# Why banks aren’t fixing the LC discrepancy problem, and why it matters

> LCs remain low-risk, yet 65–80% face discrepancies. Discover why banks aren’t solving the problem — and how smarter processes can restore trust in trade.

URL: https://www.venzotechnologies.com/blog/why-banks-are-not-fixing-the-lc-discrepancy-problem-and-why-it-matters
Author: Balaji, Co-Founder, Venzo Technologies
Published: 2025-12-08
Topic: Discrepancies and checking

## 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.