Discrepancy Fee

How to Deal with High Banking Commissions under Letters of Credit?

Ozgur Eker (CDCS) Advising Fee, Amendment Fee, Confirmation Fee, Discrepancy Fee, Handling Fee, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees , , , , , ,
high letter of credit fees and commissions

No matter how many advantages letters of credit have, they have one big disadvantage. They are expensive.

As a result, you should understand your costs before finalizing a letter of credit deal.

Letter of credit is a secure payment method in foreign trade. But this comfort of security comes with a price.

Letters of credit are one of the most expensive international payment methods available on the market.

As a result, exporters find themselves in a dilemma, when negotiating the terms of the business conditions.

Question is simple but not easy to answer; either choosing an expensive but relatively secure payment method or choosing a risky but less expensive payment method.

What are the Main Letter of Credit Fees That Exporters Have to Pay?

It is really hard to answer this question. Because what rules say is different than what the daily practice dictates.

  • According to the Rules: The issuing bank must pay all banking commissions as per UCP 600, which is the latest ICC rules of documentary credits.
  • Real Life Situations: The applicant pays the letter of credit issuance charges, but all other l/c costs will be collected from the beneficiary.

Bank Commissions That Exporters Normally Have to Pay:

  • Courier Fee / Postage Fee
  • Advising Fee
  • Discrepancy Fee
  • Handling Fee / Negotiation Fee
  • Amendment Commission
  • Confirmation Fee
  • Reimbursing Bank Charges

Real Life Example :

I would like to share a real life bank commissions example below.

These bank fees were collected from a British exporter under a letter of credit transaction. As you can see, the exporter had to pay 487 GBP to the banks as letter of credit fees.

Total transaction amount was only 1890 GBP. Letter of credit fees comprised 25% of all transaction amount, and this is unacceptable.

letter of credit bank commissions
Figure 1 : Real life example of bank commissions under a letter of credit transaction.

Suggestions to Eliminate High Banking Commissions Under Letters of Credit Transactions for Exporters:

  • Suggestion 1: Do not use letters of credit in low value transactions. As a general rule of thumb, transaction amounts below 10.000 USD to 15.000 USD can be considered as a low value businesses. Try to use alternative payment methods, instead of letters of credit on these occasions.
  • Suggestion 2: Try to convince your customer, so that the letter of credit fees will be paid by the applicant. Remember, letter of credit rules are on your side.
  • Suggestion 3: The worst case scenario may be is that, you can not find an alternative payment option and your customer does not want to pay letter of credit charges, except for the l/c issuance costs. If this is the situation, then try to learn approximate bank commissions and make sure that you have included at least some of them on your price offer.

Discrepancy Fee

Ozgur Eker (CDCS) Discrepancy Fee, Letter of Credit Fees ,
discrepancy fee

Discrepancy can be defined as an error or defect, according to the issuing bank, in the presented documents compared with the documentary credit, the UCP 600 rules or other documents that have been presented under the same letter of credit.

Discrepancy fee occurs, only when the issuing bank determines that the presentation is not complying.

Issuing banks try to justify discrepancy fee, based on their claim that discrepant documents increase handling costs of issuing banks.

Many trade professionals find these claims unjustified.

Later on this post, you can find the history of the discrepancy fee and how it evolved since its introduction to trade finance word.

But, first of all, I need to explain the usage of the discrepancy fee in letters of credit.

How to Determine, How Much You Have to Pay Due to a Discrepancy Fee, If You Make a Non-Complying Presentation:

Issuing banks must insert discrepancy fee clauses to letters of credit, otherwise they can not demand such fees from beneficiaries.

For this reason, at the first stage, you have to determine, whether or not the letter of credit contains a discrepancy fee clause.

In order to that, you must look at Field 47-A : Additional Conditions.

Discrepancy fee clauses vary from one letter of credit to another in terms of wording. But their structure remains similar. After reading couple of examples, you will be familiarized with them.

Examples of Discrepancy Fees:

  • Discrepancy Fee Format 1: Any set of documents containing discrepancies and presented to us under this documentary credit, will be charged with a fee of USD 50.00 plus telex charge (if any) at final payment. This charge is for account of beneficiary and will be deducted from any proceeds to be paid.
  • Discrepancy Fee Format 2: Discrepancy fee for USD 75.- (or equivalent in l/c currency) plus all relative swift/tlx charges will be deducted from documents value for each presentation of discrepant documents under this credit, notwithstanding any instructions to the contrary.
  • Discrepancy Fee Format 3: If documents are presented with discrepancies and accepted by applicant a fee at the rate of USD 225.

History of the Discrepancy Fees

“As I recall, it all began sometime in the mid-1980s, when banks in US began charging a discrepancy fee – usually about US$25. Over the last decade, this practice spread through the documentary credit world so much that now practically most banks, including some large international banks, engage in this practice. A senior trade finance department manager says: “Now more than 60% of the credits impose discrepancy fees and these credits come from all over the world.” writes Abdul Latiff Abdul Rahim in his article which was published in year 1997 at DCInsight. We have reached 2014 and now almost every letter of credit issued with very little exception contains a discrepancy fee.

Discrepancy fees applied to vast majority of the letters of credit because banks can increase their letter of credit commissions significantly with these kinds of charges.

“Nonetheless, there is a worrying trend whereby more and more items and with higher rates of banking charges are being deducted by banks in the course of L/C transactions. Some of these charges include: opening charges, amendment fees, advising fees, negotiation fees, confirmation fees, transferring fees, reimbursing fees, payment commissions, telex/SWIFT commissions, courier charges, document checking fees, handling charges, discrepancy fees, and commission in lieu of exchange and so on.” Wang Shanlun states in his article published in 2010 at DCInsight.

Unless exporters and importers object these high banking charges in letter of credit transactions, we should expect to see the trend keep going which results higher and higher L/C fees that will be imposing by the banks.

Who Should Pay Discrepancy Fees?

Discrepancy fees are collected from the beneficiaries.

Letter of Credit Fees

Ozgur Eker (CDCS) Advising Fee, Amendment Fee, Confirmation Fee, Discrepancy Fee, Handling Fee, Issuance Fee, Letter of Credit Basics, Letter of Credit Fees , , , , , , ,
Letter of credit fees

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Letters of credit have certain advantages as an international payment method.

If you have enough knowledge and expertise on letters of credit field, then you can use them wisely to get paid where no other payment method works.

No matter how many advantages letters of credit have, they have one big disadvantage.

They are expensive.

As a result, you should understand your costs, before finalizing a letter of credit deal.

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