Bank Payment Obligations – What are BPOs and the URBPO?

What is a Bank Purchase Obligation (BPO) Finance?

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What is a Bank Payment Obligation (BPO)?

A bank payment obligation (BPO) is a framework which is endorsed by the International Chamber of Commerce (ICC) and SWIFT, which stands as a middle ground between traditional Letters of Credit (LCs) and open account trade.

Global trade is challenged by fraudulent activity, market dynamics, and liquidity within many companies. A Bank Payment Obligation is an e-commerce (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

  1. 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.
  2. The buyer would provide data (see below) from the purchase order and payment conditions to their bank (buyers bank).
  3. 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.
  4. Seller presents the data to its bank, which is then cross-checked by the buyer. Any data mismatches are resolved where possible.
  5. 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.
  6. On the due date agreed in the contract, the buyers bank debits the proceeds from buyer’s account.

Data Fields, BPO and URBPO

Banks will often expect the following when verifying data points:
  • 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
  • Charges

BPO DOWNLOADS & USEFUL LINKS:

Whitepaper on BPO from SWIFT
ICC Information on BPO
URBPO Guidelines

Recap: Letter of Credit Video

Bank Payment Obligation

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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.

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About the Author

Trade Finance Global (TFG) assists companies with raising debt finance. While we can access many traditional forms of finance, we specialise in alternative finance and complex funding solutions related to international trade. We help companies to raise finance in ways that is sometimes out of reach for mainstream lenders.

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