1) A Bank Payment Obligation (BPO) provides the benefits of a letter of credit without manual processing by using SWIFT's Trade Services Utility to electronically match trade document data. 2) A BPO obligates one bank to pay another bank on a specified date if trade data matches, transferring risk from buyers to banks. 3) BPOs enable flexible financing, assure payment, and strengthen supply chains, while reducing costs through automated processing of electronic trade data.

1. Solutions
Bank payment obligation – an
alternative means of settlement in
international trade
Providing the benefits of a letter of credit in an
automated environment
Bank payment obligations As the volume and value of international
(BPOs) deliver all the benefits trade has grown, there has been a
Mitigating risks in of letters of credit without the
significant shift away from the use of
traditional trade instruments such as
international trade for drawbacks of manual processing letters of credit, in favour of trading on
buyers and sellers alike associated with traditional trade open account. Driven by advances in new
finance. technology, the market has demanded
new solutions to help deal with increasing
A BPO is an irrevocable undertaking
cost pressures and changing risk
given by one bank to another bank that
dynamics.
payment will be made on a specified date
after a specified event has taken place. New challenges
This ‘specified event’ is evidenced by a New challenges have emerged as a
Benefits ‘match’ report that has been generated by result of the crisis of confidence in credit
SWIFT’s Trade Services Utility (TSU). markets, forcing the implementation of a
Speed, reliability, convenience
more restrictive regulatory regime. This
Reduced costs and improved BPOs enable banks to mitigate the risks
has intensified corporate demand not
accuracy associated with international trade to the
only to apply rigorous measures to the
benefit of both buyers and sellers. They
Enhanced risk management management of risk but also to identify
enable flexible financing propositions
ways of optimising the management of
Assurance of payment across the supply chain, from pre-
working capital and enhancing process
shipment to post-shipment. They provide
Access to flexible financing efficiency.
an assurance of payment to the seller
(options) similar to that obtained under a confirmed SWIFT has worked with financial
Securing the supply chain letter of credit. services providers all over the world to
design and develop the TSU, a data
A changing landscape
matching application that sits centrally
The landscape of world trade has
on the SWIFT network. The TSU enables
changed dramatically during the past
participating banks to match key data
decade. Borders and barriers have
elements extracted from a relevant range
been broken down through widespread
of trade documents, including purchase
liberalisation in emerging markets. The
orders, commercial invoices and transport
combined pressures of globalisation
documents.
and the internet have accelerated
consolidation and specialisation, at the
same time encouraging a wave of new
entrants among service providers.

2. Benefits for importers Benefits for exporters Benefits to banks The Bank Payment Obligation
The BPO is an optional component of
Safer than prepayment. The Assurance of payment Low risk business a TSU transaction which places a legal
buyer does not have to pay obligation on the issuing bank to pay the
up front before receiving the recipient bank subject to the matching of
documents of title to the compliant data in the TSU.
goods purchased
In short, the BPO delivers equivalent
Facilitates financing for the Access to flexible pre- Prudent use of capital
business benefits to those previously
buyer eg extended payables shipment or post-shipment
obtained through a commercial letter of
finance
credit, while eliminating the drawbacks
BPO strengthens buyer/ The credit risk is transferred Steady source of of manual processing associated with
seller relationships. Secures from the buyer to the Obligor commission and fee traditional trade finance.
the supply chain bank income
One of the key features of the TSU/BPO
BPO helps to expand Reduces risk of buyer Opens door to new model is that it supports interoperability
business opportunities. May cancelling or changing the business opportunities between participating banks, because it
increase competitiveness in order makes use of a standard set of ISO 20022
foreign markets. messages.
The buyer can confirm that The buyer cannot refuse Strengthens core This interoperability enables banks to
the goods are shipped on or to pay due to a complaint relationships
collaborate with one another to extend
before the due date to the about the goods
reach across global markets, in order to
required specification
provide a comprehensive range of supply
Foreign exchange risk can Automated solution chain services to corporate customers.
be eliminated with a BPO
issued in the currency of the The matching of data in the TSU reflects
seller’s country events that have taken place in the
physical supply chain, which create
The buyer can structure The seller can structure the Lower operating costs trigger points for the provision of financial
payment according to the delivery schedule according supply chain services - for example, a
buyer’s interests to the seller’s interests, proposition for pre-shipment finance
determining when payment
based upon a confirmed purchase order,
will be made and shipping
or a proposition of post-shipment finance
the goods accordingly
based upon an approved invoice. The
The bank bears Meets the market BPO may be used as collateral in each
responsibility for any requirement for banks to case.
oversights collaborate more on risk
and client on-boarding. SWIFT has also collaborated with
corporate users on the extension of
The buyer can negotiate Automated data matching the ISO 20022 messages exchanged
better terms and conditions. reduces complexity and between financial service providers and
By issuing a BPO, the buyer increases reliability
the TSU, so that those same messages
demonstrates the ability
can be adapted for communications
to pay and can negotiate
between corporates and their banks.
improved terms in the future
These messages will, for example, enable
The BPO protects the buyer By removing subjectivity of end-to-end straight through processing
since the bank only pays physical document-checking with corporate ERP systems.
when the seller complies the risk of discrepancy,
with the specific terms and dispute and delay is
conditions and produces the reduced. Additional clarity and transparency
data required Open account often fails to provide banks
with access to underlying transaction
The buyer can build BPO can be introduced at
data – impeding their ability to follow
safeguards into the BPO, any stage of the transaction.
relevant events in the physical supply
including inspection of the Mismatches can be
goods and quality control, accepted chain. The TSU and BPO provide access
and set production and to relevant data, records and reporting
delivery times – giving banks the ability to provide risk
mitigation, finance and payment services
BPO increases convenience; Automated processing while introducing additional automation
reduces cost accelerates settlement and and efficiency into the supply chain
financing
management process.

3. By matching data via the TSU, banks largely to the publication and maintenance
can track events in the physical supply by the ICC of a set of rules, the Uniform
chain which help to trigger the availability Customs & Practice (UCP).
of value-added services in the financial
The universal acceptance of the UCP
supply chain. Unlike the manual checking
by practitioners in countries with widely
of documents, there is no subjectivity
divergent economic and judicial systems
attached to data matching – it either
is testament to its success.
matches, or it doesn’t.
Both the ICC and SWIFT believe that by
Getting more value from the TSU
working together and leveraging their
SWIFT’s TSU is a centralised matching
respective positions across the trade
and workflow engine providing timely
finance community, they can ensure that
and accurate comparison of data taken
the BPO will have an important role to
from underlying corporate purchase order
play in supporting the development of
agreements and related trade documents.
international trade in the 21st century,
The TSU supports banks’ value-added addressing cost pressures in the face of
supply chain services such as finance increased automation and changes in the
programmes, cash forecasting and regulatory environment.
liquidity management. The TSU’s workflow
can involve one, two or more banks. For more information, please contact your
SWIFT account manager or visit
Adding a BPO to a TSU transaction
www.swift.com
enhances the flexibility, speed and
reliability of supply chain finance offerings.
Official recognition from the international
community
To help banks and corporate users
get more value from the BPO, SWIFT
is collaborating with the International
Chamber of Commerce (ICC) Banking
Commission.
For many years now the Documentary
Letter of Credit has become established
as an accepted market practice, thanks
Contract Contract Contract
Buyer Seller Buyer Documents Seller Buyer Documents Seller
Documents
Documents
Application
Letter of Credit Bank Payment Open Account
Advice
Data
Data
Obligation
Documents
Data
Issuance
LC Issuing LC Advising BPO Obligor BPO Buyer’s Bank Seller’s Bank
Bank Payment Bank Bank Payment RecipientBank Payment
Bank services based on paper document Bank services based on electronic trade Bank services limited to payment
processing data exchange processing
Array of risk, financing and processing services to address both cash management
and trade finance needs
56079 - AUG 2011
A new risk mitigation and financing instrument
SWIFT © 2011