Maybe you’ve heard the Letters of Credit fluttering in the wind lately: Many procurement people are saving money by opting not to use Letters of Credit, especially to secure smaller transactions.

How could this occurr?

Of course, Letters of Credit have always been a reliable means of securing transactions. One of main reasons Letters of Credit have been so popular is because they speak one important fact rather loudly: This simple transaction certifies — even promises — that the buyer already has the money in the bank to pay for the transaction, should something go awry.

But there’s been a slight shift in that practice. Why? Because of the advent of electronic purchase processing, done under open accounts.

More and more companies are plugging in to electronic payment capabilities. So more companies are loosening up in accepting payments for smaller purchases. When the transaction is completed, the buyer pays immediately, wired from his bank directly to the vendor’s bank.

But cutting out the middle man also removes some of the visibility in the process, some procurement pros have pointed out. In many cases, though, the lower processing costs of electronic purchases on open account outweigh these concerns.

Tags: buyer, letters of credit, payment