Trade finance payments
When a buyer and seller who have never met trade across borders, banks and documents stand in for trust. Follow how a letter of credit's payment leg settles.
IN ONE LINE
Cross-border trade has an old problem: the seller does not want to ship before being sure of payment, and the buyer does not want to pay before being sure of the goods.
Banks solve it by inserting a promise.
In a letter of credit, the buyer's bank promises to pay the seller once the seller presents documents proving the goods were shipped as agreed.
The exporter, Example Supplies Ltd, ships knowing a bank — not just the importer, Demo Trading Ltd — stands behind the payment; the importer knows the bank will only pay against the right documents.
A lighter alternative is a documentary collection, where banks pass the shipping documents along and collect payment but do not themselves promise to pay — less protection, lower cost.
(SYNTHETIC / TRAINING ONLY — every firm named here is fictional.) The through-line for a payments reader is that the goods, the documents, and the money each move on their own track, and the bank's promise is what links them.
WHAT IT ACTUALLY IS
A letter of credit names a few precise roles.
The issuing bank — Bank Alfa, the importer's bank — makes the promise to pay and takes on the importer's credit risk.
Because the exporter is in another country, a bank there is brought in: the advising bank authenticates the credit and passes it to the exporter, and when it is also authorised to check documents and pay, it acts as the nominated bank.
The document that usually anchors the whole thing is the bill of lading, the carrier's receipt for the goods and a title document — whoever holds it can claim the cargo, which is why banks handle it so carefully.
The banks are dealing in documents, not goods: they never see the shipment, only the paperwork that is supposed to represent it.
If the documents match the credit exactly, the promise is triggered and payment follows; if they do not, the bank is not obliged to pay until the mismatch is resolved.
HOW IT WORKS
This choreography runs on a specific message family.
Trade-finance instructions travel as Swift category-7 messages: an MT700 issues a documentary credit, an MT707 amends it, an MT750 raises a discrepancy advice, and an MT754 advises that documents have been presented and are being paid or accepted.
The exam-room concept is discrepant documents: if the presented documents do not comply on their face with the credit — a wrong date, a missing endorsement, an amount that does not tie out — the issuing bank may refuse to pay until the importer waives the discrepancy or the documents are corrected.
Note where credit risk actually sits: the exporter is looking to the issuing bank's promise, not the importer's, which is the whole value of the instrument.
And note the two tracks again — the documents move bank to bank while the money settles separately across the banks' correspondent accounts, the subject of the flow attached to this topic.
The comparison here sets a letter of credit against plain open-account trade so the risk trade-off is explicit.
THE WORDS
- Letter of credit
- A bank's undertaking to pay an exporter once compliant documents are presented, substituting the bank's credit for the importer's promise to pay.
- Documentary collection
- A trade settlement where banks pass shipping documents from exporter to importer against payment or acceptance, but give no payment guarantee themselves.
- Issuing bank
- The importer's bank that opens a letter of credit and carries the primary undertaking to pay the exporter against compliant documents.
- Advising bank
- A bank in the exporter's country that passes a letter of credit to the exporter, confirming it looks genuine without itself taking on a payment obligation.
- Nominated bank
- A bank authorised in a letter of credit to receive documents and to pay, accept, or negotiate under it — acting on the issuing bank's authority.
- Bill of lading
- A shipping document issued by the carrier that receipts the goods, states the carriage terms, and can act as a document of title to them.
- Discrepant documents
- Presented documents that do not comply with the letter of credit's terms, giving the issuing bank grounds to refuse payment unless the discrepancy is waived.
- MT700
- The Swift message an issuing bank uses to issue a documentary credit — the anchor of the category 7 MT7xx trade-finance message family.
READ FIRST
CONNECTED TO
SOURCES
- Swift Standards MT (annual standards releases) — Swift
- Payments Signal editorial teaching models — Payments Signal
Derived from Trade finance payments. Every claim on this card is sourced on that page.