What is a Bank Payment Obligation (BPO)?
Global trade is challenged by fraudulent activity, market dynamics, and liquidity within many companies. A Bank Payment Obligation is an ecommerce (paperless) solution which offers a form of risk mitigation between suppliers and buyers via a bank.
Bank Payment Obligation – Definition
Simply put, a BPO is an irrevocable document given from a buyer’s bank to a supplier or seller’s bank, where an agreement is made to pay a specified amount of money on an agreed future date under the condition of electronic matching of data.
As with Letters of Credit which are governed by the UCP600, the Uniform Rules for Bank Payment Obligations ICC publication No. 750. (URBPO) are the rules adopted by the International Chamber of Commerce for Bank Payment Obligations.
CAPTION: Where a BPO fits in the Open Accounts (OA) and Letters of Credit (LC)
Bank Payment Obligation versus Letter of Credit?
The BPO and Letter of Credit (LC) are quite similar for the following reasons:
- The end result is the same; payment is normally advanced to the seller / supplier if certain conditions are met
- The bank stands as the intermediary or independent third party guaranteeing the payment is undertaken
Example of how a BPO transaction could work
- A buyer and a seller would agree the BPO as the payment term upon agreeing a contract. The buyer would send a Purchase Order (PO) to the seller.
- The buyer would provide data (see below) from the purchase order and payment conditions to their bank (buyers bank).
- The seller would confirm that the data from the PO is correct and send these on to their recipient bank (sellers bank). In this case, if the documents match (and the banks agree this), then the seller can ship the goods or services as agreed on the initial sales contract.
- Seller presents the data to its bank, which is then cross checked by the buyer. Any data mismatches are resolved where possible.
- If matched by both parties, the sellers bank is informed and the seller sends the trade documents directly to the buyer. Buyer will clear goods from the customs with these documents.
- On the due date agreed in the contract, the buyers bank debits the proceeds from buyer’s account.
What is the basic concept of a Bank Payment Obligations?
Taken from the ICC GUIDELINES FOR THE CREATION OF BPO CUSTOMER AGREEMENTS itself:
- A BPO is separate and independent from the underlying trade transaction.
- Involved Banks only deal with data and not with the commercial contract, documents, or the goods, services or performance to which the data or documents may relate.
- By signing the BPO customer agreement, the customer acknowledges that the bank has no involvement in, nor is responsible for, the underlying trade transaction. ICC Guidelines for the Creation of BPO Customer Agreements.
- Any BPO issued pursuant to the BPO customer agreement will be subject to URBPO.
- The customer should complete its own due diligence to assess the impact of the URBPO on its commercial transaction.
- If a customer requests a bank to issue a BPO, it incurs a corresponding reimbursement obligation to this bank as of the time a BPO is incorporated in an Established Baseline or when a BPO is incorporated by an amendment to an Established Baseline. Upon its receipt of notification of a Data Match, or upon the customer’s acceptance of a Data Mismatch, the customer becomes liable to reimburse the bank (as Obligor Bank) in accordance with the payment terms of the BPO or as otherwise agreed between the customer and the bank.
- A Data Match or Data Mismatch will be handled entirely in accordance with the provisions of URBPO, and the functionality and rules that are applicable to the TMA at the time of such Data Match or Data Mismatch.
- If the bank provides the customer with details of a Data Mismatch, the customer must provide prompt instructions to accept or reject the Submission. Clarification of the bank’s rights and duties in case it receives, or does not receive, the customer’s instruction to accept a Data Mismatch should be given.
Data Fields, BPO and URBPO
- Transaction reference
- PO Reference
- Buyer name and country
- Buyer Bank BIC
- Seller name and country
- Seller Bank BIC
- Obligor Bank
- Recipient Bank
- Amount / currency
- Goods and quantity
- Payment terms
- Data required (commercial, transport, insurance, certificate, other certificate)
- Expiry date
- Contact person
- Law applicable to the BPO
BPO DOWNLOADS & USEFUL LINKS:
Recap: Letter of Credit Video
Advantages of BPOs:
- More secure than open account terms (which accounts for the majority of trade) because there is a condition attached in order for payment to be received.
- Payment is sent to the sellers after the goods have been shipped
- A BPO might demonstrate to a buyer that they are creditworthy and reputable, thereby the ability to negotiate larger contracts
- A BPO is irrevocable (like LCs) which means exporters will be more comfortable with shipping goods
- Payment terms (such as 30 – 90 day terms) can be agreed with the importer, and invoice financing facilities can be used to advance payment to exporters
- BPO protects buyers against non-shipments, late shipments and poor quality of goods shipments.