BPO press coverage Extracts from GTNews.com

1. BPO press coverage
Extracts from GTNews.com
Bank Payment Obligations: the terms of the BPO is all based on
The Way Forward electronic data. The efficiency gain is
at least hours, but potentially days, for
Tan Kah Chye, Barclays Corporate participants in the transaction.
19 Jan 2012
It is important that all banks involved Changes in Governance
in trade finance, irrespective of size or A landmark agreement, signed during
geographical coverage, work together to 2011 between the International Chamber
facilitate the introduction and successful of Commerce (ICC) Banking Commission
implementation of the bank payment and SWIFT, has paved the way for the
obligation (BPO), leveraging the initial ICC to assume responsibility for the rules
groundwork of SWIFT and the work governing BPO. The importance of this
now underway within the International change cannot be underestimated as it
Chamber of Commerce (ICC). will mean that the BPO will benefit from
The trade finance industry has come the extensive experience the ICC has in
under criticism at times for using out- managing successful industry rules and
dated and cumbersome systems to also provides the BPO with another critical
facilitate trade transactions. Therefore the component: an industry recognised
various industry initiatives to modernise dispute resolution capability, which will
and simplify trade coming on-stream build on the foundations that have already
in 2012 should certainly be welcomed been laid down in the SWIFT-led model.
by banks and corporates alike. One Under the agreement the ICC will
such initiative is the introduction of bank develop industry standard rules for the
payment obligations (BPOs), which BPO. These rules will apply to any BPO
are set to foster significant efficiency transaction and will form the bedrock of
improvements in trade in the coming year. the future standing of the BPO, potentially
As a tool, the BPO is very similar to the elevating the BPO over time to a position
definition 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 BPO
made on a specified date after successful transaction irrespective of the platform
matching of data. The key difference that has been used to create and
with the BPO is that it is electronic and transact the BPO, resulting in the obligor
involves matching data fields as opposed and recipient banks under a BPO no
to documents. longer being limited to using the SWIFT
This is a major leap in efficiency in Trade Services Utility (TSU) functionality.
trade finance as it removes the physical This should encourage other software
presentation of shipping documents companies and vendors, many of whom
to a bank as would be the case with a are already well advanced in offering BPO
documentary credit. Instead notification functionality, to enter the market and
of 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 develop
transaction, 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 boundaries
Benefits of the BPO Where to from Here? making standardisation inevitable. In
Corporates often quote that there The future of the BPO has been boosted trade finance, open account and letter of
are many benefits with the BPO over significantly with transfer of governance credit (L/C) are the two dominant product
traditional 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 about
counterparty risk, the reality has been
different. In some specific industries and
countries L/C usage has seen growth, but
for a majority of corporations the ‘cash
trap’ nature of L/Cs has counterbalanced
their concerns about the solvency of
their trading partners. They were more
concerned about cash availability to
weather the difficult economic conditions.
The revocable L/C is less popular as
compared to the irrevocable L/Cs that
adds the endorsement of a seller’s bank
(the accepting bank) to that of the buyer’s
bank (the issuing bank). This arrangement
provides a level of protection to the seller
because the L/C cannot be cancelled
unilaterally by the buyer, and also
both banks involved in the transaction
guarantee its payment on maturity. Figure 1: L/C Versus BPO Versus Open Account
While the drawbacks in both these
products 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/C
of their trading partners, an alternative
in the sense that the BPO’s electronic
means of settlement in international trade At present, a majority of the banks
presentation of data eliminates the
was 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 BPO
A Recent Development linked to the automatic matching of data
are in the learning curve and are waiting
In the year 2009, SWIFT’s Trade Service through the TSU matching application. It
to see how effective this alternative
Utility (TSU), a matching and workflow is also more flexible than L/C as it allows
instrument can prove to be in the long
engine for open account transaction data, changes to be made anytime during the
run. Banks will have ample opportunity to
started 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 open
after a specified event has taken place. Conclusion
account in terms of mitigating risk and
This ‘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 than
by SWIFT’s TSU. managed and finance will be more readily
open account, as it acts as collateral for
available to the supply chain. A key
The BPO was designed by banks to financing.
element, however, is the level of comfort
provide complementary services to
The flavour of BPO, apart from data that counterparties feel with the legal
corporates 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 issuing
L/C to open account. It allows corporates Sellers see cash flow optimisation
bank in favour of the receiving bank.
to make use of related banking services and improved liquidity forecast due to
In the pre-shipment finance BPO acts
such as financing, payments, collections releasing of cash trapped in the supply
the same way as an L/C. There is still a
and account reconciliation. chain through automated data matching.
degree of performance risk; however this
With improved payment cycles sellers can
The 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 extended
key 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 the
The 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 has
the role of intermediaries, and in open Keeping all the above analysis in mind,
already been made. The performance risk
account the paper-based exchange of Celent expects BPO to become an
at this stage is eliminated and therefore
documents remains within the corporate- effective alternative instrument that brings
post-shipment finance can be readily
to-corporate space without going into the the best of both L/Cs and open account

4. to the international trade finance scenario
in 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 Finance
Industry
The physical supply chain has significantly
increased efficiency through the use of
new technologies and business models.
By doing so, trading counterparties
have accelerated their industry-specific
processes, reduced handling costs
and inventories, increased visibility and
improved forecasting and planning.
Some industries have succeeded to
shorten order and delivery processes
from an average 20 plus days to same-
day execution. However, on the banking
side, most of the supporting global
trade finance processes have not been
optimised sufficiently due to paper-based
practices 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 Market
finance industry to link the delivery of
financial services to what is actually
happening in the physical supply chain in
a more efficient way: i.e. using electronic
transaction data. The emergence of
trading hubs (e.g. South Korea, Taiwan
and Hong Kong) and business-to-business
(B2B) e-commerce/e-invoicing platforms
(e.g. Ariba, GXS, PayModeX, Peppol and
Tradeshift) has significantly increased
the dematerialisation of B2B processes,
such as sourcing, negotiation, quotation,
ordering, shipping, invoicing, etc.
Such new electronic B2B processes have
created a new paperless world where
efficiency gains and cost reduction are
achieved to the benefits of both buyers
and sellers. Buyers and sellers now expect
their banking partners to follow suit.
Figure 3: BPO Extends SCF Services to Higher Value Risk and Financing Services
ICC BPO Leverages Electronic
Transaction Data
The 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, commercial
paper-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 matching
data. application that then generates a ‘match’
report to show that the description of
The co-operation between the ICC and ICC BPO: A Modern Instrument
goods shipped matches precisely the
SWIFT 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 trade
new messaging standards (ISO 20022 on open account terms with the same The BPO places a legal obligation on the
standards) and a new SWIFT cloud degree of confidence that a payment will issuing bank to pay the recipient bank
application for supply chain finance (Trade be executed in accordance with the terms subject to the successful matching of
Services Utility (TSU)). The new rules of an L/C. The BPO is an irrevocable compliant data. In short, the BPO delivers
and messaging standards enable banks undertaking given by one bank to another business benefits and security equivalent
to leverage electronic transaction data bank that payment will be made on a to those previously obtained through a
available from the B2B world. Using data specified date, after a specified event commercial L/C, while at the same time
representing the purchase order, invoice, has taken place. This ‘specified event’ eliminating the drawbacks of manual
certificates and transport documents is evidenced by feeding the relevant processing typically associated with
offers 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 Dubai
access to flexible forms of financing Both the ICC and SWIFT believe that
— Commerzbank
but also supports the more efficient by working together and leveraging
management of working capital, enabling their respective positions in the trade — Deutsche Bank
the release of substantial volumes of cash finance community, the BPO will have — First National Bank
which might otherwise be trapped in the an important role to play in supporting
supply chain. the development of international trade — Hua Nan Bank
in the 21st century by addressing cost — JP Morgan
Whereas banks have attempted in part
pressures in the face of increased
to plug the gap, for example through — Kasikornbank
automation and changes in the regulatory
the issuance of conditional payment
environment. By using electronic — Korea Exchange Bank
guarantees or standby L/Cs, the
transaction data, the banking industry — National Bank of Greece
BPO acts as an electronic inter-bank
is preparing itself to better respond
conditional promise to pay offering a — Standard Bank of South Africa
to the desire of their corporate clients
comprehensive and cost-effective risk
to accelerate financial processes and — Standard Chartered Bank
mitigation 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 start
ICC BPO Extends the Scope of SCF Opportunity for International
extending their supply chain finance
Using Electronic Data Trade
services from invoice-based processing
Although 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 payment
party vendors, most are limited to the is available through SWIFT’s centralised
assurance, risk mitigation, pre-shipment
last mile of the transaction - i.e. using automated data matching engine - Trade
and post-shipment finance. Banks
the invoice approved by the buyer Services Utility (TSU), is a new financial
will be able to better respond to key
to finance the supplier’s receivables. instrument offering the opportunity to
issues for sellers, such as delayed
Although addressing suppliers’ working mitigate risks, while still capitalising on the
payments, whether dealing on L/Cs or
capital issues, this type of offering only advantage of open account trade.
open accounts. They will also be able to
represents a small - yet relevant - step
speed up processing and enable buyers Until the financial crisis of 2008, global
when considering the real potential
to optimise credit lines and to reduce trade was being conducted increasingly
of supply chain finance across the full
handling costs and inventories. Finally, on an open account basis, with SWIFT
transaction 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 account
from the very early stage of the trade finance without using their own capital. trade are clear: it is convenient and helps
transaction, i.e. the raising of the lower cost. During and subsequent
Some 19 banks have understood the
purchase order, and at every stage of to the crisis, however, treasurers and
opportunity offered by the BPO and last
the transaction lifecycle. This is a key finance managers increasingly recognised
year confirmed their decision to adopt
difference for banks that wish to provide, that despite its convenience, there are
the BPO. As corporates will discover the
for example, payment risk mitigation and/ challenges associated with the open
benefits of the BPO in 2012/2013, they
or pre-shipment finance in a secure, account model, both for buyers and
will be expecting their banking partners
efficient and collaborative way. Such sellers, particularly relating to liquidity
to react quickly. Waiting for the ICC
services represent much higher value for and risk. There is now the opportunity to
publication of 2Q13 and missing the
corporates. mitigate these risks while still capitalising
opportunity to get ready in 2012 is, in
Both 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 new
account terms, since payment will be financial instrument called bank payment
done by their own bank independently of obligation (BPO), which is available
List of Banks Adopting the BPO through SWIFT’s centralised automated
effective payment by the buyers. When
(January 2012) data matching engine - Trade Services
needed, buyers with strong credit ratings
— Banco do Brasil Utility (TSU).
will be able to facilitate pre-shipment
finance to support their critical suppliers — Bank of China
while not using their own capital as it is Advantages of Conducting Trade
— Bank of Communications
often the case today. Through Open Account
— Bank of Tokyo-Mitsubishi An open account transaction means that
Contrary to today’s reverse factoring
services which are driven by large buyers, — BMO Capital Markets goods are shipped and delivered to the
the BPO is offering an industry-wide multi- buyer (importer) before payment. As the
— BNY Mellon
bank instrument relevant to any type of relationship between trading partners
corporate 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 and
foremost, buyers can reduce underlying
costs associated with trade flows,
specifically those relating to bank fees.
Turnaround time also improves as a result
of straight-through processing (STP),
which in turn facilitates cash forecasting
and liquidity management for both parties
and reduces the need for external credit
facilities. Moreover, both parties are also
able to cut down operational requirements
as a result of less trade-related
documentation.
As enticing as it sounds, there is a variety
of challenges associated with open
account transactions. To begin, while the
buyer stands to benefit from improved
cash flow and cost savings, the seller
faces 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 Morgan
is not easy for the buyer to convince the
seller to trade on open account terms TSU, paired up with BPO, hasimmense discrepancies identified and resolved
based on their own credit rating. In some potential in today’s operating environment promptly, accelerating the exchange
instances, the buyer may need to provide as a risk mitigation tool offering cost of cash and goods. Finally, buyers also
a standby letter of credit (L/C) as security, and operating efficiencies to trading do not need to provide sellers with a
which increases overall cost. Some sellers partners. This is possibly best epitomised standby L/C as the BPO can be issued
may also require buyers to assist with in the signing of a ‘declaration of co- per purchase order or per shipment, and
financing the trade flow as a form of risk operation’ between SWIFT and the is paid only against compliant transaction
mitigation. Operationally, there could also banking commission of the International data.
be additional administrative requirements Chamber of Commerce (ICC). In effect,
Likewise, sellers also reap similar benefits
such as reconciliation of payment the declaration paves the way for the
in terms of risk mitigation, greater cost
information 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 an
of 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 firm
management and payment. At the top While the benefits offered by a BPO and
can offer further value-add services such
of the list are securing financing and a L/C are similar, there are fundamental
as providing the buyer with electronic
identifying ways to remove receivables differences between the two. The key
copies of documentation for more
from 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 automated
The Case for TSU and BPO
matching of selected data elements in
In response to the trend of open account
accordance with the agreed baseline. Growing Interest in TSU-BPO Solutions
trade, SWIFT launched a bank-to-bank
platform 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 is
documentation, namely the purchase traditional L/C arrangement. drawing traction globally over the past
order, commercial invoice, insurance year. So far, early adopters come mainly
and transport documents, can be from the communications and energy
A Differentiated Service that Benefits
automatically exchanged and matched. sectors.
Buyers and Sellers
Essentially, TSU is a centralised matching For buyers (importers), the TSU-BPO Looking ahead we expect to see a
engine aimed at providing automated solution provides the opportunity for gradual but steady climb in take-up
data matching in a timely and accurate securing more favourable payment across a wide variety of industries. In
manner. terms capitalising on the presence of an addition, we also expect more banks
In 2009, this initiative was given a boost irrevocable payment obligation. As the to join the TSU initiative, which will help
with the introduction of a new financial TSU process is handled, buyers do not accelerate the adoption of BPO globally
instrument 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 conditions
bank (buyer’s bank) to pay a recipient of a TSU-BPO transaction is lower than expected to persist and pressure on
bank upon successful matching of agreed that of a L/C transaction. Documentation working capital management optimisation
data 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 importer
trade finance is poised to gain further cohesion, there is nevertheless a clear takes on the supply risk and is obliged
momentum 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 for
The ‘Trade Tilt’ Hypothesis the importer as they can reject goods
Changing Dynamics
Nigel Taylor, GXS - David Hennah, on inspection for various reasons, and
Perhaps a subtle indicator for a coming
SWIFT 24 Jan 2012 payment will only be made if a full match
change in trade dynamics is the recent
occurs and at conclusion of payment
Much has been said about the potential article in The Times of India where the
terms. Open account places all credit risk
of the bank payment obligation (BPO) as Associated Chambers of Commerce
on the exporter and bases the cost of
an electronic equivalent to documentary and Industry of India (Assocham) assert
goods on the exporter’s credit rating and
trade 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$63bn
financial turmoil of the past few years, it to the agreed 2010 bi-lateral target of With an increasing emphasis on BRIC
is difficult to pinpoint exactly what impact US$100bn by 2015. With both countries domestic markets, rising cross-border
this new instrument may eventually have established since 1984 as each other’s trade volumes between the BRIC
on global trade, but with an accelerated ‘most favoured trading nation’, there is economies, and perceived foreign
emergence of the Brazil, Russia, India and little doubt that this objective is easily exchange (FX) risk due to reduced faith
China (BRIC) economies, the business achievable. in the US dollar and euro, the anticipated
case for electronic cross-border trade is trade tilt will see BRIC suppliers prioritise
Even though some emerging economies
increasingly 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 with
know, globalisation has seen open the long-term predictions remain
increasingly expensive and paper-bound
account trade dominate cross-border optimistic. This view is endorsed by
business processes, importers will for
transactions. In its 2010 report ‘Re- the 2011 predictions made first by
the most part resist any demand from
Thinking Trade Finance’, the International PricewaterhouseCoopers (PwC) that
overseas suppliers to revert back to
Chamber 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 by
of all global trade is settled on open Standard Chartered Bank who gave their According to the ICC, the pricing of
account terms, with traditional trade prediction as 2020. These predictions documentary trade finance is in fact
products 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 problem
an examination of how the dynamics of will represent 41% of the world’s market of affordability. This increase in pricing
globalisation 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 greater
electronic alternative to the L/C and an counterparty risk. Furthermore, the
enhancement 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 security
The 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 an
and are experiencing slow rates of over-used, over-hyped idiom and is
growth. According to the World Trade perhaps an emboldened prediction for the New Rules and Tools
Organisation (WTO), in 2009 global trade result of unfolding events. It is imprudent Enter the BPO as an alternative to the L/C
contracted by approximately 12% and to underestimate the fall-out of the current and an enhancement to open account.
global GDP declined by 2.2%. In contrast, economic climate but a prospective, The BPO is an irrevocable undertaking
the Asian Development Bank (ADB) discrete suggestion is that a ‘trade tilt’ given by one bank to another bank that
estimates Asia expanded by 9.6% in 2011 is beginning to occur right now. Initially, payment will be made on a specified
against a predicted 2.5% expansion in the the tilt is expected to see a marginal date, after a specified event has taken
US 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 elements
While some experts suspect the
countries were obliged to accept open taken from a range of associated open
developed nations of considering
account terms as the de facto standard account documentation (purchase
protectionist policies to safeguard their
when doing business with their overseas orders, commercial invoices, advanced
domestic markets, the world recently saw
customers. However, a combination shipment notices, bills of lading, etc) into
an increased number of trade agreements
of factors is emerging now that may a shared matching application, which
signed between Brazil, Russia, India and
eventually see an accumulative rejection then generates a ‘match’ report to show
China (BRIC). These BRIC economies
of open account and a consequent move that the description of goods shipped
already represent 40% of the world’s
towards other trade instruments such as matches precisely the description of
population and a quarter of the globe’s
the BPO. goods ordered.
land mass. The recent BRIC summits in
Brasilia and Sanya also demonstrated

9. The BPO places a legal obligation on important for the market to support BPO and ISO 20022: A
the issuing bank to pay the recipient choice, so that those who favour open Technology Perspective
bank, subject to successful matching account can choose open account, and
Olivier Berthier, Misys - 25 Jan 2012
of 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 an
through a commercial L/C, while there is now another option on the menu. opportunity for a positive evolution in the
eliminating 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 by
traditional trade finance. Certainty of importers and exporters alike will look SWIFT, the bank payment obligation
payment not only facilitates access to alternative methods of trade finance. (BPO) provides an alternative means of
to 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 Chamber
of working capital, enabling the release of the obvious efficiency of removing paper of Commerce (ICC) Banking Commission
substantial volumes of cash which might that benefits all counterparties, there and a working group of banks and
otherwise 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 signing
When you consider that a supplier’s
supported across the entire transaction a co-operation agreement at the Sibos
order-to-cash lifecycle can sometimes
lifecycle. in September 2011, with the intention of
exceed 120 days with inherent FX risk, it
is 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 current
high-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 been
André Casterman, head of trade and
shipment finance. In this scenario, credit around for years, will be for many more
supply chain, SWIFT, argues “there
risk is transferred to the obligor bank, and are trusted and used globally, the
has been never been an equivalent
thus mitigating counterparty risk. The time and paperwork required means that
instrument to enable an exporter to
supplier can also issue a BPO in their local there is certainly space for modernisation
trade on open account with the same
currency, mitigating any perceived FX risk of the system, particularly when it comes
degree of confidence that payment will be
from the once stable currencies of the to open account transactions not currently
executed in accordance with the terms
dollar, the euro and sterling. benefiting from L/Cs’ well-known risk
of a L/C.” Where banks attempt to plug
the gap through issuance of conditional mitigation advantages.
payment guarantees or standby L/Cs, Goldilocks and the BPO As is often the case, change involving
the BPO acts as an electronic inter-bank This ‘Goldilocks scenario’, where L/C are new technologies and standards can
conditional 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 be
mitigation and financing tool to all trading opportunity for existing global open afraid. Its standards-based technology
counterparties. account networks. foundations in particular are merely
Of course, the BPO does face significant Complex data matching solutions bring following the same path of evolution
challenges in terms of market acceptance. together the required electronic data undertaken by other areas such as cash
The modern version of the documentary elements consistent with ISO 20022 management since the mid-2000s, and
L/C became established as an accepted messaging standards with the ICC BPO the transition to BPO is unlikely to be
market 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 the
of a set of rules - the Uniform Customs instrument itself from a financial and risk
Whether importers wish to reduce
and Practice (UCP). For the BPO to management perspective, complementary
fees, enhance process efficiency or
become as widely accepted as the L/C, advantages are also expected in the
provide improved terms of trade to
it will benefit from the backing of a similar increased granularity of the data the
their overseas suppliers, existing global
set of rules published and maintained by BPO exposes. Not only will it improve
electronic networks such as SWIFT and
the ICC. SWIFT is currently collaborating settlement of trade transactions, but its
GXS, currently processing billions of
with the ICC and its membership to ability to read even more information and
transactions and trillions in spend, are
publish ICC rules for the BPO in early increase visibility should also mean banks
ideally placed to propel the BPO forward
2013. 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 capital
this new instrument today, can do so by
management. BPO
making use of the existing infrastructure,
standards and rules developed by SWIFT. A BPO is an irrevocable undertaking
given by a bank to another bank that
Banks traditionally perceive documentary payment will be made on a specified date
L/Cs as low risk business and there is after a successful electronic matching of
no 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 other
that it seeks to bridge the gap between (SCF) is the lack of standardisation.
instruments throughout their lifecycle
the current system of L/Cs, which, But a key advantage of BPO is that it
including subsidiary events and copies of
despite its value, is often blamed for is standards-based - following the ISO
documents.
being slow, inflexible, administration- 20022 standard - and therefore provides
intensive and costly in terms of both In addition to an interactive web-based an unambiguous reference to its definition
paper and processing, and open account user interface, some also include the and mechanism. It is again here a strong
transactions lacking the traditional L/C ability to integrate directly with the analogy with the L/C and its uniform
assurances 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-based
techniques in the context of open
but a consensus among the financial definition and practices today - in spite
account transactions to manage the
institutions using customer portals of initiatives such as the BAFT-IFSA
risks 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 be
for exporters can be mitigated through BPO is fundamentally aiming to tackle this
exchanged and managed electronically
buying 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 in
selling their invoice portfolio at a discount. The same level of dematerialisation is terms of business rules which the ICC is
However, these methods tend to cover largely in place at most banks’ back currently working on. Another important
only a portion of the trade transaction office operations where integrated trade aspect of the ICC endorsement to help
and lack integration with the underlying finance systems process transactions and widen adoption is the decoupling of BPO
end-to-end flow of information along the manage the necessary electronic data from being exclusively run on the SWIFT
physical supply chain. interchange with the customer channels, TSU infrastructure, despite the SWIFT
other banks via SWIFT and payment service being the obvious initial reference
From a risk management perspective with
gateways. implementation.
open account, it is also incumbent on the
parties to know their counterparties’ risk Therefore, we already have in principle Provided that all aspects of the upcoming
profile. For this reason, open account is both the channels and the back office ICC rules are fulfilled, it shall be possible
mostly 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 solution
new customers without a proven track chain. Much of the infrastructure needed provider or consortiums of the above, to
record 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 much
managing risks. data, and banks to automate the overall like L/Cs, which are independent of the
BPO aims to mitigate open account risks
and to accelerate the payment cycle.
It enables banks to provide their trade
finance customers with guarantees and
other banking services on open account
terms. Based on ISO 20022 messaging,
it brings together the Trade Services
Utility (TSU), SWIFT’s matching utility as
a reference implementation, with a set of
business rules that replace the reliance
of L/Cs on actual documents (either on
paper forms or electronic as authorised
for many years by the eUCP rules of the
ICC but with little success) with dynamic
data sets that can be automatically
streamed.
The Same, But Different
The use of electronic data exchange
to support trade finance is not a
fundamental 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
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