A leading banker has told a specialist Asian financial sector magazine that an alternative instrument for trade settlement is set to sit alongside traditional modes of settling transactions, including letters of credit (L/C) and open account.

Managing director and global head of corporate cash and trade, transaction banking, at Standard Chartered Bank, Ashutosh Kumar, told The Asset that the bank payment obligation (BPO) will become increasingly used.

Big change

Kumar argues that the BPO, which he describes as representing the shift from the physical flow of documents to an electronic flow of data, signifies a big change for banks and traders who have historically dealt in paper.

A BPO is an irrevocable undertaking given by one bank to another one that payment will be made on a specified date after a successful electronic matching of data according to a defined set of rules.

Benefits

Kumar reckons that the BPO offers benefits to both banks and corporates looking for an alternative to open account terms.

For corporate suppliers he says it provides payment assurance whereas, in an open account scenario, the supplier is wholly reliant on the assurance of the buyer.

L/C demand

Kumar thinks that the BPO resides somewhere in between an L/C and open account, and that the properties and characteristics of the L/C will still be in demand.

He is not suggesting that the BPO is going to replace the L/C in the future.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.