Bank Payment Obligation – Comparison to Letter of Credit and Open Account
Letter of credit is a secure and reliable payment method in international trade but it is slow and expensive. Open account is fast and cheap but it is very risky. The new payment option in international trade which is called BPO (Bank Payment Obligation) occupies the sweet spot between the LC and open account. BPO fast, easy to handle, reliable and not as expensive as letters of credit. On this page I will be comparing BPO to Letter of Credit and Open Account separately. The video is prepared by JPMorgan.
Bank Payment Obligation Comparison to Letter of Credit:
Both bank payment obligation and letter of credit have an irrevocable structure.
Bank payment obligation and letter of credit are governed by ICC rules. BPO rules are URBPO, letters of credit rules are UCPDC.
The conditional payment guarantee is given by a bank to another bank in BPO transactions. BPO is a bank-to-bank payment obligation. The conditional payment guarantee is given by a bank to a commercial company in L/C transactions. (Letters of credit can be issued bank-to-bank transactions as well.)
Letter of credit is paper intensive. BPO is an electronic payment method.
Documents have been checked by banks' staff manually under letter of credit transactions. Data match completed by online means under BPO transactions.
Under BPO transactions shipment documents would not be sent to banks.
Letter of credit is slow and expensive. BPO is fast and not as expensive as L/Cs.
Bank Payment Obligation Comparison to Open Account
Both bank payment obligation and open account are fast and easy to handle.
Open account is the riskiest payment method for exporters. Nonpayment risk is stemmed from the importer and must be covered by the exporter in full under open account payments. On the contrary obligor bank is the entity that is giving the payment guarantee to the exporter through the recipient bank. As a result non-payment risk mitigates from the importer to the importer's bank under BPO transactions.
There are no rules exist for open account payments. On the other hand bank payment obligations can be issued subject to URBPO 750.
Under open account transactions exporters must finance importers, whereas they can be benefited pre-shipment finance and post-shipment finance under BPO.