by Frank-Oliver Wolf, Global Head Cash Management & International Business, Commerzbank AG
In an era of technological progression and innovation, corporate demand for efficient, reliable trade solutions is increasing; a trend reflected in the fact that no less than 90% of international trade flows are now conducted on open account.
Yet while corporates may be relatively comfortable trading on these terms with longstanding, trusted counterparties, new relationships in unfamiliar trade corridors are best approached with an element of caution. In this respect, open account trading offers little in the way of risk mitigation – particularly when compared with the traditional, secure, stalwart solution of the letter of credit (LC).
The answer, therefore, could lie with the bank payment obligation (BPO). BPO offers a level of security that cannot be provided when trading on open account while, at the same time, eradicating the significant documentation demands of LCs. What is more, with demand for liquidity, management of risk and working capital increasing across the supply chain, BPO also offers the opportunity to attain financing and manage risk throughout the value chain.
The BPO is an irrevocable payment undertaking given by one bank to another that trade settlement will occur on a specific date once a pre-agreed event has taken place. This event is identified electronically through the successful matching of agreed baseline data (i.e., the data set of the underlying trade transaction). This automation allows for increased efficiency and reduced costs while providing a high level of flexibility, allowing any transactional adjustments to be made at short notice. Given that no trade documents are presented and examined, BPO is unable to offer the same level of risk protection as that provided by an LC, and is therefore not an electronic documentary credit intended to replace the LC but rather a valuable instrument in its own right.