BPO in layman’s terms
The world of Trade Finance and Risk Management is often perceived as very complicated, this is mostly due to discussions around content, interpretations and the paper based document flows.
Fortunately the all-new Bank Payment Obligation (BPO) is a clear and simple instrument that works in a digital environment and can therefore be easily summarized as follows:
BPO is an irrevocable conditional payment obligation from one bank to another bank which becomes payable after an automated check and positive match of transaction data against the BPO conditions
So what is that BPO in more detail? First of all we have to look at the uniform rules of the game. Most of us know the standard rules of soccer or tennis; hence we can have competitions globally. The Bank Payment Obligation is also covered by global rules; the Uniform Rules for Bank Payment Obligations (URBPO). All the banks have adopted these International Chamber of Commerce (ICC) governed rules in May 2014, so the rules of the game are clear and fully agreed around the globe.
Due to the digital nature of the BPO, there is no room for rule interpretation. For instance no bank staff will be performing document examination; this means that the rulebook for BPO is a lot thinner and simpler, than those for the more traditional trade finance products (like the UCP 600 for L/C’s).
Having the rules in place is one thing, but this could only be achieved on the precondition of having a common digital language set for BPO messages between the banks. Here is where the Society for Worldwide Interbank Financial Telecommunication (SWIFT) played a crucial role in setting these standards. Banks use dedicated TMST (XML) messages for BPO that follow the ISO20022 standards, this will not only enable Straight Through Processing but also enable integration with client systems.
These many different TSMT messages flow between the banks, corporates will not have to create or even understand these XML messages themselves. The banks will communicate with the corporates via portals offering access to the transactions and potentially offering up/download functionalities or even integration with the corporate back office infrastructure.
Meanwhile, as per Q3 2014, already 58 banks have stated to adopt the Bank Payment Obligation to service their client base. It is expected that this number will continue to grow as more and more corporates become aware of this efficient tool for cross border trade and risk management.