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Bank Payment Obligation is beginning to prove its worth

The problem with the BPO (Bank Payment Obligation) is that many refer to it as the LC-Lite product. However, since the adoption of the universal rules for BPOs (URBPO), the BPO is becoming more accepted and the opportunities from BPO are starting to be understood, and the product is beginning to prove its worth.

The Trade Services Utility (TSU) enables banks and clients to exchange and match trade information electronically. The Bank Payment Obligation (BPO) can be viewed as an electronic letter of credit, which provides an irrevocable undertaking that payment will be made on a specific date after the successful matching of data according to an industry-wide set of International Chamber of Commerce (ICC) rules.

Vale and MSM deal
A good example of how effective the BPO can be is the Bank of Tokyo-Mitsubishi (BTMU) arrangement of a BPO settlement between Vale International S.A. (Vale) and MSM (Thailand) Co., Ltd. (MSMT) . BTMU was the first bank in the world (July 2013) to provide non-recourse discounting export finance based on BPO. The key feature in this arrangement is that Vale can now sell off its receivables fast. BTMU is actually forfaiting on the TSU/BPO: upon the seller’s request, the bank purchases an export receivable (open account) with BPO at a discount with no recourse to the seller.

The corporate treasurer magazine reports that “Vale were able to shorten its sales outstanding (DSO) by 10 days, down to 15-20 days.” and that “with the programme with BTMU, Vale forecasts a financial gain of $37million” and “the financing programme frees up $600million in working capital.”

The corporates in the deal commented:

  • "Given the distance between Brazil and Asia, it typically takes around ten days for the original documents to reach the bank issuing the letter of credit," says Jose Carlos Guedes, Vale's Export Invoicing Manager. "With the BPO, the release of payment is no longer tied to the presentation of original documents. BTMU's expertise will enable us to make trade processing more efficient."
  • Suthee Chunpipat, Purchasing Manager of MSMT, adds: "MSMT needed a flexible materials ordering process, and Vale has wanted faster payment and less paper. Thanks to the leading position of BTMU on BPO, we were able to strengthen our relationship with Vale to our mutual advantage."

BTMU comment:

" TSU/BPO is one of BTMU's core products. Our transaction banking technologies support multinational clients with capital management and operational efficiency, focusing on trade finance and cash management," says Yumesaku Ishigaki, BTMU Global Head of Transaction Banking. "This deal will help to accelerate the global financial supply chain with operational streamlining, safety, and early fund collection and cost reduction."

There is no doubt that the combination of the TSU and the BPO enhances the ability of banks to mitigate the risk associated with international trade. This could be model for many more applications of BPOs.

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