The bank payment obligation and traditional payment methods ininternational trade

1.Traditionalpaymentmethodsininternational trade:There are five traditional payment methods in international trade:1.1 Cash in advance:● An exporter can avoid credit risk using cash-in-a

VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITYUNIVERSITY OF ECONOMICS AND LAW

FACULTY OF FINANCE AND BANKING

PRESENTATION ASSIGNMENT:

“The bank payment obligation and traditional payment methods ininternational trade”.

Course name: COMMERCIAL BANKLecturer: NGUYEN THI HAI HANG

Group AGRIBANK

Full NameStudent ID

Trịnh Thụy Ái TrâmK204041282 Nguyễn Hồng NgânK204041272 Lý Như BìnhK204041262

Ho Chi Minh City, September 02 2022 th

2.1 What is Bank Payment Obligation (BPO) 6 2.2 Example of how a BPO transaction could work 7

3 The Objectives of Bank Payment Obligation (BPO)74 Benefits and Drawbacks of Bank Payment Obligation (BPO)8

1.Traditionalpaymentmethodsininternational trade:

There are five traditional payment methods in international trade:

1.1 Cash in advance:

● An exporter can avoid credit risk using cash-in-advance payment arrangements because money is received before ownership of the products is changed.

● The most popular methods for exporters to receive cash in advance are wire transfers and credit cards.

● The least appealing alternative for the buyer is to demand payment in advance because it results in poor cash flow.

● Foreign purchasers worry that the items might not be delivered if payment is made in advance.

⇒ Exporters that insist on using this type of payment as their exclusive means of conducting business risk losing out to rivals who o昀昀er more enticing terms of recourse for items that are damaged

Seller Payment is made before goods are received.

Not a benefit for competition.

1.2 Letter of credit:

● An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents

● LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank

● An LC also protects the buyer since no payment obligation arises until the goods have been shipped as promised

⇒ Letters of credit (LCs) are one of the most secure instruments available to

exchange rates may increase the price.

Seller - Low chance of default because the

● In a documentary collection (D/C), the exporter gives control of the payment collection for a sale to its bank (the remitting bank), which then gives the buyer's bank (the collecting bank) instructions to transfer the necessary documents to the buyer for payment.

● In return for those documents, money is collected from the importer and sent through the banks participating in the collection to the exporter.

● When utilizing a D/C, the importer must pay the face value of the draft either immediately (document against payment) or on a specific date (document

● The collection letter contains instructions that list the paperwork needed to transfer ownership of the goods Although banks do serve as intermediaries for their clients, D/Cs provide no means of verification and just a few options in the event of non-payment.

Buyer - Cheaper than letters of credit method - Payment is only made after the delivery of the items.

Before the products may be inspected, payment is made; it is up to the seller to ship the goods as promised.

Seller Owns the items until the

● When products are sent and delivered before payment is due, which in international sales is often in 30, 60, or 90 days, the transaction is referred to as a "open account transaction."

● This is undoubtedly one of the most cost- and cash-efficient solutions for the importer, but it also carries one of the highest levels of risk for the exporter.

● Since the extension of credit by the seller to the buyer is more frequent abroad, foreign buyers frequently demand exporters for open account conditions due to the fierce competition in export markets.

● As a result, exporters who are hesitant to issue loans risk losing a sale to rivals By utilizing one or more of the suitable trade finance approaches discussed later in this Guide, exporters can provide open account terms that are competitive while significantly reducing the risk of non-payment.

● The exporter can use export credit insurance to seek additional protection when providing open account terms.

Buyer Cash flow is improved since payment is deferred until after goods are received.

Seller Can improve sales because this payment method benefits the customer.

● Consignment is a type of open account used in international trade, however payment to the exporter is not made until the products have been sold by the foreign distributor to the final consumer.

● An international consignment transaction is based on a legal agreement in which the exporter keeps ownership of the products until they are sold and the foreign distributor receives, handles, and sells them on behalf of the exporter.

● Exporting products on consignment is obviously very dangerous because the exporter is not guaranteed to receive payment and because the commodities are in the hands of an independent distributor or agency in a foreign country.

● Consignment increases exporters' competitiveness since items are more readily available and delivered more quickly Exporters can cut their direct inventory management and storage costs by selling on consignment.

Buyer Only when the products have been received and sold is payment made.

Relies on the seller shipping the products in good faith.

Seller Can lower the price of maintaining and storing merchandise abroad.

Delays payment and increases the potential of not receiving payment.

2.Introduction of BPO:

International trade presents a range of risk, which relates to the timing of payments between the seller and buyer For exporters, any sale is a gift until payment is received For importers, any payment is a donation until the goods are received

In response to the disadvantages of the existing payment methods, SWIFT and the International Chamber of Commerce (ICC) have established a new form of payment, called the Bank Payment Obligations (BPO) On April 17th, the ICC Banking Commission approved the URBPO contractual rules, which was brought into effect from July 1st 2013.

2.1 What is Bank Payment Obligation (BPO)

Bank Payment Obligation is a completely new payment system that was created to compensate for the shortcomings of today's payment methods It is a solution to the problems encountered by companies that use goods payment and mutual payment methods in international trade This is an irrevocable payment undertaking (IPU), which is a promise by the buyer to pay the financier the amount owed to the seller, given by one bank to another bank that payment will be made on a specified date following successful electronic matching of data generated by SWIFT's Trade Services Utility or any equivalent Transaction Matching Application, based on ICC's Uniform Rules for BPO The payment will be made on a specified date following the completion of a specified event.

BPO is essentially an alternative payment instrument for international trade settlement with automated processing and reduced risk (paying to the seller) As a result, it benefits the receiver by lowering the risk of not paying both the buyer and the seller to the bank, lowering costs, and speeding up the operation The widespread use of Bank Payment Obligations will lower costs and reduce operational errors.

BPO is fundamentally different from traditional trade finance instruments The Irrevocable Payment Undertaking (IPU) is between the banks and their corporate clients in the case of traditional trade finance instruments such as Letters of Credit (LC), whereas a BPO is an IPU between the buyer's bank and the seller's bank A BPO occurs between two banks: the obligor and the recipient.

2.2 Example of how a BPO transaction could work

● When a buyer and seller sign a contract, they will agree on the BPO as the payment term The buyer would send the seller a Purchase Order (PO).

● The buyer would provide their bank with information from the purchase order and payment terms (buyers bank).

● The seller would confirm that the information from the PO is correct and forward it to their recipient bank (sellers bank) If the documents match (and the banks agree), the seller can ship the goods or services as agreed in the initial sales contract.

● The seller submits the data to its bank, which is then verified by the buyer Wherever possible, data mismatches are resolved.

● If both parties agree, the seller's bank is notified, and the seller sends the trade documents to the buyer directly These documents will be used by the buyer to clear goods through customs.

● The buyer's bank debits the proceeds from the buyer's account on the contract's due date.

3.The Objectives of Bank Payment Obligation(BPO)

This new payment mechanism offers more advantages than ever before It does this by first offering a solution for electronic payment

other words, BPO has combined the two approaches It also streamlines trading operations by saving time and paper Therefore, it is feasible to lower stationery costs Third, BPO is intended to target small and medium-sized firms (SME), which make up around 80% of all corporate formations in both developed and undeveloped nations Fourthly, BPO provides uniform product definitions for supply chain financing Additionally, BPO connects banks chosen and represented by the manufacturer, supplier, intermediary, and final purchaser to lower Know Your Customers (KYC) expenses

Know Your Customer (KYC) is a component of the legally mandated due diligence that financial institutions must perform to confirm the identification of clients and keep track of their activities It mandates that financial institutions verify each customer's or business's beneficial owner's personal information, including their names, dates of birth, and residences In addition, it offers end-to-end automation, which cuts down on processing times and costs by doing away with proprietary formats.)

4.Benefits and Drawbacks of Bank PaymentObligation (BPO)

4.1 Benefits:

For Buyer (Importers)For Seller (Exporters)For Bank

As a payment method the bank payment obligation is more secure than the advance payment, because the BPO is a conditional payment method Under the BPO transactions, banks send payment amounts to the exporters only after the shipment of the goods, not before

Payment is provided by a bank guarantee.

a secure payment method in international trade BPO can be more secure than the letter of credit, because the documents will not be checked by human beings, by which process eliminating alleged discrepancy risks, dispute and delay Automated data matching reduces complexity and increases reliability

Low risk business

Issuing a bank payment obligation may prove that the importer is a financially secure and strong company.

Exporters could get their money very fast from the banks under the BPO

automatic system instantly Facilitates financing for the

buyer, eg: extended payables

Access to flexible pre-shipment or

post-shipment finance

Prudent use of capital

The buyer can negotiate better terms and conditions By issuing a BPO, the buyer demonstrates the ability to pay and can negotiate improved terms in the future

Exporters have more control over the goods until they have been paid by the banks under the BPO transactions as shipment documents will be held by the exporters during the BPO process Exporters do not send paper documents to the banks Once exporters receive their money from the banks, they dispatch the documents to the importers separately The BPO protects the buyer

since the bank only pays when the seller complies with the specific terms and conditions and produces the data required, moreover, against non-shipments, late shipments and inferior quality of goods shipments The buyer can confirm that the goods are shipped on or before the due date to the required specification

Protect the seller: ● Once the bank

● The buyer cannot refuse to pay due to

● BPO is a new payment mechanism that is challenging to outperform existing ways ● BPO is quite independent in terms of documents and goods Documents are

transferred directly from the exporter to the importer without a bank check, so there may be errors Besides, the bank does not guarantee the quality of the delivered goods Due to delivery before documents, there may be a risk of late arrival of documents, preventing importers from receiving goods.

● Cybersecurity and individual’s privacy is also concerned.

5.BPO in the world and in Vietnam:

5.1 In the world:

The whole process is automated, the data matching and checking of electronic documents are done by machine quickly and accurately, saving transaction processing time compared to the transaction by paper hand

Although being created in 2010, Standard Chartered Bank was the first bank to successfully conduct a BPO transaction in 2012 According to a report by SWIFT, there are currently 27 major financial groups in the world that have deployed the BPO payment method (Dao Minh Tuan, 2019) However, up to now, BPO with this electronic data matching technology does not seem to be interested as much as it was when it was born.

5.2 In Vietnam

Right from the time of implementing international payment operations, Vietnamese commercial banks have always identified technology as the key to open the door of international payment operations The application of new technologies such as data matching technology in BPO method in international transaction activities at Vietnamese banks is still modest In fact, until now, nearly 10 years since the introduction of the BPO payment method with the electronic database exchange feature, no Vietnamese commercial bank has yet implemented BPO.

Reasons for the poor development of BPO in Vietnam:

● Vietnam's legislative framework and information technology infrastructure have not established the circumstances for banks to utilize these new technologies to international transactions.

● Banks are afraid that BPO may lower demand for letter of credit products, despite the