How do banks talk to each other: An Introduction to LCs
Banks need to communicate with each other when there is a transaction that happened on credit, and a LC is provided. What is a LC? It's a commonly used abbreviation that stands for "Letter of Credit." It is a financial document issued by a bank that guarantees a buyer's payment to a seller will be received on time and for the correct amount . If the buyer is unable to make payment, the bank covers the full or remaining amount. Imagine an Indian textile importer purchasing fabric from a manufacturer in Italy. To ensure the Italian seller gets paid once they ship the goods, the Indian buyer asks their bank to issue an LC. The Italian seller’s bank confirms the LC, ships the goods, submits the documents, and receives payment safely and with the bank acting as a trusted intermediary. Types of Letters of Credit Revocable / Irrevocable (most LCs today are irrevocable) : This gives the power to the purchaser to revoke the LC wherever they want without the seller getting any...
