A BPO falls somewhere between a letter of credit and an open account
Many credit professionals are becoming more curious about the benefits of Bank Payment Obligation (BPO), a relatively new financial instrument, which industry experts say can increase international trade, boost a company’s supply chain and optimize working capital.
A BPO requires that a bank guarantees payment to the seller after data on an open account transaction is electronically matched. The process provides similar protection as a letter of credit, but it is done electronically instead of on paper.
A BPO falls somewhere between a letter of credit and an open account, explained David Hennah, global head of trade and supply chain finance for Misys, during an Oct. 27 FCIB webinar. “A BPO is sometimes referred to as the ‘Goldilocks’ solution. A letter of credit in some cases can be regarded as too hard [and] an open account too soft. BPO sits in the middle and is just right.”
Over the past few decades, the usage of letters of credit has not really grown, Hennah said. Although they will not go away, the decline is noticeable, he noted. “The power to dictate the terms of trade has shifted significantly away from the supplier in favor of the buyer. And buyers generally don’t want to go to the time and expense of a letter of credit.”
Market globalization has led to the displacement of traditional trading relationships, and BPOs offer a potential solution. Historically, Hennah said, most trade has occurred from North to South or East to West. Today, “We hear [more] about … so called south-south trade; that is trade between emerging markets,” he said. “It seems to me that where you are embarking on a new relationship, where there is no legacy of the past, you’re not talking about replacing the existing terms of trade. It’s a new relationship; the counter parties are free to negotiate from scratch. There seems to be an opportunity to adopt a bank payment obligation.”
“BPOs are also more efficient,” added Michael Van Steenwinkel, global credit manager at BP. “There are many situations in modern business, where BPO offers a very welcome flexibility, where some other trade products don’t.”
Buzz surrounding BPOs has been ever present in the business-to-business industry, and some business professionals view them as the preferred method of payment for the future. Typically, when a new instrument like BPO is introduced, it initially has a relatively low adoption rate and then usage picks up, Hennah explained. “I think at this point in time, the BPO has not yet crossed the chasm and it is at that kind of tipping point now where it is dependent on wider market adoption in Europe and in the Americas.”
FCIB’s BPO webinar is available for purchase and download here.
Source: FCIB, a division of the National Association of Credit Management and FCIB-NACM