The rules for the bank payment obligation (BPO) have been unanimously approved by members of the International Chamber of Commerce’s Banking Commission. The vote took place in Lisbon between April 15 and 18 and marked the first time any product – including letters of credit – has been given the full support of the board. This approval marks a positive development for the evolution of trade finance in an increasingly online industry.
BPO is an irrevocable undertaking, given by one bank to another that payment will be made on a specific date after a specified event has taken place. The principal benefits of BPOs are the mitigation of risk in international trade for both buyers and sellers.
Apart from the reduced costs and convenience, speed and reliability, BPOs provide an assurance of payment to the seller.
Following this unanimous approval of the rules, the BPO is expected to be used more regularly in the trade finance industry because this set of contractual rules will establish uniformity of practice in the market, very similar to those of the UCP 600, which have proven to be the most successful of the rules drafted by the ICC.
The objective was to establish this payment method as a marketwide standard, with uniform rules and messaging protocols, but Banking Commission chairman Kah Chye Tan warned that the tool is still a long way off from becoming industry standard.
He believes that this is the beginning of a long journey for the industry. He does not expect a mass pickup during the initial period, but believes that BPO ‘mass adoption’ will take place over the next few years where BPO will be adopted and embedded in the industry.
Banks and exporters are expected to give feedback in order for SWIFT and ICC to continue refining the rules according to the needs of the industry.
Trade finance is a critical banking service supporting the world economy and it is vital that the financial industry is aligned by means of improved rules and tools in support of trading counter-parties.
BPO will enable banks to mitigate the risks associated with international trade to the benefit of both buyers and sellers and also enable flexible financing propositions across the supply chain, from pre-shipment to post-shipment.
With this latest development, the market now has a coherent set of ICC rules supported by ISO 20022 standards. The BPO offers a strong foundation for banks to provide modern risk and financing services, aligned with today’s technology evolution, while addressing cost pressures in the face of increased automation and changes in the regulatory environment.
Jason Zammit is head of public and media relations at FIMBank plc.