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Sunday, June 3, 2012

The Bank Payment Obligation (BPO) is Worth Serious Consideration

The BPO promises to replace Open Account and simple Standby Letters of Credit (under UCP 600 or ISP98) payment terms, for domestic and international trade transactions relatively soon.

Unfortunately the BPO will not supplant Documentary Letters of Credit or Standby Letters of Credit that require presentation of complex or detailed documents in order to prove that the correct goods were in fact dispatched as contracted, as a pre-condition of payment. In other words the BPO process will not provide a mechanism to protect the buyer in the way that a Documentary LC will do, when the buyer does not know or trust the supplier.

The Bank Payment Obligation (BPO) is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after a successful electronic matching of data according to an industry-wide set of rules.

The ‘rules’ referred to are in the process of being drafted jointly by the ICC - International Chamber of Commerce ( and SWIFT – the Society for Worldwide Interbank Financial Telecommunication (; these rules will be referred to as the ICC Uniform Rules for BPO (URBPO) and should be published during the first quarter (Q1) of 2013.

In a recent article titled ‘Standard Chartered Pioneers the First End-To-End Automated Bank Payment Obligation Transaction’ David Vermylen, Global Credit Manager BP Chemicals Ltd was quoted as saying: “The BPO programme offers us a number of efficiency benefits through reduced document handling and lower confirming costs, and by conducting business with less paper compared to traditional Letters of Credit.” Mr Vermylen is also a member of the European Advisory Council of FCIB Europe, the European arm of the Finance Credit and International Business Association (


BarrettWells subsequently asked Mr Vermylen; ‘How is the Buyer protected against the risk that the goods invoiced are not in fact in transit or do not meet the specifications stipulated in the Purchase Order? To which he replied;

‘Less than under an LC as a bank is not vetting the actual shipment documents. Then again if the seller wants to defraud the buyer, the bank would not necessarily catch the crime. There is indeed less protection against unintentional mistakes. (Also no protection against supply of the wrong goods, quality or volume/mass/number deficiencies, or out-right fraud. Editor) The SWIFT team therefore advises (and is very honest about this) that the product (BPO) is first and foremost suitable for well established relationships where there is a lot of trust between buyer and seller…’

Either by using the SWIFT TSU (Trade Services Utility) link for delivery of SWIFT messages received by a bank straight into a company’s accounting and banking systems or a bank’s proprietary bank-to-client trade system, companies will be able to capture a number of benefits from the BPO system; for example:

1. Improved cash flow management based on certainty as to when invoice payments will be credited.

2. Reduced document handling – whether paper of electronic – since purchase orders and invoices are keyed into the system and communicated automatically; via one or two banks in nanoseconds. The SWIFT system is exceptionally secure and reliable, and covers more than 10,000 financial institutions and corporations in 210 countries

3. Reduced information discrepancies and/or reduced time involved in identifying and correcting mismatched data. The BPO system automatically matches buyer and seller data against the Purchase Order and provides various reports

4. Better payment protection (for the seller) compared to a Standby Letter of Credit; with reduced costs and handling required on both sides of a transaction

5. Access to financing options is improved for both buyer and seller

It is not clear whether the joint ICC-SWIFT URBPO drafting committee will tackle the question of buyer protection in order to re-shape the BPO as a fully-fledged replacement for all types of Letters of Credit. However one could conceive of such an objective perhaps being achieved by introducing the option for the seller’s bank - upon viewing the shipping documents and inspection certificates - to enter certain required data (such as the Bill of Lading date) into the system to be matched against the Purchase Order, in order to trigger payment to the seller.

This ICC flow chart illustrates the process.