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Bank payment obligation: The missing link?
Letters of credit (L/C) have long been mainstays for companies conducting international trade. In the past decade, corporate clients have increasingly shifted away from these traditional trade finance instruments towards trading on direct open account. Thereby, buyers pay according to the payment terms, usually upon receipt of the goods, with no involvement from a bank to cover any shortfall if a problem arises. While open account speeds up the trade cycle, the financial crisis has highlighted that open account settlement exposes exporters to the risk of non-payment and the difficulty of raising finance that were previously mitigated by L/Cs. The main challenge is how to minimise these risks and difficulties inherent in open account trading on one hand, while avoiding the ‘negatives’ of an L/C in terms of manual, paper-based and labour-intensive processing. In response to these needs, SWIFT has developed and launched a solution called bank payment obligation (BPO), in order to enrich the portfolio of trade finance services that banks offer their corporates, and to continue reducing the reliance on costly paper-based systems and processes. There is a growing belief in the potential of BPO to become standard trade practice for open account processing in the coming years. The future of the BPO has received a firm boost with its endorsement by the International Chamber of Commerce (ICC) and the transfer of governance to the ICC, with a formal calendar of work to reach standardisation around 2013. The BPO is currently being tested by some of the banks and corporates in the ICC Working Group. Going forward, the number of BPO users is set to increase on the back of surging demand for collaborative supply chain financing solutions.
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Carlo R. W. De Meijer is Economist and Senior Researcher for Market Engagement at Royal Bank of Scotland. He has a Master’s degree in International Economics from the University of Tilburg (1977). During his career, Carlo has held various positions, both as a senior economist and private investment advisor. He has published many papers on various economic and financial topics, especially related to international financial markets and to European financial and monetary integration.