In 2011, cross-border trade reached a value of around US$18.2trillion. Most of this activity—80 to 90 percent—was settled onopen account terms, meaning that the buyer received the shipmentbefore paying the seller. Open account trade has clear benefits forbuyers of goods, but it puts sellers at some risk that the buyermight not pay. This can be especially troublesome when a companyfirst begins selling to a new buyer in an unfamiliar region of theworld. The traditional method for mitigating counterparty risk insuch a situation is the letter of credit (L/C), a paper documentissued by a bank that assures payment once the bank receivesdocumentation that the shipment has fully met the contractterms.

Now companies have access to a new instrument. The bank paymentobligation (BPO) functions like a traditional letter of creditinstrument that supports a commercial open account trade payment.It transfers buyer risk to an obligor bank in the same way that anL/C does, but it does so much more efficiently because fulfillmentof a BPO involves the digital exchange and matching of data in ISO20022 XML format.

So far, around 50 banks have signed up to support BPOs, andthose banks cover approximately 75 percent of the trade flows thatpass through the global banking system. That number should continueto climb. In April, the International Chamber of Commerce (ICC)approved the Uniform Rules for Bank Payment Obligations (URBPO),the bank-to-bank rules governing use of the new instrument; therules went into effect at the beginning of July.