As we know each payment method have strenghts and weaknesses. For example open account and cash in advance payments are very easy to use. They are simple but they are risky either for the importers or the exporters. Documentary credits are secure payment methods but they are complicated and expensive. Does international trade finance need another payment method? Can bank payment obligation be the right answer?
Definition of Bank Payment Obligation :
Bank payment obligation (BPO) is an irrevocable undertaking given by an Obligator Bank (typically buyer's bank) to a Recipient Bank (usually seller's bank) to pay a specified amount on a agreed date under the condition of successful electronic matching of data according to an industry-wide set of rules adopted by ICC.
Some important definitions of Bank Payment Obligation (BPO) :
"Obligor bank" means buyer's bank under Bank Payment Obligations. Obligor bank issues the legally binding, valid, irrevocable but conditional and enforceable payment undertaking to Recipient Bank. Obligor bank is an equvalent term of issuing bank under letters of credit definitions.
"Recipient Bank" means seller's bank under Bank Payment Obligations.
"Trade Services Utility" (TSU) means a centralised matching and workflow engine providing timely and accurate comparison of data taken from underlying corporate purchase agreements and related documents, such as commercial invoices, transport and insurance.
The URBPO, the Uniform Rules for Bank Payment Obligations ICC publication No. 750. URBPO; also referred to as ICC URBPO or ICC BPO. are the rules of Bank Payment Obligation adopted by ICC banking commission.
How does bank payment obligation work?
Bank payment obligation and letter of credit have some characteristics in common. Firstly banks play a key role on both payment methods. Secondly banks are giving irrevocable payment undertaking.
Figure 1 : Basic Bank Payment Obligation Transaction
Bank Payment Obligation (BPO) transaction based on two main assumptions or expectations,
The use of minimum fields, the buyer, the seller and respective banks agree on the payment terms and conditions and on the minimum trade information required to assess the credit risk;
The dispatch of documents, such as the bill of lading, certificate of origin and certificate of quality, from the seller directly to the buyer.
Given the limited information required by the banks and the accelerated document exchange, corporates can expect a lower rate of discrepancies and an acceleration of the settlement process.