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The buyer's bank promises the seller's bank to pay once the order data and the seller's shipping data match.
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01 · In plain words
The buyer's bank promises to pay the seller's bank once the trade data matches
A , or BPO, is a promise between two banks. The buyer's bank promises the seller's bank that it will pay a fixed amount of money. The promise cannot be withdrawn (ICC, URBPO Article 3).
The bank pays when data matches. First, both banks send the order details to a shared computer system. Later, the seller's bank sends the shipping and invoice details. When the two sets of details match, the buyer's bank must pay, either right away or on a set later date (ICC, URBPO Article 10).
The banks look at data only. They do not check the sale contract, paper documents or the goods (ICC guidelines, 2015). The BPO also stands apart from the sale contract (ICC, URBPO Article 6). The ICC built the BPO to work alongside the payment methods traders already use (ICC, April 2013).
Who is involved
- The buyer, or importer, asks its bank for the BPO, based on the purchase order.
- The seller, or exporter, sends its shipping and invoice data through its bank.
- The buyer's bank, the , issues the BPO and makes the promise to pay.
- The seller's bank, the , receives the promise. Under the rules, it is always the seller's bank.
- A , or TMA, compares the data. The rules apply where both banks use the same TMA (ICC, URBPO Article 1).
02 · How it works
Nine steps take the deal from the purchase order to the money reaching the seller
Figure 1 · Interactive
A bank payment obligation, step by step
Read down the steps. The last step is where the seller is paid.
Source: SWIFT, Bank Payment Obligation: A New Payment Method, July 2016, page 11 (nine-step flow); ICC, URBPO Articles 3, 8 and 10. Who does each step is our reading of the SWIFT diagram.
03 · What it means for you
The seller gets a bank's promise once the data matches. The buyer pays later, with its bank's promise behind it.
Figure 2 · Interactive
What a BPO means for each side
Choose your side of the trade.
04 · Worked example
On a $1 million BPO paid in 90 days, getting the money now costs $12,500 in this example
This example uses round, made-up numbers. The buyer's bank will pay $1,000,000 ninety days after the data matches. The seller wants the money now, so the seller's bank pays early and takes a charge, at 5.00% a year on a 360-day year. This is a . Real rates vary by bank, country and deal.
Figure 3 · Illustrative
Early payment on a $1,000,000 BPO due in 90 days
Illustrative inputs. The amount the seller receives is highlighted.
Made-up rates, worked out by our checking script. Over 60 days the charge is $8,333.33. A gives the seller $987,654.32 over 90 days.
05 · When to use it
A BPO suits open account trade where both banks share a matching system
Good fit when
- You trade on open account, and the seller wants a bank's promise without banks checking documents (ICC guidelines, 2015).
- Your bank and your trading partner's bank both use the same TMA (ICC, URBPO Article 1).
- The seller wants the option to be paid early by its bank on a later-dated BPO.
Another tool may suit better when
- Either bank lacks access to a shared TMA. Look at a sight letter of credit, where banks check documents.
- You need banks to check documents against set terms. A follows the ICC's document rules. See Confirmed letter of credit.
- You trust each other and want no bank promise at all. Look at open account, or sell the receivable through forfaiting or factoring.
06 · Rules and a real case
A BPO follows the ICC's URBPO rules, and a 2014 trade between Germany and Japan used it
A BPO follows the , ICC publication 750E. The ICC Banking Commission adopted them on April 17, 2013, and they took effect on July 1, 2013 (ICC). They were the first uniform rules for bank payment obligations (ICC Academy).
A real case. On October 27, 2014, the ICC reported the first BPO between Germany and Japan. UniCredit and Bank of Tokyo-Mitsubishi handled it. The trade involved Rühr und Verfahrenstechnik, a German maker of industrial mixers, and Mitsui & Co. Plant Systems of Japan. The deal brought the number of banks handling BPOs to fourteen (ICC DC World News).
Summary
A BPO gets the seller a bank's promise to pay once the trade data matches
The buyer's bank promises the seller's bank to pay once the order, transport and invoice data match. Banks deal only with data. The papers go straight to the buyer. It works where both banks use the same matching system, so ask your bank first.
Related guides: Open account trade; The payment terms spectrum; Letters of credit. Related cards: Open account; Letter of credit (sight). Every term is in the Trade Finance Glossary.
Sources
- International Chamber of Commerce, Uniform Rules for Bank Payment Obligations (URBPO), ICC Digital Library, 2013. Supports: definition, parties, baseline and data match, scope, payment duty, expiry, independence, assignment of proceeds
- International Chamber of Commerce, ICC launches first-ever rules for open account trade, April 17, 2013. Supports: adoption and effective date, the BPO's place alongside other payment methods
- ICC Banking Commission (hosted on swift.com), Guidelines for the Creation of BPO Customer Agreements, August 19, 2015. Supports: banks deal only with data
- ICC Academy, URBPO e-book page, 2013. Supports: publication 750E, the first uniform rules for BPOs
- SWIFT, Bank Payment Obligation: A New Payment Method, July 2016. Supports: the nine-step flow, payment terms, use for financing
- International Chamber of Commerce (ICC Digital Library, DC World News), First German-Japan BPO processed, October 27, 2014. Supports: the real case
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