Who should care about this?

Bank payment obligations (BPOs) are a new form of payment method that sit somewhere between documentary credits and open account payment terms. They are of interest to:

  • banks that offer trade services;
  • companies that issue or receive invoices in large numbers or amounts through their trade with commercial counterparties; and
  • companies that offer e-invoicing or related services.

What is the appeal?

BPOs are the last piece in an ambitious jigsaw SWIFT has been piecing together over the last few years. The jigsaw is aimed at achieving a fully automated e-invoicing and payment system that links up the systems of buyers, sellers and their banks and e-invoicing providers across the globe. The cornerstone enabling all these different systems to talk to each other is the use of ISO 20022 messaging standards.

For example, if a seller makes a shipment and then enters information into its invoicing system about the shipment using ISO 20022 standard message fields, its bank or e-invoicing provider can receive the data electronically and automatically use the data to populate the correct fields about that shipment in its own systems. This can mean significant cost and time savings for both customer and bank.

BPOs offer various advantages over documentary credits. From a bank's perspective, BPOs remove the administrative burden and operational risks associated with paper-based document examination. From a buyer's viewpoint, the advantages are speed – shipping documents will come direct from the seller instead of via the seller's bank and then its bank – and potentially lower financing costs. For a seller, the risk of not being able to present compliant documents does not exist with a BPO.

What is it and how does it work?

A BPO is an irrevocable undertaking of the buyer's bank to pay a specified amount to the seller's bank when it receives notification of a data match from an independent data matching service. SWIFT has launched an independent data matching service as part of its Trade Services Utility.

The steps below show how a simple BPO works. As well as those mentioned below, there are, of course, other messages the banks could exchange (e.g. to deal with amendments).

  1. The seller's bank receives information from the seller (or its e-invoicing provider) about the underlying trade transaction between the seller and buyer, and a request from the seller to act as its bank under the BPO.
  2. The seller's bank uploads this information to a data matching service such as the one SWIFT provides. The information also includes details of the BPO the buyer's bank will issue in favour of the seller's bank.
  3. The data matching service sends the data set to the buyer's bank. The buyer's bank checks the information is acceptable to it and the buyer and, if it is, the buyer's bank sends an acceptance message to the data matching service.
  4. The data matching service relays the buyer's bank's acceptance to the seller's bank, and the data set for the BPO (called its "baseline") is "established". It is at this point that the buyer's bank's payment obligation becomes irrevocable.
  5. When the seller ships the goods, it provides the seller's bank with the invoice and shipping details. The seller's bank then uploads the relevant data to the data matching service. The data matching service automatically checks this information against the established baseline. If the data matches, the data matching service automatically notifies the seller's bank and the buyer's bank. From that point the BPO becomes unconditional and the buyer's bank is obliged to pay the BPO amount on maturity.

When is this happening?

SWIFT's data matching service is up and running and the service rules contain a short section on BPOs. The ICC is drafting a set of uniform rules to which BPOs can be made subject: the equivalent of UCP600 for letters of credit. The new rules are expected to come into force by the end of 2013.

A few banks have already undertaken BPO transactions. The first took place between two Chinese banks in 2011, and in May 2012 Standard Chartered Bank announced its first BPO transaction through its Straight2Bank platform. Many banks are getting system-ready for BPOs and preparing customer and interbank documentation, the latter to use in the interim before the ICC rules come into force.