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Bank payment obligations

What is Bank Payment Obligation?

Bank payment obligation abbreviated as BPO is an irrevocable undertaking which is given by an Obligor Bank i.e. buyer’s bank to a Recipient Bank i.e. seller’s bank to pay a specified amount as per the agreed date under the terms and conditions. It is applicable only after successful electronic matching of required data according to the industry-wide set of rules that are adopted and specified by ICC.

It can be considered as an irrevocable conditional obligation from one bank that has to be paid to another bank. A process which includes presenting and matching the compliant data that is derived from documents such as the purchase order, invoice, and shipment related documents, insurance certificate and certification documents. It is an instrument that is designed for providing risk mitigation. It also provides the basis for financing for transactions held between buyers and sellers who have decided not to use documentary instruments but rely upon some other payment method such as the exchange and validation of data to effect payment.

Key points

  • Provides assurance of payment
  • Mitigate risks involved in international trade for buyers and sellers
  • Poses speed, reliability, convenience
  • Results in reduced costs and improved accuracy
  • Enhanced method for risk management
  • Provides access to flexible financing
  • Reduction of risks in the supply chain

Bank payment obligation Process:

  • 01
    Buyer submits a purchase order/data to its bank for BPO baseline.
  • 02
    Buyer’s bank submits the baseline to the seller’s bank via the pre-agreed matching engine.
  • 03
    Seller’s bank accepts the submission after checking with the seller.
  • 04
    A successful match of the data binds the obligor/buyer’s bank to pay.
  • 05
    The matching engine performs the data check and provides the results.
  • 06
    Seller ships the goods and submits the data to the bank.
  • 07
    In case of a mismatch, the obligor bank may accept or reject the discrepancies.
  • 08
    Acceptance will be treated as good as successful match.

Matching conditions

Matching conditions for bank payment obligation is classified within four data sets:

  • Commercial data set - Invoice
  • Transport data set - Airway bill, bill of lading
  • Insurance data set - insurance document
  • Certificates data set – certificate documents

In all the above mentioned documents invoice or we can say the commercial data set is the most important one.

Parties involved

  • The buyer
  • Obligor bank (buyer’s bank)
  • Seller (supplier)
  • Recipient bank (seller’s bank)

Advantages for exporters

  • check_circle_outlineIt is a secure payment method in international trade for the suppliers or exporters. It can be considered to be more secure than other payment methods, because there will be no document check by human as everything is computerized, by which alleged discrepancy risks gets eliminated.
  • check_circle_outlineTends to be cheaper than letter of credit.
  • check_circle_outlineExporters could get funds very fast as the documents will be checked by an automatic system instantly.
  • check_circle_outlineExporters will have more control over the consignments until and unless they are paid by the banks under the BPO transactions as the relevant shipment documents will be held by the exporters during this process.
  • check_circle_outlineExporters could avail the finance in terms of pre-shipment and post-shipment finance in BPO transactions.
  • check_circle_outlineOnce the bank payment obligation is opened, it will be almost impossible for the importer to cancel the order without exporter’s consent.
  • check_circle_outlineNon-payment risk will shift from importer to importer’s bank i.e. obligor bank in the bank payment obligation transaction.

Advantages for importers

  • check_circle_outlineAs a payment mode it is considered to be more secure than the advance payment, because it is a conditional payment method. Under the BPO transactions, banks can send payment to the exporters only after the shipment of the consignment, not before.
  • check_circle_outlineIssuing a bank payment obligation helps to prove that the importer is financially secured and strong company.
  • check_circle_outlineThe BPO is an irrevocable payment method. Thus importers may convince exporters for making shipments with the BPO much more easily as compared to open an account or documentary collections.
  • check_circle_outlineIt makes it possible for the importers to pay the amount after receiving the consignment, if they have agreed over a deferred payment such as “60 days after match”, “90 days after match” etc.
  • check_circle_outlineThe BPO can protect the buyers, against non-shipments and late shipments and even in inferior quality of goods shipments.

Want more information about bank payment obligatons? Talk to our finance experts now.

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