Bank Payment Obligation (BPO) | Trade Samaritan

Bank Payment Obligation (BPO)

BPO is ICC’s response to new market needs to help deal with increasing cost pressures and changing risk dynamics arising as a result of widespread liberalization in emerging markets.

Documentary letter of credit is considered to be the most reliable and secured instrument to conduct trade as Open account and Collections model do not offer bank assurance. ICC Global Trade and Finance Survey 2013 indicate that exports have slackened in many developing countries. SMEs make up 80%-90% of businesses in most regions and experience a trade finance gap on account of their lack of collateral, credit history and technical expertise. Execution of a documentary letter of credit transaction can get complex and it is observed that at least 70%-75% of Letter of credit (LC) transactions are found to be discrepant thereby defeating the inherent characteristic of LC i.e. bank’s undertaking to pay. Moreover SME sector tends to have medium to low value transactions which makes LC issuance (issuance, confirmation and discrepancy fees) an expensive affair for them, also this sector lacks the necessary technical skill to execute an LC transaction successfully. Both these factors put together make an LC transaction less lucrative for this sector. Open account transactions constitute 75%-80% of world trade, open account transactions are subject to party and payment risk.

In the light of above challenges, International Chamber of Commerce (ICC) in June 2013 launched an innovative instrument to facilitate international trade in the present supply chain standards known as ‘Bank Payment Obligation’ (BPO). And the governing regulation is known as ‘Uniform Rules for Bank Payment Obligation’ (URBPO) which came into force in July 2013.

As of June 2013, 53 financial institutions, including 15 of the top 20 trade banks, have adopted the BPO.  30 corporate across various industries are already live or in the process of implementing the BPO instrument.

Bank Payment ObligationBank  payment obligation

A bank payment obligation is an irrevocable conditional obligation from one bank to pay another bank. A process that may be subject to the presentation and matching of compliant data derived from documents such as the purchase order, invoice, and related transport, insurance and certification documents.

One of the key features of the BPO is that it supports inter-operations between participating banks, because it makes use of a standard set of ISO 20022 messages.

This inter-operations enables banks to collaborate with one another to extend reach across global markets, in order to provide a comprehensive range of supply chain services to corporate customers. The matching of data using ISO 20022 messages reflects events that have taken place in the physical supply chain, which create trigger points for the provision of financial supply chain services – for example, a proposition for pre-shipment finance based upon a confirmed purchase order, or a proposition of post-shipment finance based upon an approved invoice. The BPO may be used as collateral in each case.

BPO provides the benefits of a letter of credit (LC) in an automated environment and enables banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers.

Now let us understand the process flow of a basic BPO transaction.

Bank Payment Obligation process flow

Example of a pre-agreed matching engine is SWIFT’s Trade Services Utility (TSU). The criteria required for a successful data match is set up within the TSU or other data matching engine using purchase order data. This is known as the ‘baseline’. The bank that issues a BPO is known as the obligor bank and the seller’s bank who receives the payment is known as the beneficiary bank.

BPO combines the best of both worlds i.e. documentary credit as well as open account and offers several benefits to all the parties.

Benefits for Importers Benefits for Exporters Benefits for Banks
Safer than prepayment Zero subjectivity in terms of scrutiny Low risk
Facilitates financing Assurance of payment against compiant data Commission and fee income
Secures supply chain Flexible pre or post shipment finance New business opportunities
Customized payment structure Customized payment structure Automated solution
Payment against specific terms Elimination of foriegn exchange risk Lower operating costs
Ability to include quality control in the data Reduced complexity and cost in documentation Meets the market requirement

BPO is a relatively new solution on the market and requires a marketing effort to increase the transaction volume. It requires a new infrastructure in the bank. BPO transaction is a paperless transaction and does not provide the title documents in the custody of the bank hence banks need to exercise vigilance while granting BPO baselines to corporate customers.





  • cvrk

    Thanks for introducing me to this concept..This product will become popular