Why Banks Aren’t Fixing the LC Discrepancy Problem — And Why It Matters
The Decline of LCs: A Contradiction in the Market
Letters of Credit (LCs) have been declining globally as businesses move toward open account and supply chain finance models. SWIFT data shows a steady drop in traditional trade instrument usage since 2014, while open account flows continue to rise.
Yet ICC Trade Register consistently reports that LCs remain one of the lowest-risk products in global trade, with average default and loss rates well below 0.1%.
The contradiction is clear:
If LCs are so safe, why are they losing relevance?
A major contributor is a long-standing operational problem:
65–80% of LC presentations are refused on first examination due to discrepancies (ICC TAB-3).
When exporters depend on buyer waivers after navigating complex LC terms and paying bank fees, the LC loses its fundamental value — independent assurance of payment.
This raises an essential question:
Why aren’t banks doing more to help beneficiaries submit complying presentations?
What We Observe in the Market
1. Fee Structures Reward Volume, Not Compliance
Banks earn issuance, amendment, confirmation, document-handling, and discrepancy charges — regardless of whether the presentation is compliant. In fact, discrepancies generate additional fees.
2. Banks Avoid Detailed Guidance
To minimise liability and legal exposure, banks avoid transaction-specific advice or documentation support.
3. LC Operations Are Stretched Thin
LC processing teams deal with:
- High transaction volumes
- Reduced staffing
- Growing compliance requirements
- Legacy systems
Their mandate is to process documents quickly and accurately — not to teach exporters how to avoid discrepancies.
4. Investment Priority Has Shifted to Open Account & SCF
Most banks now prioritise digital SCF platforms, payables finance, and corporate channels.
LC process modernisation rarely receives budget.
5. Applicant Waivers Mask the Problem
Since buyers frequently waive discrepancies:
- Shipments continue
- Losses remain low
- Banks feel little urgency
- Exporters quietly absorb the delays and uncertainty
To exporters, the LC begins to feel like open account — but with more complexity and higher fees.
Why This Should Concern Banks
Even if LC fee income remains stable in the short term, the long-term risks are significant:
1. Loss of Unfunded Income
When exporters repeatedly face discrepancies and waivers, they shift to open account terms — reducing LC utilisation and associated fee income.
2. Loss of Visibility Into Trade Flows
A strong LC portfolio gives banks valuable insight that fuels:
- FX business
- Supply chain finance
- Risk distribution
- Cash management
Losing this visibility weakens the bank’s broader trade franchise.
3. Strategic Weakening of Trade Relationship Depth
LCs often act as an entry point for deeper client engagement.
A declining LC business erodes this foundation.
The decline of LCs is not inevitable — it is largely the result of operational design choices.
How Banks Can Help Beneficiaries Achieve Compliant Presentations
A few practical improvements can deliver measurable impact:
1. Structured Beneficiary Training
Provide simple:
- Checklists
- Guides
- Sample documents
- Short tutorials
These significantly reduce avoidable discrepancies.
2. Light-Touch Draft Checks
Optional pre-check services (with clear terms and non-binding disclaimers) help exporters catch errors early.
3. Discrepancy Analytics
Track discrepancy patterns by corridor, product, exporter segment, or LC structure — then target improvements.
4. Smarter Use of Digital Tools
Trade platforms and corporate portals can generate:
- Shipment-date alerts
- Presentation-deadline alerts
- LC expiry reminders
- Data prompts for quantity, description, and other key LC fields
These tools prevent easily avoidable operational errors.
5. Better LC Templates and Clause Standardisation
Simplifying and standardising LC conditions reduces ambiguity and eliminates common discrepancy triggers.
None of these require major investment — only a shift in mindset and operational focus.
Venzo’s Perspective
At Venzo, we believe the LC itself is not the problem — the operating model around it is.
Banks have unintentionally normalised high discrepancy rates, and exporters are losing confidence in the instrument as a result.
Reducing discrepancies is not about reinventing the LC.
It is about reengineering processes, improving clarity, and using digital tools more intelligently.
Banks that modernise their LC operations will not only revive trust in the LC as a reliable instrument but also strengthen their broader trade ecosystem — across SCF, FX, payments, and compliance.