Bank Payment Obligation (BPO)

Ömer Haluk TURANLI
Education Consultant

There are various payment methods used in foreign trade. In this article, you will find information about the newest of these, Bank Payment Obligation (BPO), which was included in our legislation this year.

BPO was included in our legislation only this year, but it first entered into force on July 1, 2013 (ICC Publication No: 725), so it is not actually that new a payment method.

I would like to share the reasons why BPO has not been fully integrated into our commercial life and why it was included in our legislation seven years after its first appearance. In my opinion, it may not have been necessary to include it in our legislation until today, since it has not found a sufficient place for itself in world trade and is not encountered very often.

It may not be preferred by financial institutions either, because its operation is so practical that it eliminates intensive document review processes and the concept of reserves, thus eliminating bank commissions received in this direction, and thus can cause serious income losses for banks.

Nevertheless, although its use, at least in our country, has not yet reached the level it should be, it seems that it will find more space thanks to the speed gained by digitalization and the decreasing trend in physical document production and transfer.

So what is BÖY? BÖY is a version of non-bank guaranteed payment methods (cash against goods, payment against documents, etc.) with bank guarantee added, and is a new banking product that provides wide financing opportunities, in other words, it is not a type of letter of credit. It is an alternative that can be used by merchants who find products such as letters of credit and bank guarantees complex and expensive and do not want to use them for such reasons, but also want to benefit from bank guarantee.

The International Chamber of Commerce defines BÖY as follows:

"It is an irrevocable and independent commitment of the Obligor Bank to make a payment to the Recipient Bank, to enter into a deferred payment obligation and to pay the determined amount on time, upon the compliance of the data received from the Recipient Bank in the electronic environment with the elements (conditions) specified in the Established Baseline."

As can be understood from this definition, the system proceeds entirely through digital media. There is no physical document submission to the banks. At the beginning of the transaction, the contract terms between the parties are transmitted to the bank and a data bank is created with the information / data contained in these terms. After the exporter ships the goods, it sends the originals of the commercial documents directly to the importer and transmits a copy to its bank (beneficiary bank). The beneficiary bank enters the information in the documents into the data bank created at the beginning of the transaction and the system compares the existing data with the newly entered data. If the data matches, the liable bank becomes liable to make the payment without receiving any confirmation, instruction, etc. from the importer.

If the data does not match, the buyer and seller are notified by the system, if the buyer accepts the differences in the data, the liable bank makes the payment to the exporter, if the importer does not accept the differences, the exporter makes the necessary corrections and ensures that it is included in the system again.

Roughly speaking, the system operation is this simple and practical. Since there is no physical document traffic, reserves and the fees that come with it, repetitions in obtaining documents and correcting errors, and therefore time losses are eliminated.

Finally, I would like to share with you the differences between BÖY and Letter of Credit methods.

Letter of Credit: Letter of Credit,       

Documentary Credit

a Transactions are made on physical documents

a Transactions are not very fast

a Financing opportunities are not very wide

a There are heavy ICC rules such as UCP and ISBP

a Technically complex and complicated

a Physical documents can be lost

a Physical documents are examined according to the terms of the letter of credit and ICC rules, if they are not suitable, a reserve is placed

a The person examining the documents uses his/her own judgment, subjectivity may be involved.

a Starts after opening

a Compliance checks are not easy, there are many details and they can be overlooked,

a Operation risk is high, those examining the documents may overlook reserve issues

a Operation risk is high, those examining the documents may overlook reserve issues

Bank Payment Obligation: BPO- Bank Payment Obligation

a Transactions are made on Data instead of physical documents

a Transactions are made very fast

a Financing Opportunities are easy and abundant

a There is a plain and simple ICC rule like URBPO

a Its technique is simple, Presentation + TMA (Electronic matching) + Reports

a There is no risk of loss specific to physical documents

a There are no reserve issues specific to physical documents

a There is no subjectivity in document review, the machine automatically matches the data

a It can be started when needed. First Structured Data Line then BPO

a Compliance checks are easier and more objective, there are not many details, there are few data elements

a Compliance checks are easier and more objective, there are not many details, there are few data elements

a Operation cost is low