BTL 718 - Bank Payment Obligation (BPO)

 

The Banking Tutor’s Lessons

BTL 718                                                                          27-10-2024

Bank Payment Obligation (BPO)

 

Bank  Payment  Obligation  (BPO)  is  a  framework  which  is  endorsed by the   ICC    (International  Chamber  of  Commerce)   and  SWIFT  ( The  Society  for  Worldwide Interbank  Financial  Telecommunication,  which stands as a middle ground  between traditional Letters of Credit (LCs) and Open Account Trade.

Global  trade  is  challenged  by  fraudulent  activity,  market dynamics, and liquidity within many companies.  A Bank  Payment  Obligation is an e-commerce (paperless) solution which offers  a  form  of  risk  mitigation between suppliers and buyers via a   bank.

A  BPO  is  an  irrevocable document given from a buyer’s bank (Obligator Bank) to a supplier  or  seller’s  bank  (Recipient Bank) , where  an  agreement is made to pay a   specified  amount   of   money   on  an  agreed  future  date  under  the  condition  of   successful electronic matching of data. 

Letters  of  Credit   are   governed  by the UCP600 , BPO are governed by the Unifor Rules for Bank Payment Obligations ICC publication No. 750 (URBPO)  The BPO and Letter of Credit (LC) are quite similar for the following reasons:

a) The end result is the same; payment is normally advanced to the seller/supplier if certain conditions are met 

b) The bank stands as the intermediary or independent third party guaranteeing the payment is undertaken 

Under a traditional documentary letter of credit,  a bank is obligated to pay subject to the physical presentation of compliant documents.

Under a Bank Payment Obligation (BPO) a bank is similarly obligated to pay subject to the electronic presentation of compliant data.

Therefore, a  BPO  offers assurance of  payment, risk mitigation for  all parties, and possible   use  as   collateral  for  finance.   A  BPO  can  be  seen  as  an alternative  instrument for trade settlement.

In case of LC, Bank services based on paper document processing, whereas in case of  BPO, Bank services based on electronic trade data exchange.

The  BPO   is  not   only   a  Trade Finance Tool, but an enabler of SCF (Supply Chain  Finance).   BPO   present  an  opportunity   to   provide   post-shipment  financing to   suppliers,   allowing  them  to  access  finance at earlier stages in their supply chain  cycles. 

BPO is not an electronic letter of credit.

BPO  is  a   Bank-to-Bank   transaction,   whereas   normally   LC  is  a Bank-to-Seller transaction. (LC  can be Bank-to-Bank transaction as well).

LC is paper intensive, whereas BPO is an electronic payment method.

LC is slow, whereas BPO is fast.

In  case  of  LC,   documents  to be verified by Bank manually, whereas in BPO, data match completed by online means.

Under BPO transaction, shipment documents would not be sent to Banks.

Advantage of BPO for Importers :

BPO  is  more  secure  than Advance Payment because BPO is a conditional payment method.   Under  BPO  transactions,  banks  send  payment amount to exporters only  after shipment of the goods, not before.

 

Sekhar Pariti

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