The Society for Worldwide Interbank Financial Telecommunication (SWIFT) recently announced the Bank Payment Obligation (BPO) mechanism as its new strategic initiative in the area of trade finance. SWIFT BPO is similar to the familiar letter of credit (LC). However, BPO has an edge over LCs as it is transmitted electronically between two banks (the BPO advising and issuing banks). The BPO issuing bank makes the promised payment on behalf of the buyer to the BPO advising bank. In other words, a BPO is a binding bank-to-bank payment obligation based on the presentation of compliant data. It supports all types of financing (buyer centric and seller centric).

As opposed to the physical exchange of documents in an LC transaction, SWIFT’s BPO system stresses on the automated presentation and exchange of documents using the Trade Services Utility (TSU) to fuel the finance supply chain. This provides a wide range of benefits to corporate customers in the form of increased visibility, cost reduction and better working capital management. It also allows banks to offer competitive forms of finance. Exporters forced to extend open account terms to their buyers will be able to eliminate the cost of risk mitigation by opting for BPOs.

Currently, this initiative from SWIFT is restricted to TSU members only. Around 20 banks have joined hands with SWIFT in this initiative. To ensure success and wider acceptance of this initiative across the globe, SWIFT is partnering with the Banking Commission of the International Chamber of Commerce (ICC). Official recognition to BPO is expected by the end of this year (2011). The ICC has created an ICC-BPO working group to build a globally accepted standard that is neutral and acceptable across industry. By removing the necessity for laborious manual processing, the BPO initiative creates a “new” way of doing things more effectively.