Letters of credit return as trade disruption raises payment risk

International banks are seeing renewed demand for letters of credit as companies seek stronger payment protection during a period of sanctions pressure, shipping disruption and geopolitical uncertainty.

The shift is notable because letters of credit had been losing ground for years as open account trade and supply chain finance structures became more common. But rising risk in commodity markets, longer shipping routes and uncertainty around counterparties are pushing some buyers and sellers back toward more traditional bank-backed instruments.

For exporters, the appeal is clear. A letter of credit provides greater certainty that payment will be made if documentary conditions are met. For importers, it can help reassure suppliers when confidence is being tested by market volatility.

The return of the instrument also reflects a wider change in trade finance. Companies are no longer optimising only for cost and speed. They are placing more value on security, documentation control and bank confirmation.

That is particularly important in corridors affected by sanctions, war risk insurance costs, fuel disruption and uncertainty around cargo movement.

Banks may benefit from higher volumes, but the operational burden is also rising. Letters of credit remain document-heavy, and errors in paperwork can still delay payment or create disputes.

The renewed interest suggests trade finance is becoming more defensive. In a more fragmented market, old instruments are regaining relevance because they offer something many companies now need more urgently: trust.