by Paul Johnson, Senior Product Manager, Global Trade & Supply Chain, Bank of America Merrill Lynch
Much has been written about the benefits offered by the Bank Payment Obligation (BPO) – but how is the BPO used in practice and how can companies build a business case to adopt this new trade instrument?
In 2011, cross-border trade reached the value of around $18.2tr. The majority of this activity was settled on open account terms, which accounts for around 80-90% of world trade.
Open account trading has many benefits for companies buying goods – but for sellers, the open account model is often less than ideal. While many governments around the world, including the US government, have been actively encouraging exports, the open account trading model presents more risk for sellers than a letter of credit transaction. This is particularly the case when a company is trading with a new buyer in an exotic location for the first time. Nevertheless, in order to remain competitive, the seller may be forced to offer extended open account terms to its new potential client.