KEY POINTS ER? The BPO, although it has similarities to a letter of credit, is in many ways a V Feature different instrument. R E O Under a BPO, the seller in the underlying transaction has no direct claim against the obligor bank if the recipient bank fails to perform. W, W, The automation of the data set comparison process in the mechanics of the Uniform NO Rules for BPOs removes the element of subjectivity. – – T Authors Geoffrey L. Wynne and Hannah Fearn F CREDI O The bank payment obligation: will it ER ER TT replace the traditional letter of credit – AL LE ON I T now, or ever? RADI T The International Chamber of Commerce (ICC) suggests that a bank payment comparison of the data set against the HE T obligation (BPO) can be viewed as an electronic letter of credit. This article requirements of the established baseline. analyses the BPO and explores the differences between a BPO and a letter of If there is a match, the TMA sends an credit, compares the transferability of BPOs and letters of credit in supply chain automatic notification to the parties and the financing and considers the benefits and risks of automation for banks. It obligor bank is bound to pay the recipient suggests how banks might use BPOs to offer financing to traders and considers bank in accordance with the payment terms REPLACE T whether BPOs will replace letters of credit as a method of payment settlement of the BPO. in international trade transactions. It is possible for a single established baseline to include more than one BPO. : WILL: I This allows a buyer to ask several banks to ON WHAT IS A BPO? I A spotlight has been placed on the finance a single transaction. Under URBPO, T nBPO following the ICC’s launch The underlying nature of a BPO is the same each such obligor bank gives an independent of the Uniform Rules for Bank Payment as for a letter of credit: it is an irrevocable BPO, and no joint and several obligations BLIGA Obligations (URBPO) in June 2013. The undertaking given by one party to another are created between those banks. O purpose of URBPO is to establish the to pay on satisfaction of certain specified NT means of using BPOs in the global banking conditions. It allows buyers and sellers to BPO V LEttER OF crEDIT: THE market. However, the success of the BPO mitigate the risks of trading by transferring BENEFICIARY AND THE RIGHTS OF ME Y rests not only on the success of URBPO the payment risk to a bank. THE UNDErlYING SEllER in establishing a set of uniform rules, but A BPO is created in relation to an The most important difference between a K PA also in determining whether there is either underlying trade transaction. The banks BPO and a letter of credit is the identity of N the scope or the need for another trade of the seller and buyer, who have agreed to the beneficiary. A BPO exists between two instrument in the market. participate in the BPO, submit data about banks: the obligor bank, who undertakes HE BA A key driver in developing the BPO the underlying transaction to an electronic to make a payment, and the recipient bank, T was the opportunity for banks to tap into data matching platform (transaction who receives that payment. The seller in the the huge proportion of international trade matching application or TMA). This data underlying transaction has no direct claim transactions currently settled on an open is called a “baseline”. If matching data is against the obligor bank if the recipient bank account basis. It is hoped that trading submitted by the two banks, the TMA sends fails to perform. Further, the relationship counterparties, looking for a way to lower an automatic notification and the baseline between the recipient bank and the seller is the risks of open account trading, but for is “established”. At this point, the buyer’s outside of the scope of URBPO. The terms whom letters of credit are not appropriate bank, known as the obligor bank, becomes on which the proceeds of a BPO are paid to (perhaps due to cost, timing or the level of irrevocably bound by the terms of the BPO. the seller must be agreed separately between sophistication involved in making complying Once the seller has shipped its goods, the the recipient bank and the seller. presentations), will turn to BPOs as a seller’s bank, known as the recipient bank In theory, a seller could mitigate the risk cheaper, perhaps simpler, alternative. (or another bank who has agreed to submit of the recipient bank failing to perform by The ICC suggests that the BPO is an data for the BPO), may upload the relevant requesting an assignment of the proceeds alternative “electronic” letter of credit. data about the shipment to the TMA. This of the BPO in its favour (as permitted The BPO, although it has similarities to a is called a “data set” and might include, under art16 of URBPO). However, the letter of credit, is in many ways a different for example, commercial, transport and obligor bank’s consent is required for any instrument. The question is, does the BPO insurance information about the shipment. assignment, and the role of the recipient have the potential to replace the letter of The recipient bank is not required to submit bank in the BPO cannot be transferred (so credit in international trade transactions? any documents. The TMA performs a only the recipient bank could submit data 102 February 2014 Butterworths Journal of International Banking and Financial Law T Feature HE BA N K PA Y ME NT O BLIGA to establish the BPO and trigger payment and there are risks for banks of mistakenly would have control over the submission of under it). disclosing the second beneficiary’s invoice data to trigger payment. Contrast this to T By contrast, a letter of credit is issued to the end-buyer and causing a breach of a back-to-back letter of credit, where the I ON in favour of the seller, meaning that the confidentiality. middleman’s bank needs to take security seller (as beneficiary) has a direct claim Another possibility is assigning the over the first letter of credit to protect WILL: I against the issuing bank (the buyer’s bank) proceeds of the letter of credit under art 39 its position. for payment. This relationship is within the of UCP 600. This might work where the T scope of the Uniform Customs and Practice middleman’s supplier does not want the BPO V LEttER OF crEDIT: THE REPLACE for Documentary Credits, 2007 Revision, right to perform as beneficiary under the BENEFITS OF AUTOMATION? ICC Publication No. 600 (UCP 600), and letter of credit. BPOs are established and managed using there is no need for a separate contractual Neither of these methods will work TMAs. The entirely electronic nature of relationship between the issuing bank and where the middleman’s end-buyer has BPOs is reflected in URBPO, which defines T the seller. agreed to settle payment with a BPO. This is the ISO 20022 trade services management HE If a letter of credit is issued, and the because the middleman is not party to that messages (TSMT messages) used to T RADI beneficiary seller is concerned about the BPO and has no rights to transfer or assign. communicate the existence and terms of issuing bank’s ability to perform, it can A third possibility is the issuing of BPOs between banks. T I obtain further comfort by asking its own back-to-back letters of credit. Here, the The automated nature of the BPO ON bank to confirm the letter of credit. This middleman, on receiving of a letter of is demonstrated when considering how AL LE independent undertaking given by the credit for the sale of his goods, uses this as payment is triggered under a BPO, confirming bank to the beneficiary seller is collateral for the issue of a letter of credit when compared to a letter of credit. An also within the scope of UCP 600. in favour of his supplier. The middleman’s issuing bank must honour a letter of TT As a BPO does not give any rights to bank, who issues the second letter of credit, credit on the occurrence of a complying ER the seller, there is no provision within will invariably act as advising bank under the presentation (art 7 of UCP 600). By O F CREDI URBPO for the recipient bank to give a first letter of credit, giving it comfort as to contrast, an obligor bank must honour “confirmation”-style undertaking to the the existence of the first letter of credit and a BPO when the TMA performing the seller. This is not to say that the recipient control over presentation of the documents relevant data comparison notifies the T bank cannot choose to give the seller an under that letter of credit. parties of a data match. – independent undertaking against receiving NO a BPO, but this would fall outside the scope W, of the BPO. “The automated nature of the BPO is demonstrated O when considering how payment is triggered under a R E BPO V LEttER OF crEDIT: V THE MIDDLEMAN – BPO, when compared to a letter of credit” ER? TRANSFERABILITY AND BACK-TO-BACK trANSActIONS This type of arrangement is not expressly There are two key distinctions here. There are several ways for the middleman in recognised within UCP 600 and this is First, a letter of credit requires presentation a supply chain to use the benefit of a letter of not necessary as both letters of credit can of documents.