Paying a Chinese supplier: T/T versus L/C

The Incoterms rules settle who books the freight and where risk moves (Incoterms in one page). They say nothing about “the time, place, method or currency of payment of the price” (ICC, Incoterms 2020 Q&A, read 14 October 2026). Payment is a separate term on the same order, and the one that decides who is out of pocket when the order goes wrong.

The order in which the money moves

Where the loss lands

The credit rows rest on UCP 600 Articles 2, 5, 8, 16 and 34. The D/P and D/A rows rest on URC 522 Articles 2, 7 and 10; the first and last rows on the trade agency’s descriptions of cash-in-advance and open account (Cash-in-Advance, Methods of Payment, read 14 October 2026). The deposit row follows from the first: no rule governs a deposit, only the contract.

One arrangement out of six puts a bank behind the payment, and it does nothing about the goods.

What a credit promises, and what it leaves alone

UCP 600 has been in force since 1 July 2007 (ICC announcement, read 14 October 2026). A credit is “any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation” (UCP 600, Art. 2, read 14 October 2026). The issuing bank is “irrevocably bound to honour as of the time it issues the credit” (Art. 7(b)), and the credit is a separate transaction from the sale contract (Art. 4).

Three limits come with it. The bank reads paper: “Banks deal with documents and not with goods, services or performance to which the documents may relate” (Art. 5). Art. 34 disclaims responsibility for “the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods”.

A credit cannot be issued available by a draft drawn on the applicant (Art. 6(c)).

The promise is only as good as the bank behind it. Confirmation (Arts. 2 and 8) adds a second, definite undertaking from the confirming bank, priced separately and case by case — both tariffs below carry a confirmation line.

Five banking days, and a list of discrepancies

The refusal figure is ICC’s own: “It is estimated that the global percentage of documents refused on first presentation under documentary credits ranges between 65-80%” (ICC Banking Commission, Technical Advisory Briefing No. 3, 27 June 2022). The same sentence calls it an estimate. The briefing adds that a refusal “does not necessarily mean that a beneficiary will not receive settlement at all” — it means delay and a larger bank bill — and counts a third category: refusals that are not valid at all.

The procedure is written down:

• five banking days to examine, counted from the day of presentation (Art. 14(b));
• one single notice stating each discrepancy relied on, by the close of the fifth banking day (Arts. 16(c), 16(d));
• a bank that fails to act “shall be precluded from claiming that the documents do not constitute a complying presentation” (Art. 16(f));
• the issuing bank may ask its customer to waive the discrepancies, which does not extend the five days (Art. 16(b));
• presentation within 21 calendar days of shipment, where an original transport document is presented, and before expiry (Art. 14(c)).

The refusal sources that recur most, and the article each breaks:

Art. 30 fixes three tolerances that do not have to be written into the credit. “About” or “approximately” permits 10% either way; a 5% quantity tolerance applies where quantity is not stated in packing units or items; and 5% less on the amount is allowed even when partial shipment is barred, if the quantity ships in full and no unit price is cut.

What the bank charges

Two published China corporate tariffs, one effective 10 April 2026 and one effective 1 October 2026, read 14 October 2026. The institution names stay out of this text; the links carry the documents, and the point is the shape of the charge.

Three readings of that table.

The floor decides, not the rate. On a USD 20,000 order, 0.1% of a transfer is USD 20, under one card’s USD 50 floor, and 0.15% of a three-month credit is USD 30, under the other card’s USD 45 floor. The tariff that prices a credit at 0.25% per six months counts a shorter tenor as two quarters and charges USD 200 for anything under USD 200, so a three-month credit on that order costs USD 200 against a USD 50 wire. The smaller the order, the larger the fixed share.

Time is billed in quarters. The card that charges 0.15% per three months charges double for a six-month credit. The other prices in six-month blocks and counts a shorter tenor as two quarters, so three months and six months cost the same. A usance credit adds a monthly acceptance or deferred-payment commission.

One refused presentation costs more than the transfer did. The discrepancy fee is USD 75 or USD 80 per presentation. On a USD 20,000 order that is 0.375% to 0.4%, against a wire that costs USD 50 at the floor plus a USD 30 cable. The ICC briefing passes on the comment that a number of banks “now consider discrepancy fees as an essential element of their revenue stream”, and that the practice is “perhaps, being abused in some cases”.

On the wire side, the amount that reaches the seller is smaller than what left. One card states its transfer charges “do not include any charges that may be imposed by correspondent banks” and that “your beneficiary may not receive the full amount”; the fee-allocation code the buyer picks decides whose account the intermediary draws on. The other card’s line is blunter: “correspondent bank charges: according to actual amount deducted”. That is the line a factory quote puts on its payment terms.

Collections: documents against money, and no promise

The rules for a D/P or D/A transaction are URC 522, the ICC’s 1995 revision (URC 522, ICC Digital Library, read 14 October 2026). The banks do not examine the documents: “Banks will not examine documents in order to obtain instructions” (Art. 4(a)(2)), and they “will present documents as received without further examination” (Art. 12(c)). They assume no liability for the documents’ “form, sufficiency, accuracy, genuineness, falsification or legal effect” (Art. 13), and no obligation to act on the goods, “including storage and insurance”, even when instructed (Art. 10(b)).

What the rules give the seller is a release condition. Where a collection contains a draft payable at a future date and the instruction is silent on which release applies, documents are released only against payment (Art. 7(b)); the same article discourages a future-dated draft combined with release against payment (Art. 7(a)). If the buyer refuses the bank’s charges and the instruction permits waiver, those charges come back to the party who sent the collection (Art. 21(a)). Non-payment is advised to the remitting bank without delay (Art. 26(c)(3)), which is when the seller learns it owns goods at a foreign port.

The US trade agency agrees: the banks “do not verify that the documents are accurate and do not guarantee payment as they do with Letters of Credit”; the method is “generally recommended” where there is an established and ongoing relationship; and if the importer does not pay, “the exporter typically needs to find another buyer, pay for return transportation, or abandon the merchandise” (Documentary Collections, read 14 October 2026).

What is common at what size

Two official sources put the market’s shape in numbers, both as estimates.

Open account is the largest single bucket; documentary instruments are a minority of it. The official guidance follows order size and relationship: cash-in-advance for small transactions “for which other payment methods may not be cost-effective” (Cash-in-Advance); collections where there is an established and ongoing relationship (Documentary Collections); a credit “when reliable credit information about a foreign buyer is difficult to obtain” (Methods of Payment). The WTO records one market where local banks charged a flat USD 1,500 to open a credit and required 30% collateral, a fixed cost a small order cannot absorb.

That pattern is my reading, not a measurement: a first order between parties with no history arrives as a deposit or cash in advance, a credit appears where the amount can carry the fixed fees; D/P or open account comes after several shipments. The “30% deposit, 70% balance” split circulates as the small-order default: industry-common figure, unverified.

How these figures were read

Rule text is ICC’s own: the UCP 600 and URC 522 articles are ICC Digital Library pages, read 14 October 2026, not a commentary. Fees are two published China corporate tariffs, effective 10 April 2026 and 1 October 2026, read the same day; both state that prices can be agreed case by case. The refusal band is ICC’s wording, and ICC calls it an estimate in the same sentence. The market-share figures are estimates by their publishers; the ISBP row is an ICC Academy article that marks its views as the contributor’s own. No bank, factory or seller is named here.

What I could not check

• The 30% deposit, 70% balance structure as a market norm. Traceable to no primary publisher, and neither tariff mentions a deposit percentage. Industry-common, unverified.
• What any particular bank charges a particular buyer. Negotiated rates, waivers for small entities and per-customer arrangements appear in the same documents.
• How long a presentation takes end to end. The rules set the outer limits; courier time and internal queues are published nowhere I could find.
• Whether a confirming bank will confirm any given credit. Both tariffs price confirmation case by case, on the risk of the issuing bank and its country. No public list exists.
• The 65–80% refusal band as a measurement. ICC’s sentence begins “It is estimated”, and the same briefing notes that the survey it cites measured direction rather than level: 26.7% of respondents reported a decrease, 12.3% an increase, 58.9% no change.
• The IMF–BAFT chart. Three survey points from 2007 to 2009, share of respondents’ business, cited inside a WTO publication, not a current measurement.
• China’s foreign-exchange administration, and its effect on which terms a seller will accept. I read no SAFE rule for this piece, so nothing above rests on one.
• No order is described here. No case from my own files appears; the tariffs are cited as documents, not as recommendations.