Bank payment obligation

Under a traditional documentary letter of credit a bank is obligated to pay subject to the physical presentation of compliant documents. Under a Bank Payment Obligation (BPO) a bank is similarly obligated to pay subject to the electronic presentation of compliant data. BPO is an irrevocable undertaking given by one bank to another that payment will be made on a specified date after successful electronic matching of data according to industry-wide rules set by the International Chamber of Commerce Banking Commission (ICC). Therefore, a BPO offers assurance of payment, risk mitigation for all parties, and possible use as collateral for finance. In this last instance, a BPO can be seen as an alternative instrument for trade settlement.

The principal objective of a BPO is to replicate for open account trade that is already available for traditional documentary credit. For decades documentary credit has been established as a universal market practice, thanks largely to the publication and maintenance by the ICC of a set of rules, the Uniform Customs & Practice (UCP). The universal acceptance of the UCP by practitioners in countries with widely divergent economic and judicial systems is testament to its success. BPO goes a step further as it does not want to create a parallel world to documentary credit but aims to combine the best of both worlds of documentary credit and open account. The new rules and messaging standards will enable banks to leverage electronic transaction data available from the B2B world.

Using data representing the purchase order, invoice, certificates and transport documents, banks have the ability to accelerate global trade finance processes, as well as to increase visibility on transaction details (e.g. line items) in order to better mitigate risk and finance transactions.