International banks HSBC and Citi have revealed a spike in demand for traditional trade finance instruments over recent months, seemingly bucking the trend of a longer-term decline.
As a centuries-old financial instrument, letters of credit (LCs) are often considered somewhat unfashionable, and over recent years have accounted for only a small portion of trade-related payments.
In the US, the Federal Reserve reported on May 8 that figures collected from the country’s banks “consistently show a decline in trade finance activity over the past decade”, both as a share of US goods exports and in absolute value terms.
It said rising compliance costs, declining numbers of correspondent banking relationships and increasingly well-established supply chains have likely reduced the need for LCs and other documentary trade finance instruments.
However, its figures only extend to the end of 2024 or start of 2025. Since then, against a backdrop of geopolitical uncertainty and supply chain upheaval, US lenders have highlighted an apparent reversal of this trend.
“Demand for traditional products has risen steadily over the past six to nine months – from standby letters of credit to secure surplus supplies, to bill of exchange-backed solutions that allow buyers to pay early while preserving liquidity, to usance payable at sight structures,” said Ajit Menon, US head of HSBC’s Global Trade Solutions business.
“We’re seeing significant interest here, and understandably so.”
For instance, suppliers are in growing need of certainty as cross-border flows require greater capital and capacity, Menon said. International organisations have warned that rising costs and shifting trade strategies could increase the likelihood of defaults, delays and claims.
“Traditional trade finance instruments are well-suited to that environment,” he said. “The conversation is fundamentally about risk mitigation, not just access to funding.”
Adoniro Cestari, head of trade and working capital solutions at Citi in New York, said LCs are now being seen less as a fallback and more as a means of addressing counterparty, jurisdictional or logistical risks from the outset.
“In today’s environment, the resurgence of letters of credit is a rational response to heightened risk. As supply chains fragment and geopolitical tensions persist, clients are prioritising production resilience and certainty of payment and control over execution,” he said.
“Ultimately, this reflects a broader shift where predictability and certainty of payments have become a competitive advantage.”
There is a precedent for LC usage surging during periods of upheaval, with the Federal Reserve report noting that volumes “jumped during the Covid pandemic”.
One reason for the LC’s association with challenging environments is its resilience, Cestari said. Frameworks such as the International Chamber of Commerce’s (ICC) UCP 600 rulebook provide consistent standards across international markets.
“In a more fragmented regulatory environment, that consistency is highly valuable,” he said. “It provides clarity and reduces execution risk, particularly in complex, multi-market supply chains.”
The uptick in documentary trade finance is not happening in a uniform way, however.
“This is playing out at different speeds and in different ways depending on the sector and the market,” HSBC’s Menon said. “But there are pockets of very strong activity, particularly across certain industries in the US and Europe, each responding to their own specific dynamics.”
Open account trade remains strong in established, high-trust relationships, Cestari said. LCs and products such as guarantees “are being deployed more selectively where risk is elevated, relationships are newer or transactions are of larger values and more complex”.
“The most sophisticated treasury teams are using both [LCs and open account trade], calibrating their approach corridor by corridor, even more so in the current interest rate environment,” he said.
From a European perspective, Florian Witt, chair of the ICC Banking Commission and head of international and corporate banking at Oddo BHF, said the “big change” is in South-South trade.
“That is a rather new relationship, so institutional trust is not at the level where it is between [for example] Germany and France today,” he said.
But for Cestari, higher-value strategic sectors are also acting as a demand centre for documentary trade products.
“In areas such as semiconductors, AI infrastructure and critical materials, supply chains are more complex and negotiating dynamics are less balanced,” he said.
“In those cases, the payment certainty and structured execution that LCs provide are often a prerequisite to transact, rather than an optional layer of protection.”
