Introduction:
It is a novel remittance technique based on data matching that can be utilized for risk mitigation and financing. The BPO offers a new instrument to support trade payment. As a result, the implementation of BPO is a business change in basic assumptions from paper-handling to electronic processing that impacts sales, legal, accounting, credit management, risk management, and operations. It will require a change in the existing processes as well as in the primary IT infrastructure. The fundamental nature of a BPO is the same as for a LC (letter of credit); an irrevocable undertaking given by one party to another to pay on fulfilment of certain specified circumstances. It allows buyers and sellers to lessen the risks of transaction by transferring the payment risk to a bank. For the first time an open account payment obligation can be confirmed by banks in order to get financed. The ICC supports the market launch with the release of unified rules (URBPO).
URBPO:
The ICC has published rules governing the BPO, the Uniform Rules for Bank Payment Obligations Publication 750 which are projected to have the same impact as UCP 600 has for L/Cs. The URBPO provides the legal foundation for management of the BPO between banks. The ICC Banking Commission has enacted rules which identify the Bank Payment Obligation as an accepted practice in much the same way as the L/C has become an accepted market practice with the support of UCP. The BPO market adoption is supported by the publication of the Uniform Rules for Bank Payment Obligations (URBPO), a set of rules governing the handling of BPO between involved banks. The ICC has lately decided to revise the URBPO to be more aligned with market and to allow for better market adoption. Besides the URBPO, SWIFT has also issued a TSU Rule Book for operating the SWIFT TSU Platform.
Procedure of BPO:
A BPO is formed in relation to an underlying trade transaction. The banks of the seller and buyer, who have agreed to take part in the BPO, submit data about the underlying transaction to an electronic data matching platform (transaction matching application or TMA). This data is known as a “baseline”. If matching data is submitted by the two banks, the TMA sends an automatic notification and the baseline is “established”. At this point, the buyer’s bank, known as the obligor bank, becomes irrevocably bound by the terms of the BPO. Once the seller has shipped its goods, the seller’s bank, known as the recipient bank, will upload the relevant data about the shipment to the TMA. This is called a “data set” and might include commercial, transport and insurance information about the shipment.
The recipient bank is not required to submit any documents. The TMA performs a comparison of the data set against the requirements of the established baseline. If there is a match, the TMA sends an automatic notification to the parties and the obligor bank is bound to pay the recipient bank in accordance with the payment terms of the BPO. It is possible for a single established baseline to include more than one BPO. This allows a buyer to ask several banks to finance a single operation. Under URBPO, each such obligor bank gives an independent BPO, and no joint and several obligations are created between those banks.
Security:
The irrevocable payment undertaking of the obligor bank to effect payment, is based on the buyer’s credit worthiness. It does not only secure the payment itself, but also provides security for financing by the recipient bank or the obligor bank, depending on the type of finance. In the 4-corner model of the BPO, the reliability of the bank-to-bank relationship provides extra security for the process of financing the commercial activity. However, the existence and authenticity of the trade transaction is secured by two matching processes of the BPO transaction:
1) matching of baseline data between buyer and seller
and
2) matching of trade data against the established baseline.
According to their contractual arrangements, the buyer and seller are obliged to deliver correct data for the matching, and the banks concerned are not expected to verify the authenticity of data; therefore, a trusted trading relationship between the trade partners is essential.
In Conclusion:
Many arguments have ascended due to frauds and errors in the process of LC transactions. This issue has caused an obstacle in financing the international commercial activities and cash flow in banks. By introducing an electronic system through Bank Payment Obligation, International Chamber of Commerce has tried to deal with ambiguous and uncovered areas of LC.
However, despite the few similarities BPO has with LC, its structure and nature in optimal conditions would be able, in a large scale, to prevent fraud and errors in international payment and reduce disputes in this field accordingly.