BPOs

How Bank Payment Obligations (BPOs) Work

Global Trade Risk Management Strategies LLC

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How Bank Payment Obligations Work

Buyer

Contract (Purchase Order)

Seller

A Bank Payment Obligation (“BPO”) is an engagement by a bank that is issued pursuant to a trade transaction. The BPO is requested by the buyer and contains the bank’s undertaking to pay the seller’s bank based on presentation by the seller’s bank of data specified in the BPO. The intent is that the data evidence compliance of the seller with the contract between the buyer and seller, so the starting point is the execution of such contract. The contract should specify what data the seller is required to submit in order to trigger the payment obligation.

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Buyer


Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank

Seller

The buyer applies for a BPO and transmits to his bank the data requirements that are specified in the contract. Simultaneously, the seller alerts his bank that it will be receiving a BPO and also transmits to this bank the data requirements that are specified in the contract and expected to be in the BPO.

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Buyer


Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank

Seller

Baseline Submission

w/ BPO

Baseline Submission

Transaction Matching

Application

At the core of the BPO concept is the use of a computerized system that performs data matching. This “Transaction Matching Application” may be hosted by one of the banks or by a third party. The banks agree on what TMA they will use and each uploads the data requirements provided by its customer. The buyer’s bank further indicates that it engages to pay the seller’s bank upon presentation to the TMA of data that comply with the data requirements.

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Buyer


Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank

Baseline Match Report


Seller

Baseline Submission

w/ BPO

Baseline Submission


Application

The TMA compares the data requirements files submitted by the two banks against one another and notifies both of any mismatches. If the data requirements match, both banks are notified that a “baseline” has been established and that the buyer’s bank’s BPO is now in effect.

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Buyer


Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank



Seller

Baseline Submission

w/ BPO

Baseline Submission


Application

The BPO itself is in favor of the seller’s bank, so there is an expectation that the seller’s bank will engage with the seller to provide some sort of service, but the Uniform Rules for BPOs do not specify what type of engagement the seller’s bank may enter into with the seller. It may be merely an agreement to receive and upload a data file or it may involve a commitment from the seller’s bank to pay the seller upon submission of a compliant data set.

Engage-ment

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Goods


Buyer


Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank



Seller

Baseline Submission

w/ BPO

Baseline Submission


Application

Based on the arrangements in place, the seller ships the goods that the buyer ordered.

Engage-ment

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Goods

Documents


Buyer


Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank



Seller

Baseline Submission

w/ BPO

Baseline Submission


Application Engage-ment

All of the documents—invoices, transport documents, etc.— are sent by the seller directly to the buyer.

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Goods

Documents


Buyer


Shipment Data Set

Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank



Seller

Baseline Submission

w/ BPO

Baseline Submission


ApplicationShipment

Data

Engage-ment

The seller submits data about the shipment and to his bank in the manner specified in the bank’s engagement. The bank compiles the data into a data set and uploads it to the TMA to compare with the requirements described in the “established baseline.”

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Goods

Documents


Buyer


Shipment Data Set

Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank



Seller

Data Set

Match Report

Data Set

Match Report

Baseline Submission

w/ BPO

Baseline Submission


ApplicationShipment

Data

Engage-ment

The TMA notifies both banks of the results of the data matching process. If there are no mismatches, the BPO is triggered and the buyer’s bank is obligated to pay. If there are mismatches, the buyer’s bank may accept or reject them.

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Goods

Documents

Payment

Payment


Buyer


Shipment Data Set

Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank



Seller

Data Set

Match Report

Data Set

Match Report

Baseline Submission

w/ BPO

Baseline Submission


ApplicationShipment

Data

Engage-ment

Payment takes place outside the BPO framework, by normal bank-to-bank means. Based on its own engagement with the seller, the seller’s bank pays the seller.

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Goods

Debit

Documents

Payment

Payment


Buyer


Shipment Data Set

Shipment Data

Purchase Order Data

Seller’s Bank

Purchase Order Data

Buyer’s Bank



Seller

Data Set

Match Report

Data Set

Match Report

Baseline Submission

w/ BPO

Baseline Submission


Application Engage-ment

The buyer’s bank turns to the buyer for reimbursement of the payment.

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