Bank Payment Obligation (BPO) is a relatively new financial instrument that falls somewhere between a letter of credit and an open account.
“A BPO is sometimes referred to as the ‘Goldilocks’ solution,” said David Hennah, global head of trade and supply chain finance for Misys, during an Oct. 27 FCIB webinar. “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.”
A BPO is a legally binding undertaking given by one bank to another bank. It confirms a payment will occur on a specified date after electronic data submitted by the seller and the buyer is successfully matched. “When that’s the case, shipments will be made and documents will be sent directly to the buyers and the sellers, remaining outside of the banking system,” Hennah said.
Buzz surrounding BPOs has indicated they could become the preferred method of payment in the future for business-to-business transactions. Typically, new instruments such as BPO follow a trend of relatively low adoption in the beginning that 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.”
For more information on BPOs, check out FCIB’s Week In Review on Nov. 27, or download the complete webinar here.
- Jennifer Lehman, NACM marketing and communications associate