by Thomas Dusch, Head of Trade Finance International Sales Germany, UniCredit
From its launch in 2007, uptake of the BPO was initially slow. Over the past year or so, adoption has increased dramatically, with several ‘first’ transactions in Europe and Asia, many of which were driven by UniCredit. The BPO offers many advantages, but as yet, there remains a lack of education of the instrument and its value. Voted the most important recent innovation in trade by respondents to a survey at SIBOS 2014, it is a tool with the potential to bring unprecedented levels of risk mitigation and automation in trade transactions, whilst opening the door to a range of financing options and improving balance-sheet fundamentals such as days payable outstanding (DPO) and days sales outstanding (DSO).
Importance of the Bank Payment Obligation
The Bank Payment Obligation (BPO) is an irrevocable undertaking given by a bank to another bank that payment will be made on a specified date after successful electronic matching of data according to an industry-wide set of International Chamber of Commerce (ICC) rules. The digital method uses a Transaction Matching Application (TMA), such as SWIFT’s Trade Services Utility (TSU), to send order details electronically, using the standardised ISO 20022 format.
The BPO represents a major innovation in the settlement of trade transactions. Currently, the two most popular settlement methods are letters of credit (LCs) and open account transactions. While these both have their benefits and uses, they are not ideal for all potential settlement scenarios. Letters of credit use banks to mediate between trade counterparties, making them an essential tool for financing and managing risk. Yet the documentation involved is cumbersome, taking on average 21 days to complete, and longer if there are errors or omissions in the documentation.