Bank payment obligations vital for international trade

Time for importers, exporters to get familiar with the new international transaction mechanism

The International Chamber of Commerce has put in place the new Uniform Rules for Bank Payment Obligations (URBPO) that will provide an alternative means of settlement of international transactions.

A 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 specified event has taken place. This 'specified event' is evidenced by a 'match' report that has been generated by Trade Services Utility (TSU) developed by SWIFT (Society for Worldwide Interbank Financial Transactions) or any equivalent transaction matching. The TSU is a matching engine hosted and maintained by SWIFT for the bank community that matches data extracted from different trade documents like invoice, purchase order, transport document and certificates. The rulebook of the BPO says that the obligor bank is irrevocably bound to pay to the recipient bank according to the terms of the established TSU baseline if there are no mismatches or all involved parties accept the mismatches. In other words the BPO is an irrevocable bank-to-bank payment obligation based on the presentation of compliant data. It can support any type of open account supply chain finance product buyer-centric and seller-centric. 

A BPO works in a manner similar to letters of credit but the key difference is that where payments under LCs are made upon presentation of compliant documents, the payments under BPO are made subject to presentation of compliant data, as agreed. So, the buyer when he requests his bank (the obligor bank) to issue a BPO specifies the baseline data and the receiving bank effects payment if the seller submits shipment data that match the baseline data. SWIFT has developed the necessary ISO 20022 messaging standards to ensure smooth implementation of the new settlement mechanism.  

The BPO will provide the benefits of a letter of credit in an automated environment, without the drawbacks of manual processing associated with the traditional letter of credit. The BPO protects the buyer since the bank only pays when the seller complies with the specific terms and conditions and produces the data required. The buyer can build safeguards into the BPO, including inspection of the goods and quality control, and set production and delivery times. The seller gets assurance of payment and access to pre-shipment or post-shipment finance. Automated data matching removes subjectivity in physical examination of documents and the risks of discrepancy disputes and delays. BPO ensures speed, reliability, convenience, reduced costs and improved accuracy.

The BPO and related ISO 20022 messaging standards provide access to relevant data, records and reporting - giving banks the ability to provide risk mitigation, finance and payment services while introducing additional automation and efficiency into the supply chain management process.

By matching data via the ISO 20022 messaging standards, banks can track events in the physical supply chain which trigger the availability of value-added services in the financial supply chain. Unlike the manual checking of documents, there is no subjectivity attached to data matching - it either matches, or it doesn't.

Indian importers and exporters should quickly familiarise themselves with this new payment settlement mechanism. The banks should prefer the automated solution of compliant data at reduced costs that BPO offers. The Reserve Bank should ask banks to train the necessary staff and make available the new service to their clients.

Email: tncr@sify.com