) may confirm the credit through the LOC. Once the issuing bank sends a request to the correspondent, the correspondent obligates itself to insure the payment under LOC. The confirming bank will not confirm the credit under LOC until it evaluates the bank and the country from which the LOC was obtained. The confirming bank acts as the advising bank.

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For example, an exporter in China exports his products to the USA. The consumer in the USA approaches the issuing bank in USA for LOC to make the payment to the seller in China. The issuing bank sends a request to the confirming bank to insure the payment and confirm credit after evaluating the country and the bank from which LOC was obtained. Then, the issuing bank makes the payment to the merchant’s bank once the confirming bank (advising bank) provides its confirmation to pay the merchant.