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Bank Payment Obligation (BPO) articles published by GTNews


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A compilation of Bank Payment Obligation (BPO) articles published by GTNews in 2012. …

A compilation of Bank Payment Obligation (BPO) articles published by GTNews in 2012.

• Bank Payment Obligations: The Way Forward - Tan Kah Chye, Barclays Corporate
• Improving Trade Finance Efficiency with Bank Payment Obligation - Prathima Rajan, Celent
• Accelerating Global Trade Finance - André Casterman, SWIFT
• Mitigating Risk and Maximising Opportunity for International Trade - Pravin Advani, JP Morgan
• The ‘Trade Tilt’ Hypothesis - Nigel Taylor, GXS - David Hennah, SWIFT
• BPO and ISO 20022: A Technology Perspective - Olivier Berthier, Misys.

Published in: Business, Economy & Finance

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  • 1. BPO press coverageExtracts from GTNews.comBank Payment Obligations: the terms of the BPO is all based onThe Way Forward electronic data. The efficiency gain is at least hours, but potentially days, forTan Kah Chye, Barclays Corporate participants in the transaction.19 Jan 2012It is important that all banks involved Changes in Governancein trade finance, irrespective of size or A landmark agreement, signed duringgeographical coverage, work together to 2011 between the International Chamberfacilitate the introduction and successful of Commerce (ICC) Banking Commissionimplementation of the bank payment and SWIFT, has paved the way for theobligation (BPO), leveraging the initial ICC to assume responsibility for the rulesgroundwork of SWIFT and the work governing BPO. The importance of thisnow underway within the International change cannot be underestimated as itChamber of Commerce (ICC). will mean that the BPO will benefit fromThe trade finance industry has come the extensive experience the ICC has inunder criticism at times for using out- managing successful industry rules anddated and cumbersome systems to also provides the BPO with another criticalfacilitate trade transactions. Therefore the component: an industry recognisedvarious industry initiatives to modernise dispute resolution capability, which willand simplify trade coming on-stream build on the foundations that have alreadyin 2012 should certainly be welcomed been laid down in the SWIFT-led banks and corporates alike. One Under the agreement the ICC willsuch initiative is the introduction of bank develop industry standard rules for thepayment obligations (BPOs), which BPO. These rules will apply to any BPOare set to foster significant efficiency transaction and will form the bedrock ofimprovements in trade in the coming year. the future standing of the BPO, potentiallyAs a tool, the BPO is very similar to the elevating the BPO over time to a positiondefinition of a documentary credit in that it similar to the letter of credit (L/C).is an irrevocable undertaking given by one The ICC rules will be platform agnostic,bank to another bank that payment will be meaning that they will apply to a BPOmade on a specified date after successful transaction irrespective of the platformmatching of data. The key difference that has been used to create andwith the BPO is that it is electronic and transact the BPO, resulting in the obligorinvolves matching data fields as opposed and recipient banks under a BPO noto documents. longer being limited to using the SWIFTThis is a major leap in efficiency in Trade Services Utility (TSU) finance as it removes the physical This should encourage other softwarepresentation of shipping documents companies and vendors, many of whomto a bank as would be the case with a are already well advanced in offering BPOdocumentary credit. Instead notification functionality, to enter the market andof the BPO obligation and the decision provide alternative competition.on whether the seller has complied with
  • 2. Figure 1 shows the key stages of a BPO Another major benefit of electronic trade in their own right may decide to developtransaction, which can be summarised as: finance programmes like the BPO is BPO solutions based on the benefits that the massive improvement it can have they believe can be achieved, but a robust— Buyer and seller exchange contracts. cash flow forecasting. The presence corporate demand is required for the BPO— uyer instructs their bank (obligor B of a committed payment due date is to enter the mainstream trade finance bank) to establish the BPO containing often worth the cost of participation, world. the data that the seller needs to particularly if the BPO is used in longer provide to obtain payment. standing trading relationships where bank Conclusion— bligor bank agrees to support the O involvement can be requested later in the These are exciting times for trade finance transaction and issues the BPO to the process (resulting in lower bank line usage banks and to realise the full benefits that recipient bank. and bank fees). the BPO can offer both banks and their— he recipient bank notifies the BPO to T Overall, there is significant corporate customers it is important that all banks the seller. interest in BPOs, and when combined involved in trade finance, irrespective with other initiatives such as corporate of size or geographical coverage, work— fter shipment of goods the seller A SWIFT membership, BPO’s can provide a together to facilitate the introduction and provides the data required under the powerful platform for revolutionising trade. successful implementation of the BPO, BPO, which flows through the recipient leveraging the initial groundwork of SWIFT and obligor banks where it is matched and the work now underway within the to the original BPO requirements. BPO Progress to Date ICC. When reviewed in terms of actual transactions and participation, progress has been limited. SWIFT says that Improving Trade Finance there currently 19 banks committed to Efficiency with Bank Payment participating in promoting the BPO and a slightly smaller number with the capability Obligation to enter into BPO transactions. Some are Prathima Rajan, Celent - 20 Jan 2012 more active than others. Likewise, the The newly developed bank payment number of live transactions entered into obligation (BPO) will allow corporates to so far has been small with the majority conduct more business, as their risk will of the transactions conducted within the be better managed and finance will be Asian markets and most of those within more readily available to the supply chain. the Chinese domestic market. The banking industry has always been Notwithstanding, this limited progress among the pioneers of computerisation interest continues to grow with a handful and networking, which in turn have driven of large corporations and a growing the adoption of worldwide standards. number of banks actively pursuing the use This is particularly true in the case of the BPO within their supply chain. of international trade finance, where financing often goes beyond boundariesBenefits of the BPO Where to from Here? making standardisation inevitable. InCorporates often quote that there The future of the BPO has been boosted trade finance, open account and letter ofare many benefits with the BPO over significantly with transfer of governance credit (L/C) are the two dominant producttraditional documentary credits. Benefits to the ICC. Of course, this development categories.are: in its own right will not embed the use of Despite the financial crisis and the the BPO across the industry. BPO can— Faster payment to the seller. significant rise of counterparty risk only be as successful as the L/C if all concerns that have emerged, open— eduction in utilisation of banking lines R participants in international trade commit account is still a dominant means of and related fees due to later issuance to trying it and finding a place for it in their conducting international trade. Open of the BPO. businesses. account is a high risk option for trading— otential for different approaches P In the early stages, education and partners, particularly exporters, and to the provision of confirmations of communication of the benefits that the require a significant level of trust between obligor bank risks, particularly where BPO can offer is also a key cornerstone of the two counterparties. In addition, in the exporter/seller has some internal its future success. This education has to industries where payment cycles are appetite on the obligor bank or where go across all the communities who may long, open account transactions curtail multiple banks are needed to cover a benefit from the BPO including buyers, cash flow and increase cost for the single transaction. sellers and banks. Ultimately, like any exporters. Due to high competition in new development or initiative, the relative export markets, foreign buyers often press— otential creation of new ‘events’ on P success will depend on how forcefully exporters for open account terms, and which to base financing, particularly customers, in this case corporates, this will strain the exporter. pre-shipment financing that can assist demand that their banks are able to small and medium-size enterprise Although a rebound of L/C usage would provide them with BPO solutions. Banks (SME) exporters. have been expected during the past few
  • 3. years due to increased concern aboutcounterparty risk, the reality has beendifferent. In some specific industries andcountries L/C usage has seen growth, butfor a majority of corporations the ‘cashtrap’ nature of L/Cs has counterbalancedtheir concerns about the solvency oftheir trading partners. They were moreconcerned about cash availability toweather the difficult economic conditions.The revocable L/C is less popular ascompared to the irrevocable L/Cs thatadds the endorsement of a seller’s bank(the accepting bank) to that of the buyer’sbank (the issuing bank). This arrangementprovides a level of protection to the sellerbecause the L/C cannot be cancelledunilaterally by the buyer, and alsoboth banks involved in the transactionguarantee its payment on maturity. Figure 1: L/C Versus BPO Versus Open AccountWhile the drawbacks in both theseproducts resulted in high risk, increased bank-to-bank space. availed against the risk of the buyer.costs and concerns about the solvency The BPO is more convenient than L/Cof their trading partners, an alternative in the sense that the BPO’s electronicmeans of settlement in international trade At present, a majority of the banks presentation of data eliminates thewas much needed. worldwide are yet to realise the physical documents in the process, and is importance and advantage of such thus more cost effective than L/C as it is transaction. The existing banks using BPOA Recent Development linked to the automatic matching of data are in the learning curve and are waitingIn the year 2009, SWIFT’s Trade Service through the TSU matching application. It to see how effective this alternativeUtility (TSU), a matching and workflow is also more flexible than L/C as it allows instrument can prove to be in the longengine for open account transaction data, changes to be made anytime during the run. Banks will have ample opportunity tostarted to offer bank payment obligation lifecycle of a transaction for any amount integrate the BPO into their existing trade(BPO) as an irrevocable undertaking that can be different from the total value of services portfolio in the years to come.given by one bank to another bank that the goods consigned.payment will be made on a specified date Likewise, it is more secure than openafter a specified event has taken place. Conclusion account in terms of mitigating risk andThis ‘specified event’ is evidenced by a The BPO will allow corporates to conduct providing assurance of payment to the‘match’ report that has been generated more business as their risk will be better exporter. It is also more adaptable thanby SWIFT’s TSU. managed and finance will be more readily open account, as it acts as collateral for available to the supply chain. A keyThe BPO was designed by banks to financing. element, however, is the level of comfortprovide complementary services to The flavour of BPO, apart from data that counterparties feel with the legalcorporates who are either trading on open matching exercise promised by TSU, is underpinnings of the new instrument.account already or planning to move from the conditional undertaking by the issuingL/C to open account. It allows corporates Sellers see cash flow optimisation bank in favour of the receiving make use of related banking services and improved liquidity forecast due to In the pre-shipment finance BPO actssuch as financing, payments, collections releasing of cash trapped in the supply the same way as an L/C. There is still aand account reconciliation. chain through automated data matching. degree of performance risk; however this With improved payment cycles sellers canThe combination of international trade is heavily mitigated, as the data has been reduce processing effort, cost and risk.rules with that of technology ensures two matched at the purchase order stage by Likewise, buyers benefit from extendedkey elements: both parties and independently verified payment terms that further enable the— PO ensures the buyer will make the B under TSU. Thus, the success rate of possibility to negotiate improved terms payment. such transactions is high from banks’ with the seller. Improved cash flow, perspective.— PO acts as collateral for financing. B increased competitiveness and optional At post-shipment stage, financing is ability to trigger payment are some of theThe BPO brings the best of both the L/C made easy as the data match between added advantages to the buyer.and open account. In L/C banks will play the invoice and the purchase order hasthe role of intermediaries, and in open Keeping all the above analysis in mind, already been made. The performance riskaccount the paper-based exchange of Celent expects BPO to become an at this stage is eliminated and thereforedocuments remains within the corporate- effective alternative instrument that brings post-shipment finance can be readilyto-corporate space without going into the the best of both L/Cs and open account
  • 4. to the international trade finance scenarioin the years to come. Figure 1: ICC BPO Rules and SWIFT’s TSU Accelerating Global Trade (UCP) were first introduced in 1933 to Finance alleviate the confusion caused by individual countries’ promoting their own national André Casterman, SWIFT - 23 Jan 2012 rules on letter of credit practice. The The partnership between the International objective was to create a set of contractual Chamber of Commerce (ICC) and rules that would establish uniformity. The SWIFT will revolutionise global trade ICC rules on documentary credits - UCP finance practices by leveraging 600 - are the most successful privately electronic transaction data available from drafted rules for trade ever developed. dematerialised business-to-business (B2B) SWIFT is a member-owned co-operative processes and by establishing paperless through which the financial world inter-bank practices. conducts its business operations. SWIFT In an opinion piece, entitled “Collaborative provides a worldwide communications Supply Chain Finance: A Few More Steps platform, products and services that allow to Go”, published in SWIFT’s Dialogue customers to connect and exchange magazine on October 2010, I advocated financial information securely and reliably. that the time had come for “the ICC SWIFT also acts as a catalyst to bring [International Chamber of Commerce] the financial community together to to embrace the BPO [bank payment collaboratively shape market practices, obligation] rules and help the industry define standards, such as the ISO 20022 establish best practices in supply chain financial messaging standards, and finance”. I also suggested that a set of develop global technology solutions, such ICC rules governing collaborative supply as SWIFTNet messaging and transaction chain finance will be “a key milestone” for matching services. the trade banks, as such rules will offer a The recently signed partnership is now legally binding, valid and enforceable risk well underway with an ambitious timetable mitigation instrument for financing open aiming to establish the new BPO rules by account transactions. 2Q13. The goal of both industry-owned One year on, at Sibos 2011 in Toronto, organisations is to enable banks to extend the ICC and SWIFT confirmed their joint the benefits of the letter of credit (L/C) ambition and action plan to provide the to the open account world by re-using global trade industry with new rules and electronic transaction data available from tools in support of the development of their corporate customers. Using the BPO, international trade in the 21st century. sellers will benefit from timely payments whereas buyers will be able to support The ICC was established in 1919 to pre-shipment finance of their strategic facilitate the flow of international trade. It suppliers without conceding advance was in that spirit that the Uniform Customs payments. and Practice for Documentary Credits
  • 5. Opportunity for the Trade FinanceIndustryThe physical supply chain has significantlyincreased efficiency through the use ofnew technologies and business models.By doing so, trading counterpartieshave accelerated their industry-specificprocesses, reduced handling costsand inventories, increased visibility andimproved forecasting and planning.Some industries have succeeded toshorten order and delivery processesfrom an average 20 plus days to same-day execution. However, on the bankingside, most of the supporting globaltrade finance processes have not beenoptimised sufficiently due to paper-basedpractices slowing down key processes,such as discrepancies handling.The time has now come for the trade Figure 2: BPO Brings Benefits of L/C to Open Account Marketfinance industry to link the delivery offinancial services to what is actuallyhappening in the physical supply chain ina more efficient way: i.e. using electronictransaction data. The emergence oftrading hubs (e.g. South Korea, Taiwanand Hong Kong) and business-to-business(B2B) e-commerce/e-invoicing platforms(e.g. Ariba, GXS, PayModeX, Peppol andTradeshift) has significantly increasedthe dematerialisation of B2B processes,such as sourcing, negotiation, quotation,ordering, shipping, invoicing, etc.Such new electronic B2B processes havecreated a new paperless world whereefficiency gains and cost reduction areachieved to the benefits of both buyersand sellers. Buyers and sellers now expecttheir banking partners to follow suit. Figure 3: BPO Extends SCF Services to Higher Value Risk and Financing ServicesICC BPO Leverages ElectronicTransaction DataThe dematerialised B2B processes offer global trade finance processes, as well associated open account documentation,banks the opportunity to extend today’s as increase visibility on transaction details such as purchase orders, commercialpaper-based trade finance services to new (e.g. line items) in order to better mitigate invoices, advanced shipment notices,services based on electronic transaction risk and finance transactions. bills of lading, etc, into a shared matchingdata. application that then generates a ‘match’ report to show that the description ofThe co-operation between the ICC and ICC BPO: A Modern Instrument goods shipped matches precisely theSWIFT is delivering a complete package There has never been an equivalent description of goods ordered.made of new rules (the BPO), as well as instrument to enable an exporter to tradenew messaging standards (ISO 20022 on open account terms with the same The BPO places a legal obligation on thestandards) and a new SWIFT cloud degree of confidence that a payment will issuing bank to pay the recipient bankapplication for supply chain finance (Trade be executed in accordance with the terms subject to the successful matching ofServices Utility (TSU)). The new rules of an L/C. The BPO is an irrevocable compliant data. In short, the BPO deliversand messaging standards enable banks undertaking given by one bank to another business benefits and security equivalentto leverage electronic transaction data bank that payment will be made on a to those previously obtained through aavailable from the B2B world. Using data specified date, after a specified event commercial L/C, while at the same timerepresenting the purchase order, invoice, has taken place. This ‘specified event’ eliminating the drawbacks of manualcertificates and transport documents is evidenced by feeding the relevant processing typically associated withoffers banks the ability to accelerate data elements taken from a range of traditional trade finance.
  • 6. Certainty of payment not only facilitates Conclusion — Commercial Bank of Dubaiaccess to flexible forms of financing Both the ICC and SWIFT believe that — Commerzbankbut also supports the more efficient by working together and leveragingmanagement of working capital, enabling their respective positions in the trade — Deutsche Bankthe release of substantial volumes of cash finance community, the BPO will have — First National Bankwhich might otherwise be trapped in the an important role to play in supportingsupply chain. the development of international trade — Hua Nan Bank in the 21st century by addressing cost — JP MorganWhereas banks have attempted in part pressures in the face of increasedto plug the gap, for example through — Kasikornbank automation and changes in the regulatorythe issuance of conditional payment environment. By using electronic — Korea Exchange Bankguarantees or standby L/Cs, the transaction data, the banking industry — National Bank of GreeceBPO acts as an electronic inter-bank is preparing itself to better respondconditional promise to pay offering a — Standard Bank of South Africa to the desire of their corporate clientscomprehensive and cost-effective risk to accelerate financial processes and — Standard Chartered Bankmitigation and financing tool to all trading optimise working capital.counterparties. The time has now come for banks to Mitigating Risk and Maximising prepare for this innovation and startICC BPO Extends the Scope of SCF Opportunity for International extending their supply chain financeUsing Electronic Data Trade services from invoice-based processingAlthough data-driven supply chain finance services (e.g. e-invoicing, factoring and Pravin Advani, JP Morgan - 24 Jan 2012(SCF) solutions are widely available reverse factoring) to purchase order-from large banks and from some third- Bank payment obligation (BPO), which based services, such as paymentparty vendors, most are limited to the is available through SWIFT’s centralised assurance, risk mitigation, pre-shipmentlast mile of the transaction - i.e. using automated data matching engine - Trade and post-shipment finance. Banksthe invoice approved by the buyer Services Utility (TSU), is a new financial will be able to better respond to keyto finance the supplier’s receivables. instrument offering the opportunity to issues for sellers, such as delayedAlthough addressing suppliers’ working mitigate risks, while still capitalising on the payments, whether dealing on L/Cs orcapital issues, this type of offering only advantage of open account trade. open accounts. They will also be able torepresents a small - yet relevant - step speed up processing and enable buyers Until the financial crisis of 2008, globalwhen considering the real potential to optimise credit lines and to reduce trade was being conducted increasinglyof supply chain finance across the full handling costs and inventories. Finally, on an open account basis, with SWIFTtransaction lifecycle. buyers will be able to avoid supplier estimating the figure to be around 80-With the BPO, banks are involved as defaults by facilitating pre-shipment 85%. The rationales for open accountfrom the very early stage of the trade finance without using their own capital. trade are clear: it is convenient and helpstransaction, i.e. the raising of the lower cost. During and subsequent Some 19 banks have understood thepurchase order, and at every stage of to the crisis, however, treasurers and opportunity offered by the BPO and lastthe transaction lifecycle. This is a key finance managers increasingly recognised year confirmed their decision to adoptdifference for banks that wish to provide, that despite its convenience, there are the BPO. As corporates will discover thefor example, payment risk mitigation and/ challenges associated with the open benefits of the BPO in 2012/2013, theyor pre-shipment finance in a secure, account model, both for buyers and will be expecting their banking partnersefficient and collaborative way. Such sellers, particularly relating to liquidity to react quickly. Waiting for the ICCservices represent much higher value for and risk. There is now the opportunity to publication of 2Q13 and missing thecorporates. mitigate these risks while still capitalising opportunity to get ready in 2012 is, inBoth large and mid-caps sellers will enjoy my view, a mistake banks ought to avoid on the advantages of open account trade.timely payments when dealing on open making. The answer comes in the form of a newaccount terms, since payment will be financial instrument called bank paymentdone by their own bank independently of obligation (BPO), which is available List of Banks Adopting the BPO through SWIFT’s centralised automatedeffective payment by the buyers. When (January 2012) data matching engine - Trade Servicesneeded, buyers with strong credit ratings — Banco do Brasil Utility (TSU).will be able to facilitate pre-shipmentfinance to support their critical suppliers — Bank of Chinawhile not using their own capital as it is Advantages of Conducting Trade — Bank of Communicationsoften the case today. Through Open Account — Bank of Tokyo-Mitsubishi An open account transaction means thatContrary to today’s reverse factoringservices which are driven by large buyers, — BMO Capital Markets goods are shipped and delivered to thethe BPO is offering an industry-wide multi- buyer (importer) before payment. As the — BNY Mellonbank instrument relevant to any type of relationship between trading partnerscorporate in any industry. — China Citic Bank matures, conducting trade through open — China Minsheng Bank account can offer substantial benefits
  • 7. to both the buyer and seller. First andforemost, buyers can reduce underlyingcosts associated with trade flows,specifically those relating to bank fees.Turnaround time also improves as a resultof straight-through processing (STP),which in turn facilitates cash forecastingand liquidity management for both partiesand reduces the need for external creditfacilities. Moreover, both parties are alsoable to cut down operational requirementsas a result of less trade-relateddocumentation.As enticing as it sounds, there is a varietyof challenges associated with openaccount transactions. To begin, while thebuyer stands to benefit from improvedcash flow and cost savings, the sellerfaces the risk of payment delay or default Figure 4: Trade Services Utility (TSU) Bank Payment Obligation (BPO)after the shipment of goods. As such, it Compared with L/Cs. Source: JP Morganis not easy for the buyer to convince theseller to trade on open account terms TSU, paired up with BPO, hasimmense discrepancies identified and resolvedbased on their own credit rating. In some potential in today’s operating environment promptly, accelerating the exchangeinstances, the buyer may need to provide as a risk mitigation tool offering cost of cash and goods. Finally, buyers alsoa standby letter of credit (L/C) as security, and operating efficiencies to trading do not need to provide sellers with awhich increases overall cost. Some sellers partners. This is possibly best epitomised standby L/C as the BPO can be issuedmay also require buyers to assist with in the signing of a ‘declaration of co- per purchase order or per shipment, andfinancing the trade flow as a form of risk operation’ between SWIFT and the is paid only against compliant transactionmitigation. Operationally, there could also banking commission of the International additional administrative requirements Chamber of Commerce (ICC). In effect, Likewise, sellers also reap similar benefitssuch as reconciliation of payment the declaration paves the way for the in terms of risk mitigation, greater costinformation with purchase orders. acceptance of BPO as an alternative and operating efficiencies from using the means of settlement in international trade,Likewise, the seller also faces a variety TSU-BPO solution. providing the benefits of a L/C in anof open account trade-related issues Moreover, in instances where the bank automated environment.besides those associated with risk acts for the buyer and the seller, the firmmanagement and payment. At the top While the benefits offered by a BPO and can offer further value-add services suchof the list are securing financing and a L/C are similar, there are fundamental as providing the buyer with electronicidentifying ways to remove receivables differences between the two. The key copies of documentation for morefrom its balance sheet. difference is that whereas the L/C relies accurate data matching and the seller upon the physical checking of complete with document preparation services. sets of documents, BPO uses automatedThe Case for TSU and BPO matching of selected data elements inIn response to the trend of open account accordance with the agreed baseline. Growing Interest in TSU-BPO Solutionstrade, SWIFT launched a bank-to-bankplatform called TSU through which pre- Figure 4 provides an illustration of the The TSU-BPO’s promise of risk mitigation,defined data extracted from trade-related TSU-BPO process compared with a greater cost and operating efficiency isdocumentation, namely the purchase traditional L/C arrangement. drawing traction globally over the pastorder, commercial invoice, insurance year. So far, early adopters come mainlyand transport documents, can be from the communications and energy A Differentiated Service that Benefitsautomatically exchanged and matched. sectors. Buyers and SellersEssentially, TSU is a centralised matching For buyers (importers), the TSU-BPO Looking ahead we expect to see aengine aimed at providing automated solution provides the opportunity for gradual but steady climb in take-updata matching in a timely and accurate securing more favourable payment across a wide variety of industries. Inmanner. terms capitalising on the presence of an addition, we also expect more banksIn 2009, this initiative was given a boost irrevocable payment obligation. As the to join the TSU initiative, which will helpwith the introduction of a new financial TSU process is handled, buyers do not accelerate the adoption of BPO globallyinstrument called BPO, which is an need to invest in additional technology as an alternative payment means.irrevocable undertaking by the obligor or resources to use the solution. Cost With volatile economic conditionsbank (buyer’s bank) to pay a recipient of a TSU-BPO transaction is lower than expected to persist and pressure onbank upon successful matching of agreed that of a L/C transaction. Documentation working capital management optimisationdata within TSU. is handled more efficiently, with
  • 8. to mount, the role of TSU-BPO in that, while the alliance may lack political Under open account terms, the importertrade finance is poised to gain further cohesion, there is nevertheless a clear takes on the supply risk and is obligedmomentum in 2012 and beyond. appetite between developing nations to to ‘match’ a purchase order, shipping increase trade with one another. or warehouse data to the supplier invoice. This is seen as very low risk forThe ‘Trade Tilt’ Hypothesis the importer as they can reject goods Changing DynamicsNigel Taylor, GXS - David Hennah, on inspection for various reasons, and Perhaps a subtle indicator for a comingSWIFT 24 Jan 2012 payment will only be made if a full match change in trade dynamics is the recent occurs and at conclusion of paymentMuch has been said about the potential article in The Times of India where the terms. Open account places all credit riskof the bank payment obligation (BPO) as Associated Chambers of Commerce on the exporter and bases the cost ofan electronic equivalent to documentary and Industry of India (Assocham) assert goods on the exporter’s credit rating andtrade processes and an automated that trade between China and India will their ability to acquire working capital.alternative to open account. With the increase from its existing level of US$63bnfinancial turmoil of the past few years, it to the agreed 2010 bi-lateral target of With an increasing emphasis on BRICis difficult to pinpoint exactly what impact US$100bn by 2015. With both countries domestic markets, rising cross-borderthis new instrument may eventually have established since 1984 as each other’s trade volumes between the BRICon global trade, but with an accelerated ‘most favoured trading nation’, there is economies, and perceived foreignemergence of the Brazil, Russia, India and little doubt that this objective is easily exchange (FX) risk due to reduced faithChina (BRIC) economies, the business achievable. in the US dollar and euro, the anticipatedcase for electronic cross-border trade is trade tilt will see BRIC suppliers prioritise Even though some emerging economiesincreasingly compelling. those buyers who are able to offer experienced short-term contraction improved terms of trade. But as L/As the banking and treasury communities followed by talk of ‘over-heating’, Cs continue to be associated withknow, globalisation has seen open the long-term predictions remain increasingly expensive and paper-boundaccount trade dominate cross-border optimistic. This view is endorsed by business processes, importers will fortransactions. In its 2010 report ‘Re- the 2011 predictions made first by the most part resist any demand fromThinking Trade Finance’, the International PricewaterhouseCoopers (PwC) that overseas suppliers to revert back toChamber of Commerce (ICC) generally China will eclipse the US as the largest documentary trade.acknowledged that at least 80%-85% global economy by 2030, and then byof all global trade is settled on open Standard Chartered Bank who gave their According to the ICC, the pricing ofaccount terms, with traditional trade prediction as 2020. These predictions documentary trade finance is in factproducts such as the letter of credit may be combined with those of Goldman substantially higher now than it was pre-(L/C) representing the remainder. But Sachs which suggests the BRIC countries crisis, further accentuating the probleman examination of how the dynamics of will represent 41% of the world’s market of affordability. This increase in pricingglobalisation are ‘tilting’ suggests that the capitalisation by 2030, and will become is said to reflect higher funding costs,bank payment obligation (BPO), a new four of the six largest economies by 2050. increased capital constraints and greaterelectronic alternative to the L/C and an counterparty risk. Furthermore, theenhancement to open account, will be an banking industry appears to believe that Impact of the ‘Trade Tilt’increasingly viable trade instrument. the prevailing higher fee structures are So what does the accelerated emergence justifiable, given the additional securityThe developed economies currently of the BRIC economies mean for the that L/Cs offer to trading counterparties.face multiple economic challenges developed nations? ‘Trade shift’ is anand are experiencing slow rates of over-used, over-hyped idiom and isgrowth. According to the World Trade perhaps an emboldened prediction for the New Rules and ToolsOrganisation (WTO), in 2009 global trade result of unfolding events. It is imprudent Enter the BPO as an alternative to the L/Ccontracted by approximately 12% and to underestimate the fall-out of the current and an enhancement to open GDP declined by 2.2%. In contrast, economic climate but a prospective, The BPO is an irrevocable undertakingthe Asian Development Bank (ADB) discrete suggestion is that a ‘trade tilt’ given by one bank to another bank thatestimates Asia expanded by 9.6% in 2011 is beginning to occur right now. Initially, payment will be made on a specifiedagainst a predicted 2.5% expansion in the the tilt is expected to see a marginal date, after a specified event has takenUS and further stagnation in the eurozone. return to the low-risk letter of credit. To place. This ‘specified event’ is evidenced date, many BRIC suppliers to developed by feeding the relevant data elementsWhile some experts suspect the countries were obliged to accept open taken from a range of associated opendeveloped nations of considering account terms as the de facto standard account documentation (purchaseprotectionist policies to safeguard their when doing business with their overseas orders, commercial invoices, advanceddomestic markets, the world recently saw customers. However, a combination shipment notices, bills of lading, etc) intoan increased number of trade agreements of factors is emerging now that may a shared matching application, whichsigned between Brazil, Russia, India and eventually see an accumulative rejection then generates a ‘match’ report to showChina (BRIC). These BRIC economies of open account and a consequent move that the description of goods shippedalready represent 40% of the world’s towards other trade instruments such as matches precisely the description ofpopulation and a quarter of the globe’s the BPO. goods mass. The recent BRIC summits inBrasilia and Sanya also demonstrated
  • 9. The BPO places a legal obligation on important for the market to support BPO and ISO 20022: Athe issuing bank to pay the recipient choice, so that those who favour open Technology Perspectivebank, subject to successful matching account can choose open account, and Olivier Berthier, Misys - 25 Jan 2012of compliant data. In short, the BPO those who favour L/C can choose L/C.delivers business benefits and guarantees For those looking for a hybrid solution Despite industry inertia to change,equivalent to those previously obtained which balances the best of both worlds, bank payment obligation (BPO) is anthrough a commercial L/C, while there is now another option on the menu. opportunity for a positive evolution in theeliminating the drawbacks of manual As the anticipated tilt materially alters face of an increasingly online industry.processing typically associated with trade dynamics, so we foresee that Launched at the beginning of 2010 bytraditional trade finance. Certainty of importers and exporters alike will look SWIFT, the bank payment obligationpayment not only facilitates access to alternative methods of trade finance. (BPO) provides an alternative means ofto flexible forms of financing, but also Fully electronic trade automates business settlement in international trade. SWIFT,supports the more efficient management process and data matching. Apart from together with the International Chamberof working capital, enabling the release of the obvious efficiency of removing paper of Commerce (ICC) Banking Commissionsubstantial volumes of cash which might that benefits all counterparties, there and a working group of banks andotherwise be trapped in the supply chain. are also clear pre- and post-shipment corporates, undertook an initiative to trade finance opportunities that can be establish the BPO, most recently signingWhen you consider that a supplier’s supported across the entire transaction a co-operation agreement at the Sibosorder-to-cash lifecycle can sometimes lifecycle. in September 2011, with the intention ofexceed 120 days with inherent FX risk, itis not difficult to understand an exporter’s With the BPO offering an assurance of encouraging industry-wide adoption.desire to move away from the relatively payment upon matching a confirmed BPO sets out to upgrade several currenthigh-risk open account scenario. purchase order, suppliers can potentially methods for settling international trade. leverage the BPO as collateral for pre- While letters of credit (L/Cs) have beenAndré Casterman, head of trade and shipment finance. In this scenario, credit around for years, will be for many moresupply chain, SWIFT, argues “there risk is transferred to the obligor bank, and are trusted and used globally, thehas been never been an equivalent thus mitigating counterparty risk. The time and paperwork required means thatinstrument to enable an exporter to supplier can also issue a BPO in their local there is certainly space for modernisationtrade on open account with the same currency, mitigating any perceived FX risk of the system, particularly when it comesdegree of confidence that payment will be from the once stable currencies of the to open account transactions not currentlyexecuted in accordance with the terms dollar, the euro and sterling. benefiting from L/Cs’ well-known riskof a L/C.” Where banks attempt to plugthe gap through issuance of conditional mitigation advantages.payment guarantees or standby L/Cs, Goldilocks and the BPO As is often the case, change involvingthe BPO acts as an electronic inter-bank This ‘Goldilocks scenario’, where L/C are new technologies and standards canconditional promise-to-pay, offering a too hard, open account is too soft and be daunting, but in the case of BPO,comprehensive and cost-effective risk BPOs are just right, offers an exciting there are a number of reasons not to bemitigation and financing tool to all trading opportunity for existing global open afraid. Its standards-based technologycounterparties. account networks. foundations in particular are merelyOf course, the BPO does face significant Complex data matching solutions bring following the same path of evolutionchallenges in terms of market acceptance. together the required electronic data undertaken by other areas such as cashThe modern version of the documentary elements consistent with ISO 20022 management since the mid-2000s, andL/C became established as an accepted messaging standards with the ICC BPO the transition to BPO is unlikely to bemarket practice thanks largely to the rules to provide a solid platform for BPO problematic on this front.publication and maintenance by the ICC issuance, acceptance and financing. Beyond the clear benefits of theof a set of rules - the Uniform Customs instrument itself from a financial and risk Whether importers wish to reduceand Practice (UCP). For the BPO to management perspective, complementary fees, enhance process efficiency orbecome as widely accepted as the L/C, advantages are also expected in the provide improved terms of trade toit will benefit from the backing of a similar increased granularity of the data the their overseas suppliers, existing globalset of rules published and maintained by BPO exposes. Not only will it improve electronic networks such as SWIFT andthe ICC. SWIFT is currently collaborating settlement of trade transactions, but its GXS, currently processing billions ofwith the ICC and its membership to ability to read even more information and transactions and trillions in spend, arepublish ICC rules for the BPO in early increase visibility should also mean banks ideally placed to propel the BPO forward2013. In the meantime, those buyers are able to enhance their services too. as the emerging standard for cross-and sellers keen to take advantage of border trade finance and working capitalthis new instrument today, can do so by management. BPOmaking use of the existing infrastructure,standards and rules developed by SWIFT. A BPO is an irrevocable undertaking given by a bank to another bank thatBanks traditionally perceive documentary payment will be made on a specified dateL/Cs as low risk business and there is after a successful electronic matching ofno reason to believe they will disappear data according to a defined set of rules.completely, nor should there be. It is
  • 10. Therefore, a BPO offers: is ready. In many ways, it’s not that accounting, risk management and billing different to L/Cs, whose process is of transactions, is already in place.– n assurance of payment. A already largely electronic. Corporate– isk mitigation for all parties. R One of the things that is crippling the e-banking systems offered by a large– ossible use as collateral for finance. P industry and hindering the adoption proportion of banks active in trade of mass working capital financing finance support the ability to issue,Interest in BPO is fuelled by the fact techniques such as supply chain finance notify and monitor L/Cs and otherthat it seeks to bridge the gap between (SCF) is the lack of standardisation. instruments throughout their lifecyclethe current system of L/Cs, which, But a key advantage of BPO is that it including subsidiary events and copies ofdespite its value, is often blamed for is standards-based - following the ISO documents.being slow, inflexible, administration- 20022 standard - and therefore providesintensive and costly in terms of both In addition to an interactive web-based an unambiguous reference to its definitionpaper and processing, and open account user interface, some also include the and mechanism. It is again here a strongtransactions lacking the traditional L/C ability to integrate directly with the analogy with the L/C and its uniformassurances provided by banks. corporates’ enterprise resource planning acceptance across the globe. This is (ERP) or treasury systems. Statistics vary in contrast with SCF and its variations,Trading parties use complementary between different banks and regions, which do not rely on standards-basedtechniques in the context of open but a consensus among the financial definition and practices today - in spiteaccount transactions to manage the institutions using customer portals of initiatives such as the BAFT-IFSArisks of their transactions in lieu of L/Cs. today is that more than 80% of their glossary.For example, the risk of payment default total volumes of L/Cs will generally befor exporters can be mitigated through BPO is fundamentally aiming to tackle this exchanged and managed electronicallybuying credit insurance, arranging - not only the standardisation from an ISO with their customers.standby L/Cs or various methods of 20022 messaging perspective, but also inselling their invoice portfolio at a discount. The same level of dematerialisation is terms of business rules which the ICC isHowever, these methods tend to cover largely in place at most banks’ back currently working on. Another importantonly a portion of the trade transaction office operations where integrated trade aspect of the ICC endorsement to helpand lack integration with the underlying finance systems process transactions and widen adoption is the decoupling of BPOend-to-end flow of information along the manage the necessary electronic data from being exclusively run on the SWIFTphysical supply chain. interchange with the customer channels, TSU infrastructure, despite the SWIFT other banks via SWIFT and payment service being the obvious initial referenceFrom a risk management perspective with gateways. account, it is also incumbent on theparties to know their counterparties’ risk Therefore, we already have in principle Provided that all aspects of the upcomingprofile. For this reason, open account is both the channels and the back office ICC rules are fulfilled, it shall be possiblemostly used for longstanding and trusted systems to support the kind of facilities for a party independent from SWIFT,relationships, while L/Cs are preferred for necessary to deploy BPO in the value such as a bank, a corporate, a solutionnew customers without a proven track chain. Much of the infrastructure needed provider or consortiums of the above, torecord and where banks play a key role to enable corporate customers to upload implement platforms supporting the end-thanks to their extensive knowledge in and action their purchase order or invoice to-end deployment of BPO. Again muchmanaging risks. data, and banks to automate the overall like L/Cs, which are independent of theBPO aims to mitigate open account risksand to accelerate the payment cycle.It enables banks to provide their tradefinance customers with guarantees andother banking services on open accountterms. Based on ISO 20022 messaging,it brings together the Trade ServicesUtility (TSU), SWIFT’s matching utility asa reference implementation, with a set ofbusiness rules that replace the relianceof L/Cs on actual documents (either onpaper forms or electronic as authorisedfor many years by the eUCP rules of theICC but with little success) with dynamicdata sets that can be automaticallystreamed.The Same, But DifferentThe use of electronic data exchangeto support trade finance is not afundamental change and the technology Figure 5: The Benefits of Richer Structured ISO 20022 Data Sets. Source: Misys
  • 11. network over which they are processed, even if most of them eventually take the form of MT700 messages transmitted over the SWIFT network. Advantages Key points about standardisation are the guarantee of interoperability between participants (parties and systems), a larger pool of skilled resources and the de-risking of investment in proprietary technology. But the advantages do not stop there. Even if exchanged electronically, L/C transactions transmitted over proprietary channels and SWIFT tend to contain large amounts of unstructured data such as free text. BPO, on the other hand, streamlines this data, making it more Figure 6: ISO 20022 for Cash Management, Trade and SCF. Source: Misys structured and granular with ISO 20022. This in turn facilitates usage, distribution and storage of the transaction data. Barriers to Adoption Conclusion This development will provide corporates The acceptance and expansion of BPO Despite industry inertia to change, BPO is a finer control over their transactions and presents something of a chicken and egg an opportunity for a positive evolution in a deeper integration with the existing situation - people will only start adopting it the face of an increasingly online industry. process of their physical supply chain. It once enough people are doing it, but how L/Cs are still used faithfully by many will also enable banks to instantly access do we get to that tipping point of critical corporates and banks alike and open and identify specific trade activity, not mass? Creating a set of rules relies upon account transactions are already the only minimising risk, but also tailoring their demonstrable evidence gathered from norm, but there is a need to streamline services to match the customer’s needs. real, live transactions and this will take the flow of information so that it benefits time to amass. In an effort to build this both sides of the settlement. For example, by capturing data from a evidence, BPO is currently being tested purchase order, a bank can be alerted to The BPO can help achieve this. We are by some of the corporates in the working a customer’s upcoming need for foreign seeing beneficial change in many areas group, which will help drive momentum in currency in order to settle the underlying of trade finance, much like with cash adoption. invoice at due date. Another example is management before. Reaching critical the access to more detailed descriptions Basel III is another potential obstacle mass for any service is always a complex of goods and services allowing a to adoption. Confusion about how to feat, but, in parallel with the ICC work on tighter matching in order-to-pay (O2P) calculate risk and how much capital to the subject, we believe the technology processes down to line item levels. set aside for BPO transactions could transition to BPO will be a relatively hinder its acceptance. Traditionally, trade simple one where the benefits will quickly This more granular access to the data finance practitioners as a group tend to proven. can therefore be seen as an interesting resist change. However, we are seeing means by which banks can provide clear interest in those ranks with an influx value-add features beyond commoditised of commercial and logistics backgrounds payment services and ultimately remain and appetite to realise this evolution. relevant to their corporate clients. It can particularly be the case to those large From the technology perspective, the international clients who have moved analogy with the L/C processing and the an increasing proportion of their trade similarities with the development of cash business onto open account terms, management are certainly contributing rendering the bank’s involvement in to lowering those barriers. Existing IT the transaction unnecessary. The BPO expertise within banks coupled with the can play a role in helping avoid this ability to leverage infrastructure already disintermediation of banks and create a in place for cash management and new source of fee and commission-driven payments in support of ISO 20022 should income for financial institutions. facilitate the evolution.00000 - FEB 2012 For more information about SWIFT visit SWIFT © 2012