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Analysis

Bank Backing for Open Account Trade Payments

The bank payment obligation (BPO) provides similar protection for sellers as an L/C does, but far more efficiently.

By Paul Johnson | Updated on August 07, 2013

In 2011, cross-border trade reached a value of around US$18.2 trillion. Most of this activity—80 to 90 percent—was settled on open account terms, meaning that the buyer received the shipment before paying the seller. Open account trade has clear benefits for buyers of goods, but it puts sellers at some risk that the buyer might not pay. This can be especially troublesome when a company first begins selling to a new buyer in an unfamiliar region of the world. The traditional method for mitigating counterparty risk in such a situation is the letter of credit (L/C), a paper document issued by a bank that assures payment once the bank receives documentation that the shipment has fully met the contract terms.

Now companies have access to a new instrument. The bank payment obligation (BPO) functions like a traditional letter of credit instrument that supports a commercial open account trade payment. It transfers buyer risk to an obligor bank in the same way that an L/C does, but it does so much more efficiently because fulfillment of a BPO involves the digital exchange and matching of data in ISO 20022 XML format.

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