Introduction
The bank payment obligation (‘BPO') is a new digital financial instrument used by banks 13.01 to facilitate cross-border trade. It is issued electronically by the buyer's bank (the obligor bank) to the seller's bank (the recipient bank) to ensure payment to the seller, mitigate the performance risk for the buyer, and finance the trade transaction.
It was created to address the drawbacks of documentary credits, which include a relatively high cost, slow payment process and subjective judgment on the decision to honour the credit, on the one hand; and open account transactions, which offer minimal security and financing options to the contracting parties, on the other hand. Launched in 2013, it has been hailed as ‘the biggest innovation to have taken place in the trade finance world since the letter of credit came into common use in the 17th century;'1 objectively, however, it is one among a few promising modern techniques such as electronic letters of credit and blockchain-executed letters of credit that can facilitate trade finance.Inspired by the long and successful history of documentary credits, the BPO is an irrev- 13.02 ocable and autonomous bank undertaking whose honour is conditional on the performance of the conditions prescribed in the undertaking.2 Whereas the bank's undertaking in a documentary credit runs in favour of the exporter, the undertaking in a BPO runs in favour of the exporter's bank. Furthermore, whereas the bank undertaking in a documentary credit is conditional on the presentation of compliant documents to the nominated bank, the undertaking in a BPO is conditional on the successful matching of structured trade data on an independent electronic platform.[1229] It differs, therefore, from a documentary credit which is an obligation of the issuing bank directly to the exporter and depends on the examination of documents by the banks.[1230] Thus, according to the Uniform Rules for Bank Payment Obligations (‘URBPO'),[1231] [1232] a bank payment obligation is ‘an irrevocable and independent undertaking of an Obligor Bank to pay or incur a deferred payment obligation and pay at maturity a specified amount of money to a Recipient Bank following submission of all Data Sets required by an Established Baseline resulting in a Data Match or an acceptance of a Data Mismatch...
’.6 The irrevocable undertaking, once communicated to the recipient bank, constitutes a legally binding, valid, and enforceable payment obligation of an obligor bank to a recipient bank under the appropriate standard of law and is enforceable in accordance with its terms. Specifically, the seller is assured of payment if it meets its obligations, while the buyer is assured that payment will only be made if the conditions of payment in the BPO are met. In business terms, the BPO is a form of a guarantee from the buyer's (‘obligor') bank to seller's (‘recipient') bank and is intended to offer a level of security to the seller's bank so that it supports the financing of open account transactions.[1233] Furthermore, it is conceptually a new financial instrument and it is neither a ‘lite' letter of credit nor an electronic letter of credit.[1234] The BPO is different from the electronic letters of credit that are envisaged in the Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation (Version 1.1), which is better known by its acronym ‘eUCP’[1235] Whereas the eUCP caters for the electronic presentation of paper documents to the bank to trigger payment, the BPO framework only envisages the extraction of trade data from the trade documents for electronic presentation and the electronic matching of that data on a specified matching application.[1236] The dematerialisation of trade, in this instance through the use of digital trade information instead of paper-based information, and the use of ecommerce platforms for the exchange of information instead of the manual examination of documents, are intended to improve working capital and financial processes for the trading parties and generate income and efficiencies for the banks involved.[1237] The BPO conforms to the market trend of the digitisation of trade flows and the conduct of business generally, including the use of communication platforms for the exchange of information among different parties using structured messages.Conceptually, the BPO is positioned between documentary letters of credit, which require the banks to receive documents and make decisions basing on those documents before payment is made, on the one hand; and open account transactions, where the banks' role is limited to transmitting documents and making payment without making any decisions on the documents, on the other hand. The banks' role in BPOs consists of the receipt of electronic trade data and its transmission to a transaction matching application (‘TMA') that determines if the data matches a previously determined data set.
The obligor bank's undertaking introduces the security and legal features of a documentary credit, while the TMA's electronic matching of data introduces the element of efficiency found in open account trading.[1238] Currently, the BPO is bank-centric because it was designed by banks to intermediate in the supply chain finance where they were not significant playersNew Roman",serif;color:black'>[1239]and operates on the matching platform to which only banks have access. Its operations centre around the TMA, currently, the Trade Service Utility platform (‘TSU') operated by SWIFT, which makes decisions on data matches or mismatches; and the use of structured messages based on the ISO20022 XML standard. Furthermore, the rules governing the BPO only cover the bank-to-bank relationships leaving the relationship between the banks and the underlying parties to bilateral agreements.[1240]13.04
This chapter considers the business case for, and the legal aspects of, the BPO, and makes two main points. First, the legal aspects of the BPO are familiar, since its starting point is to create a secure instrument similar to a documentary credit and apply it in the open account space. Secondly, the commercial factors that led to the creation of the BPO constrain its growth and wide acceptability at the same time. The BPO was created as digital innovation and yet it faces competition from other digital initiatives that are products of the same technological innovations; furthermore, it was created to fill the gap between documentary credits and open account transactions; and yet, each one of these techniques has a stable customer base and will not be easily displaced. Therefore, the BPO can only thrive in the limited digital space not occupied by documentary credits, open account transactions, and its digital competitors. Following this introduction, section II of this chapter outlines the factors that led to the creation of the BPO as well as its contractual setting, thereby shedding light on its intended role in trade finance.
It will point out that, as a digital solution to the payment for and financing of trade, its unique value lies in the technological innovation to adapt the security and financing features of the documentary credit to the open account space. This part also provides the benchmarking evidence for evaluating the future role of the BPO, which will be undertaken later in this chapter. SectionIII focuses on the legal aspects, as extracted from the applicable URBPO (also called ‘the Rules' in this chapter), with a view to placing the rules governing the new instrument in the context of the general rules governing the well-established finance instruments. Thus, in pertinent places, the chapter lightly compares the provisions in the URBPO to the better-known rules for documentary credits, the Uniform Customs and Practice for Documentary Credits (‘UCP'), to elucidate the key principles governing the BPO. Section IV postulates on the sustainability of the new financial instrument and observes that, notwithstanding the advantages of the BPO over the more established documentary credits and open account transactions, there has been a slow adoption of the new financial instrument and that the older financial instruments have been resilient in the face of the challenger instrument. Nonetheless, there is a niche market in cross-border trade where the BPO plays an important part and that could be the springboard for its sustainability as an additional trade finance instrument. The BPO has progressed further in international recognition than earlier electronic initiatives because it was supported by international rules from the outset, which rules relied on the familiar legal principles used in documentary credits, and was launched via an international banking network. Arguably, it points to the way of the future and might inspire the development of other instruments in the further digitalisation of trade finance.[1241]II.