Home ›› 30 Mar 2022 ›› Editorial
The usual payment methods in international trade are Payment in Advance, Documentary Credit, Documents against Payment, Documents against Acceptance, and Open Account. Bank Payment Obligation (BPO) is an alternate payment instrument to settle international trade with automated processing and reduced risk. Bank Payment Obligations (BPO) has been jointly introduced by Society for Worldwide Interbank Financial Telecommunication (SWIFT) and the Banking Commission of International Chamber and Commerce (ICC). BPO is an innovative bank-assisted trade instrument, potential game-changing innovation shaping supply chain finance and international trade in coming years.
BPO is an irrevocable undertaking given by an Obligor Bank (Buyer’s Bank) to a Recipient Bank (seller’s bank) to pay a specified amount on a specific date after successful electronic matching of data of physical movement of consignment generated by SWIFT’s Trade Services Utility (TSU) or any equivalent Transaction Matching Application. BPO will follow the Uniform Rules for Bank Payment Obligation (URBPO) similar to UCP 600 for Letter of Credit. The BPO can be applied to the transaction of both goods and services.
In all other trade finance, processing and matching are paper-based, manual, time-consuming and expensive, whereas BPO processing is automated by providing for electronic processing and matching using the global standard ISO 20022 messages. Presently, LC guarantees the exchange of goods for payment based on physical presentation of compliant documentation. A BPO guarantees the exchange of goods for payment based on electronic presentation of compliant data; bypassing the tedious document management and exchange process involved in a traditional LC with a much faster and easier alternative.
The transaction will follow the messaging confirmation of different data and related ISO 20022 messaging standards to provide access to relevant data, records and reporting – giving banks the ability to provide risk mitigation, finance and payment services while introducing additional automation and efficiency into the supply chain management process. ISO 20022 is an inter-operability enabled message standard used by banks.
This messaging standard provides additional clarity and transparency by providing access to relevant data of physical supply chain, records, and reporting. This gives banks the ability to provide risk mitigation, finance, and payment services while introducing additional automation and efficiency into the supply chain management process. Banks can track events in the physical supply chain, which helps trigger the availability of value-added services in the financial supply chain.
In the case of traditional trade finance instruments like Letter of Credit (LC), the undertaking on irrevocable payment is between the banks and supplier. In contrast, a BPO is an irrevocable payment undertaking between the buyer’s bank and the seller’s bank.
The manual preparation and processing of documents under existing systems are characterized by high cost due to manual processing, the frequent discrepancy in handling, and liquidity pressures. On the other hand, a BPO’s automated processing and matching reduces the processing cost and enables banks to offer competitive rates to corporates for the BPO transaction. The timely delivery of matching reports on POs and invoices enables clients to have quicker access to liquid resources.
BPOs with access to all relevant movement of consignment and other information enables banks to mitigate the risks associated with international trade to benefit buyers and sellers. They allow flexible financing propositions across the supply chain, from pre-shipment to post-shipment. They can assure payment to the seller, similar to a confirmed letter of credit.
The BPO and related ISO 20022 messaging standards provide additional clarity and transparency by providing access to relevant data of physical supply chain, records and reporting, giving banks the ability to provide risk mitigation, finance and payment services while introducing additional automation and efficiency into the supply chain management process. By matching data via the ISO 20022 messaging standards, banks can track events in the physical supply chain. The process helps to extend value-added services in the financial supply chain.
Exporters enjoy many benefits from BPO. It provides assurance of payment with the credit risk being transferred from the buyer to the obligor bank, thereby giving access to flexible pre-shipment or post-shipment finance from banks. It reduces the risk of buyers canceling or changing the order, and the buyer cannot refuse to play due to a complaint about the goods. The seller can structure the delivery schedule according to the seller’s interests, determining when payment will be made and shipping the goods accordingly.
The bank bears responsibility for any oversights, and automated data matching reduces complexity and increases reliability. The risk of discrepancy, dispute, and delay is reduced by removing the subjectivity of physical document-checking. Mismatches can be resolved, accepted, and the automated processing accelerates settlement and financing.
Importers, too stand to benefit from BPOs. The main advantage is that it increases convenience and reduces costs. The buyer does not have to pay upfront before receiving the title documents to the goods purchased. It is safer than payment in advance. It facilitates financing for the buyer e.g. extended payables. The buyer can confirm that the goods are shipped on or before the due date to the required specification and can structure payment according to the buyer’s interests; the buyer can negotiate better terms and conditions. With the issue of BPO by buyers, the bank demonstrates the ability to pay and negotiate for improved terms for any future transactions. The BPO protects the buyer since the bank only pays when the seller complies with the specific terms and conditions and produces the data required. The bank undertakes certain services, including inspection of the goods, quality control, and set production and delivery times.
It strengthens buyer/seller relationships and secures the supply chain. It helps expand business opportunities and may increase the buyer’s competitiveness in foreign markets. It is an assurance of payment, risk mitigation for all parties and possible use as collateral for finance. Since there is no manual processing like document creation, verification, validation, tracking and reporting, BPO will benefit corporates operationally. It will also result in significant cost savings for the corporate through early access to pre-shipment and post-shipment finance needs.
Since there is no manual processing like document creation, verification, validation, tracking and reporting, BPO will benefit all the stakeholders operationally. It will also result in significant cost savings through early access to pre-shipment and post-shipment financial needs.
Most importantly, there is no need to re-issue the document in case the shipment happens at a different location, due to external factors such as natural disasters. The exporters will not have to incur bank charges on discrepant document handling and tracking and there will not be any verification and amendment charges. For the exporters, it will also facilitate early liquidity and working capital management due to faster transaction, processing and settlement. The importers can access the goods early, as they will receive the documents quickly.
The operational savings for bankers from enrolling in the TSU or similar Transaction Matching Application will include first a reduction in the expense of document examination. By reducing the number of discrepancies, banks and corporates will be able to reduce the investigation effort, avoiding disputes, delays, etc. The impact will vary from business to business.
BPO provides many benefits to exporters, importers, and banks by mitigating risks in international trade for buyers and sellers alike. Other benefits include speed, reliability, convenience, reduced costs, improved accuracy, enhanced risk management, assurance of payment, access to flexible financing, and securing the supply chain.
BPO can potentially change the world of trade finance by effectively acting as an automated letter of credit. Although BPO is not expected to replace open-account trade finance arrangements, which provide a direct connection between a buyer and its supplier, it would make it easier to enable trade in risky markets and set up new supplier lines. It may change trade relationships between buyers and suppliers with a shorter history of working together.
BPO is the new solution in supply chain finance to shape trade in the 21st century, an alternative means of settlement in international trade providing the benefits of a letter of credit in an automated and secured environment. It will combine the best of both Documentary Credit and Open Account options and will offer an alternative means of settlement in international trade.
The writer is a legal economist. He can be contacted at mssiddiqui2035@gmail.com
