One of the offshoots of the commercial revolution of the late 13th and early 14th centuries was the new type of credit organisations. International merchants began to engage in the banking business as a side activity, thus competing against ordinary deposit bankers. Whether or not they were formally registered as deposit bankers, merchants could legitimately practise the same credit operations about their trade as other bankers. What differentiated merchant bankers from ordinary ones was the way they took full advantage of letters of exchange to charge whatever interest they wished.
The Italian banking houses can thank the letters of exchange for their rising fortunes. The letters were contracts whereby a party received from another an advancer in local currency and promised repayment in another place. Thus, it was a highly flexible instrument, which made it possible to move great amounts of money from one part of Europe to another in a short period of time. The time being determined by how long it took a courier to make the journey. The lending party took an entitled service fee for changing the currency and taking care of the transfer. However, as the local currency was paid in advance and the repayment was delayed until the letter of the borrowing party had reached its destination, the transaction actually involved a loan by the second party to the first.
The reasons behind such transaction are easy to see. The borrowing party wanted to take a consignment of goods to a fair in a foreign country, to be able to buy the merchandise they borrowed a sum of money. In the contract they promise to repay the loan but in the currency of the country they sold their stock. The agreement was recorded in the books of the notary, thus if either party needed proof of the transaction, it could be found in legally binding documents.
The difference of currency and place could be eliminated by a second contract or clause reversing the operation, in other words arranging for a transfer of the foreign currency back to the original place and in the original currency. Such "dry exchanges" became necessary as they made it possible for both parties to circumvent the rules of the Church. By using dry exchanges, direct loans were disguised as exchange transactions, thus canonical rules didn't affect them. The trick was of great importance for large merchant companies whose business called for a continuous flow of payments back and forth from one place to another.
The letter of exchange was already known to both deposit bankers and merchants of the late twelfth century, it becoming the most widely used instrument of credit in the course of the thirteenth century. This was made possible by the flexibility of the contract, which was increased by the intensification of overland trade, as well as the advantages it offered. However, although the letter of exchange gradually spread throughout the Mediterranean world, large-scale credit based on it became the speciality of a small number of Italian merchant companies.