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SWIFT BPO for Corporates ICTF conference


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SWIFT presentation for Bank Payemnt Obligation (BPO) for the ICTF Conference (Paris April 2012)

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SWIFT BPO for Corporates ICTF conference

  1. 1. Bank Payment Obligation for supplychain financeImprove efficiency and mitigate payment delayand default risk in a multi-bank environmentICTF conferenceParis, 23 April
  2. 2. Supply Chain Finance Context and key challenges SWIFT and your payments business
  3. 3. Key objectives in the financial supply chain Making trade receivables and liabilities visible 5 How to allocate capital efficiently to support my production process? Inventory Physical Supply Chain turnover1 2 How to improve my purchase-to- How to reduce my pay process, extend my paymentorder-to-cash cycle, free 3 terms or get discounts for early What is my credit risk? payment? up cash and get credit as early as needed? Working Accounts Accounts Capital Receivable Payable Management Supplier Buyer 4 Where is my cash and my liabilities? How to improve my liquidity forecasts? Treasury management Financial Supply Chain 3
  4. 4. Current financial supply chain challenges Payment risk and mitigation tools Cash in advance Documentary collectionSupply Chain Supply Chain Supply Chain Supply Chain Physical Physical Order Production Shipment Delivery Order Production Shipment Delivery Delivery default or Delivery default or delay risk delay risk Financial Financial Documentary Payment Settlement Pay ment collection Settlement Payment (default) or delay risk Letter of credit Open accountSupply Chain Supply Chain Supply Chain Supply Chain Physical Physical Order Production Shipment Delivery Order Production Shipment Delivery Delivery default or delay risk Financial Financial Letter of Payment & Payment Settlement Open account Settlement credit Payment (default) or delay risk Payment default or delay risk 4
  5. 5. Trade and Financial supply chainMarket trends and challenges Increased cost of borrowingFinancing models New partners with various risk profiles Need faster and efficient access to financingWorking capital Accuracy of liquidity forecasting and planningoptimisation Complex trade and cash reconciliation Multitude of interfaces and systemsTechnology Little or no automationevolution Lack of business process integration New emerging trade corridorsTrade globalisation Growing multi-bank relationships Strong need for efficiency and security at lower cost 5
  6. 6. Supply Chain Finance Bank Payment Obligation Open account
  7. 7. The Bank Payment Obligation (BPO)A new alternative instrument for trade settlement A BPO is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after a successful electronic matching of data according to an industry-wide set of rules. New ICC Uniformed Rules for BPO Target publication Q1 2013 7
  8. 8. Secure and optimise your trade transactions with Bank Payment Obligation A legally binding, valid and irrevocable bank payment SWIFT matching platform obligation based on a minimum implementing BPO using set of matched transaction data ISO20022 standards that and being adopted by the ICC implements the BPO in a multi- bank environment Bank Payment Obligation Trade Service Utility Supplier (TSU) Bank Bank Buyer A commercial agreement An agreement betweenbetween buyer and seller, with Business-to-business buyer and its bank with potential financing options practices potential financing options 8
  9. 9. Minimum data subset Order number, Bank Payment Obligation flows Product name & quantity Amount, currency, date Buyer & seller (name, address) BICs of the banksBusiness Supplier/Exporter Recipient bank Obligor bank Buyer/ImporterRole BPO Trade Services Utility (TSU) Tchin Wa manufacturer BBBBCNSH PPPPUS33 Big-Mart distributor 1. Contract and Paper documentsTradeProcessing 2. Electronic data matchingservices  Financing 3. Pre-/post shipment finance 4. Payables financeservices a/c 5. Guaranteed payment a/cPayment and cash + -management USD 15,370 CNY 100,000Fees Risk commitment fee Risk commitment fee, payment and service charge fee and service charge 9
  10. 10. BPO combines the best of both worlds Contract Contract Contract Documents Documents Buyer Seller Buyer Seller Buyer Seller Documents Application Documents Letter of Bank Open Advice Data Data Credit Payment Account Obligation Documents Data IssuanceLC Issuing LC Advising Obligor Recipient Buyer’s Seller’s Bank Bank Bank Bank Bank Bank Payment Payment PaymentBank services based on paper Bank services based on Bank services limited to document processing electronic trade data exchange payment processing Array of risk, financing and processing services to address both cash management and trade finance needs 10
  11. 11. BPO positioning Better than Letter of Credit Better than Open Account Electronic presentation of data Better payment risk mitigation instead of physical documents than Standby L/CImprove quality and objectivity of Facilitate win-win trade compliance verification relationships Quicker process as it focuses Reduced on-boarding andonly on data relevant for financing operational costsCan be added at any time, for any Enhanced trade transaction amount value processing and reconciliation Easier access to financing Can be used as collateral for services financing 11
  12. 12. Supply Chain Finance Business scenarios
  13. 13. Accelerate the settlement and financing process through trade processing automation Purchase Shipment Acceptance Settlement ExecuteTrade and Match Match transport Reconcile approved payment andpayment Purchase (shipping) (e-)invoices with reconcileprocessing Orders information purchase orders collections Shorten finance acceptance time Authenticated Shipment & certificate Invoice Due Date purchase order documents acceptance (D) Pre-Shipment Post-Shipment Post-Shipment Payment finance finance finance New opportunity windows to get access to supply chain finance 13
  14. 14. Case 1: Seller mitigates the risk of non-payment or payment delay Buyer commits to pay the seller (no financing) I need to offer payment2 assurance to my supplier and confirm the purchase order I want to be certain 1 that I will be paid on time BPO TSU Buyer Obligor Bank Recipient Bank Seller I can offer the guarantee of I will substitute for the payment to my customer 3 creditworthiness of my customer and guarantee the payment to 4 based on the BPO issued by the buyer’s bank the seller’s bank (BPO) for a fee Payment guarantee 14
  15. 15. Case 2: Buyer mitigates the supplier default risk Buyer supports pre-shipment finance for the supplier I want my business- critical supplier to increase I want to access cost-2 its financial resilience and 1 effective financing to cover my working will confirm the purchase order capital expenditure BPO TSU Buyer Obligor Bank Recipient Bank Seller I will guarantee the I will offer pre- payment (BPO) to the shipment finance to 3 seller’s bank upon the 4 my customer based confirmed purchase order on the BPO Payment guarantee Financing services 15
  16. 16. Case 3: Supplier mitigates liquidity risk Supplier gets post-shipment finance I want my business- critical supplier to 2 increase its financial resilience and will confirm the transport or I want to be paid as early as possible commercial data 1 after the shipment to the buyer BPO TSU Buyer Obligor Bank Recipient Bank Seller I will guarantee the payment I will offer earlier payment to (BPO) to the seller’s bank 3 based on the submission of 4 my customer based on the BPO issued by the buyer’s compliant transport or bank commercial data Payment guarantee Financing services 16
  17. 17. Case 4: Buyer mitigates its liquidity risk Buyer gets import finance with extended payment terms I accept the goods I shipped the goods delivered by my2 seller but would 1 to the buyer and I want to be paid on like to pay at a time, later date BPO TSU Buyer Obligor Bank Recipient Bank Seller I can offer the guarantee of I will guarantee the payment (BPO) to payment to my customer 3 the seller’s bank and will offer the extension of payment terms to my 4 based on the BPO issued by the buyer’s bank customer for a fee Payment guarantee Financing services 17
  18. 18. Supply Chain Finance Key Benefits
  19. 19. BPO benefits Payment Assurance Receivables Streamline finance Processing BPO Payables Risk finance mitigation 19
  20. 20. A multi-bank solution … BPO Payment … based on ICC rules & Assurance ISO messages … Receivables Structured data finance and BPO e-matching … and powered by Risk Payables SWIFTs Trade finance mitigation Services Utility (TSU) & Correspondent Banking network 20
  21. 21. Key benefits for the seller Receivables Cash flow optimization Get payment on time Payment Optimisation of risk-reward Assurance transactions Improve liquidity forecasts Improve discrepancy management Easy integration with e-invoices Receivables Structured data Reduce processing effort finance and Syndicate payment risk BPO e-matching Supply Chain Finance (optional) Payables Risk finance mitigation Pre-/post shipment financeAlternative to credit insurance 21 Reduced interest costs
  22. 22. Key benefits for the buyer Procurement Cash flow optimization Payment Pay key suppliers on time Assurance Reduce administrative costs Reduce investigations & disputes Outsource payables processing Control payment time execution Receivables Structured data finance and BPO e-matching Supply Chain Finance (optional) Payables Risk finance mitigation Extend payment termsNegotiate commercial terms 22Reduce supply default risk
  23. 23. BP Chemicals case BPO to replace confirmed L/CsCompany profile Key benefits• 2010 Revenues of USD 14 billion • Get paid on time and avoid judicial proceedings• Revenue created for approx. 50% in Asia • Reduce complexity – removal of paper trail• Trade account receivables of EUR 1.4 billion • Limit to relevant trade information only (consolidated receivables only) • Reduce cost by removing vetting activities and• More than 600 clients worldwide presentation assistance • Improve customer offer by allowing for flexibleChallenges options• About 50% of exposure on secured terms • Improve speed of handling• Competitive commodities market requires a • Reduce the risk of discrepancies secure and cheaper alternative to L/Cs • Reduce need for confirmation cost by being able to• High processing and confirming costs (0,8% tap larger pools. Free up banking lines. of transaction value) • Easy to exercise tool for liquidity• LCs process limits commercial possibilities • Easier access to banks to secure transactions and weakens compliance under certain • Possibility to spread the risk with multiple obligors conditions Gains expected greater than $1m worldwide, but most upside, but most of the upside lies in more marginal income 23
  24. 24. Multi-bank export to APAC and EMEA at BP Chemicals Proof-of-concept (ongoing) Chemical fiber Co. Kuala LumpurBuyers of BP Petrochemicals Exporters Textile & Garnement HK Co. BPO TSU London Industrial Zhuhai fiber Co. Polyester Belgium fiber Co. BPO Obligor BPO Recipient Belgium Bank branches Banks 24
  25. 25. Vale case BPO based on confirmed invoiceCompany profile Key benefits• 2010 Revenues of USD 46.8 billion • Reduce the DSO by approx.10 days (including• Main product Iron ore (69,9%) internal processes efficiency gains) with a financial gain over USD 37 million / year.• Approximately 100 clients worldwide (Iron Ore) • Freeing up Working Capital – USD 600 million. • Reduce costs for customers.• Main market is China (32%) • Reduce document delivery costs.Challenges • Reduce the risk of discrepancies • Improve access to Trade Financing products to our• Competitive commodities market requires a customers. secure and cheaper alternative to L/Cs • Reduced environmental impact - reducing paper• L/Cs at sight for USD 18 billion with China usage in extra copies of the shipping documents clients for the banks• DSO (Days Sales Outstanding) is between 25 and 30 days Significant process efficiency gains and working capital gains Supply Chain Finance for Corporates – Webinar – 7 December 2011 25
  26. 26. Multi-bank export to China at Vale Proof-of-concept (ongoing) Steel Manufacturer 1Buyers of Vale Exporter Steel Manufacturer 2 BPO Steel BPO Recipient Manufacturer 3 Banks Steel BPO Obligor Manufacturer 4 Bank branches Supply Chain Finance for Corporates – Webinar – 7 December 2011 26
  27. 27. Supply Chain Finance Detailed features
  28. 28. The baseline gathers the matching conditionsusing data extracted from trade documents Purchase order Allows payment risk syndication among different Mandatory obligor banks Baseline Optional Matching conditionsCommercial Transport Insurance Certificates data set data set data set data set Air Waybill (AWB), bill Insurance Certificate Invoice of lading (BOL),… document document 28
  29. 29. BPO offers flexible payment terms and allows early information gathering on settlement detailsCase 1: Mitigate delivery default risk and offer extend payment terms to the buyer When ? Open account Supply Chain Supply Chain Payment vs. delivery Physical Purchase Production Shipment Delivery Order • On delivery date (D) • At the end of the month of delivery (D+30) BOL Invoice PO • At the end of a period after delivery (D+P) Financial Data • At the end of a month after period of BPO D+0, +30 or +P Payment match or delivery (D+P+30) +P+30 daysCase 2: Mitigate payment default risk and offer post-shipment finance to the seller When? Letter of credit Supply Chain Supply Chain Payment vs. invoice Physical Purchase Delivery Production Shipment • On receipt of invoice (I) Order • At the end of the month of invoice (I+30) PO BOL Invoice • At the end of a period after invoice receipt (I+P) Financial Data match I+0, +30 or +P • At the end of a month after period of BPO Payment or received invoice (I+P+30) +P+30 daysCase 3: Mitigate payment default risk and offer pre-shipment finance to the seller When? Cash in advance Supply Chain Supply Chain Physical Purchase Production Shipment Delivery Order Payment vs. “presentation” (matching) PO BOL Invoice • After match or mismatch acceptance (M) M+0 Financial BPO Data Payment match 29
  30. 30. BPO includes details of charges as per international standard trade terms - INCOTERMS Allows partial shipmentOption 1: Specification of the shipment costs Supply Chain Supply Chain Shipment terms Physical Purchase Production Shipment Delivery Order • Costs and freight • Cost insurance and freight BOL Invoice PO • Carriage paid Financial BPO Data Payment • Carriage and insurance paid D+0, +30 or +P match or +P+30 daysOption 1: Specification of the delivery costs Physical Supply Delivery terms Chain Purchase • Delivered at frontier Production Shipment Delivery Order • Delivered duty paid BOL Invoice • Delivered duty unpaid PO Supply Chain • Delivered ex quasy Financial Data BPO D+0, +30 or +P Payment • Delivered ex ship match or +P+30 days • Exworks • Free alongside ship • Free carrier • Free on board 30
  31. 31. Supply Chain Finance Risk mitigation 32
  32. 32. Current challenges on documentary credit Long, costly and cumbersome process Re-route ships … or risk …..or storage at Longer inventory Delayed Delayed in case of due to a port of cycles or… production delivery refusal waiver destination Physical Supply Chain Purchase Production Shipment Delivery Order PO BOL Invoice Financial Supply Chain L/C issuance and L/C issuance and Documents presentation and Documents presentation and Payment Payment acceptance acceptance compliance verification compliance verification Need to request Payment delay even when “at Customer cannot free L/C earlier sight” or on delivery its credit limits Trade Post-Trade Pre-settlement SettlementT T+1 T+10 S > T+20 33
  33. 33. BPO addresses the challenges of documentary credits Measuring process efficiency Sales Cycle 8 1 Reduce opening time 2 Increase inventory turnover cycle (DIO)Physical Supply 2 3 4 Chain Purchase Production Shipment Delivery 3 Reduce the production lead time (DIO) Order 4 Reduce shipment delivery delays Pre- BOL matching PO Reduce the number of amendments not & Invoice 5 related to financial liability BPO Data match PaymentFinancial Supply Chain 6 Reduce payment delays when at sight (DSO) 1 5 6 7 Reduce risk coverage needs Shorten sales cycle – increased window 8 Risk coverage of opportunity to sell 7 34
  34. 34. BPO compared to other trade finance tools Mitigate risk Open SBLC/ Risk Risk description L/C BPO Notes Account Insurance Weak credit rating of the importer Substitute by banks credit worthinessFinancial Temporary liquidity shortage of the exporter Finance production and shipment or forfaiting Bank financial risk Change bank (L/C) or split the risk (BPO) Payment default Shorter for BPO than othersCommercial Unpredictable cash-in flows to payment delay Shorter for BPO; impact on discounting for L/Cs at sight Refuse to honor payment Usually irrevocable for L/C, always irrevocable for BPO False or falsified information (do not match Validate authenticity “on their face” (L/C) or goods) electronically (BPO) - Link BPO to the carriers for fraudEconomic Transport Early or late shipment Specify last shipment date Loss, theft, deterioration Mitigate through additional insurances Fluctuations in currency, interest, inflation Can predict cash flows in FX risk hedging rates Insurrections, terrorism war Syndicate the risk to other countriesPolitical Sanctions , force majeure Mitigate through additional insurances 35
  35. 35. Example Securing your trade transactions A representative decision making processCredit, commercial and country risk Commitment to pay assessment Yes Select a confirming bank to substitute its Confirmed letter Confirmed credit worthiness for of credit or BPO Yes Is the buyer’s that of the buyer’s bank bank creditworthiness Select the buyer’s bank Is the buyer’s weak? to substitute its credit Advised letter orcreditworthiness worthiness for that of of credit BPO weak? No the buyerIs there a risk of Yes Standby letterpayment delay? Are the profit Select a bank or of credit or margins at risk? company insurance insurance on or BPO Open Account No Are the Documentary Do not secure the revenues at collection or or TSU Payment No transaction risk? Open Account 36
  36. 36. BPO addresses financial supply chain challenges Payment risk mitigationWhen to use BPO? When to use BPO?• New or less established • Unsecure relationship or market relationships • High exposure to risk (market• Good credit worthiness of price volatility, solvency risk ,…) buyer’s bank Letter of credit Open account • High costs of risk mitigation• High probability of payment measures delays due to discrepancies Supply Chain Supply Chain Supply Chain Supply Chain Physical Physical Order Production Shipment Delivery Order Production Shipment Delivery Delivery default or delay risk T+0, +30 or +90 days Financial Financial Letter of Payment & T+0, +30 or +90 days Payment Settlement Open account Settlement credit Payment (default) or delay risk Payment default or delay risk Long, costly and cumbersome discrepancies management Political, economic or commercial risks Risk of delayed payment due to the L/C processing Risk default or delay in payment obligation after (documentary credit ) shipment of goods Optimise the processing time and costs while BP Secure the transaction while maintaining a securing the transaction competitive offer  Gain certainty of the timing of the cash flows and improve  With no need for export working capital financing (loan liquidity forecasts or revolving credit lines) or credit insurance or standby  Use BPO for pre-/post-shipment finance, as for L/Cs letters of credit  Syndicate the risk for very large value transactions  Ability to offer extended payment terms as an  Ability to offer commercial incentives reflecting the processing alternative to factoring and forfaiting costs savings  Improved transaction tracking (ease integration of  Ability to reduce supply default risk for importers payment and trade processing )  Establish and maintain successful trade relationship 37
  37. 37. BPO offers the best cost vs. risk performanceProcessing efficiency/cost Low Processing efficiency/cost Open Account - Less paper work and training than L/C Bank Payment or insurance on Open Account Obligation - Need workflow management compared (service fees) to SBLC or demand guarantee SBLC, demand guarantee Risk mitigation security Insurance - Similar to L/C (liquidity nature of the on Open Account underlying assets) Letter of - Banks do not transmit the paper Credit document (bill of lading) - Better payment delay risk mitigation than insurance on open account High Low High Risk mitigation security (payment delay and default risk) 38
  38. 38. Supply Chain Finance Integration aspects 39
  39. 39. 21 structured standards (tsmt) Industry standards for supply chain finance Electronic matching BPO standards Industry Trade transaction 21 messages matching scheme 21 messages (tsmt) based on tsmt (tsmt) messages 1 2 3Commercial Any channel / Buyer’s Any Open Seller’s Any channel / Seller Buyer bank(s) bank(s) solutions any format / Transaction any format / any solution Matching platform any solution Trade Services Utility (TSU) Standard exchange and matching of richer electronic structured data 40
  40. 40. Integration options based on volumes and bank relationships Purchase Order data Transport, invoice, … data BPOBuyer Buyer’s bank Sellers bank Seller 1. Bank-specific Trade Portals Bank Trade a. Manual access to bank-owned portal back-end Trade portal over Internet – 1 portal Internet per bank Bank b. ERP integration with bank-owned Trade portal for large volumesERP 2. Vendor Multi-bank Trade solutions a. Manual access to vendor multi-bank Multi-bank Bank Trade Trade solution (local application or Portal front-end back-end hosted portal) b. ERP integration with vendor-owned Vendor Bank multi-bank Trade portal (local or hosted)ERP 41 41
  41. 41. Supply Chain Finance Next steps and conclusion Are my banks ready now? What is my business case?
  42. 42. Key roles and responsibilities for BPO• Buyers and Sellers – Provide the merchandise details (description, quantities, unit price, ...) – Agree on the amount of the payment obligation – Define the payment terms: on receipt of the invoice, on delivery or extended – Agree on the expiry date – Agree on the financing terms and conditions – Agree on who bears the financing charges – Agree on the shipping terms and latest shipment date• Obligor bank(s) – Propose the bank to advise the obligation, with agreement of the seller – Propose the bank to confirm the obligation (if any) with agreement of seller – Verify apparent authenticity and deliver to recipient bank, upon successful matching 43
  43. 43. 33 banks adopting BPO (update as at 4 April 2012)Including 12 from the top20 Trade banks 44
  44. 44. 33 banking groups adopting BPO by primary regional location (update as at 27 April 2012) AM EMEA AP• Banco do Brasil • Barclays • ANZ• Banco Itaú BBA • BNP Paribas • Bangkok Bank• Bank of America • Byblos Bank • Bank of China• BMO Capital Markets • Commercial Bank of Dubai • Bank of Communications• BNY Mellon • Commerzbank • BTMU• Citi • Deutsche Bank • China Citic Bank• JP Morgan • First National Bank of S. Africa • China Minsheng Bank • HSBC • Hua Nan Bank • National Bank of Greece • Kasikornbank • Qatar National Bank • Korea Exchange Bank • Standard Bank of South Africa • Siam Commercial Bank • The Royal Bank of Scotland • Standard Chartered Bank • UBS • SMBC 45
  45. 45. Key considerations for your business caseWorking capital optimisation (CCC) Quality and compliance Get paid quicker (from 10 to 5 days), Improved business relationships Extended payment terms Better credit rating and credit risk managementBetter cash allocation to inventory and Lower rate of litigations transportation Reduction of loans and interests, Better financing terms Adjacent benefits Financial Business benefits case Trade transaction processing Operational benefits Lower on-boarding costs Costs Improved cash management Lower auditing, collection, accounting effort Lower rate of investigation 46
  46. 46. Summarizing BPO value for Corporates Process efficiency Payment timeliness Business growth Standards & rulebook ICC adoption Multi-bank access 47
  47. 47. Q&A? 48
  48. 48. Thank youGeneric e-mail: supplychain@swift.comJoin our LinkedIn group Supply Chain on SWIFT 49