Document against Payment (D/P) means that the exporter hands over a full set of documents to the bank and entrusts the bank to collect money from the customer. The bank will notify the foreign merchant to pay and hand over the full set of documents to the customer at the same time as receiving the payment. For foreign merchants, it is basically a matter of handing over money and taking goods at the same time, which is more secure. At the same time, if the foreign merchant does not pay, the bank will not deliver the documents, but return them to the exporter, which avoids the risk of “losing both money and goods” for the exporter. Since D/P must be specially entrusted to the bank, the handling fee charged by the bank is much higher than that of ordinary T/T.
D/P has certain risks for exporters. This is mainly because before obtaining the payment, the exporter has already handed over the goods to the freight forwarder for transportation out of the country. If the market changes at this time, the foreign merchant intends to breach the contract, or takes the opportunity to bargain and refuses to pay, then even if the exporter does not “lose both money and goods”, it will face the double costs and complicated procedures for returning the goods. In the D/P method, the bank is only responsible for transferring the documents on the premise that the foreign merchant agrees to pay. If the foreign merchant does not pay, the documents will be returned, and the bank has no power to supervise the foreign merchant to fulfill the contract.
Imagine that if the foreign merchant intends to play tricks and suddenly changes his mind after the exporter delivers the goods, and asks for a price reduction, but the range is not higher than the freight for the goods to go back and forth, the exporter weighs the pros and cons, and most of the time he can only suffer a loss and give in.
T/T is beneficial to exporters, and D/P is beneficial to foreign merchants. In order to resolve this contradiction, a more reasonable method has long been produced in international trade, that is, both the buyer and the seller agree that the bank will act as the credit guarantor of the foreign merchant (a full set of foreign trade documents) before they can receive the payment for the goods. On the other hand, it ensures that as long as the exporter delivers the full set of documents as required, the foreign merchant must pay and cannot regret it midway. The bank acts as a credit guarantee and will issue corresponding documents to prove it. This method is a “letter of credit”, referred to as L/C.