Article

By André Casterman

While letters of credit have been a valuable enabler of global trade for centuries (and remain extremely popular in regions such as Asia, where more than 60 per cent of all L/Cs are handled), they are being supplanted by open account as a means of settling trade transactions. Yet between these two payment methods there remains a need for an alternative instrument that combines the certainty of payment of the L/C with the speed and higher efficiency of open account (i.e., where trade documentation is exchanged directly between counterparties given sufficient level of trust). That need can now be fulfilled with the Bank Payment Obligation (BPO), which has global applicability and is particularly attracting Asian companies. While they are a newer instrument, BPOs offer the same degree of commercial certainty as commercial L/Cs.

The BPO payment method aims at delivering the best of both worlds in terms of risk mitigation and efficiency/ cost. In comparison with an L/C, a BPO has a far shorter transaction timeline, reducing transaction time in most cases five to seven days, and in some cases even 10 days or more. No checking and transmission of physical documents are required, as everything is done electronically in the SWIFT Trade Services Utility (TSU) with the data being routed using the ISO 20022 messaging standard.

Furthermore, unlike for an L/C, checking is done electronically and automatically in the TSU - there is no need for both banks to conduct their own separate scrutiny as is the case with an L/C. At the same time, a BPO provides the same assurance of payment as an L/C and can also be used by suppliers to obtain pre-shipment finance.

Further to the April 2013 adoption of the URBPO by the ICC Banking Commission, a growing number of banks and corporates started implementing the new rules in order to extend their trade finance services for the benefit of their corporate clients. In this article, I wish to share the highlights of the current status of adoption.

Bank adoption

A total of 56 banking groups have now confirmed their adoption of the BPO. With this metric, we aim to identify those financial groups that have taken a clear decision to implement the URBPO and that wish to communicate it early on to their clients. This community of future BPO banks includes 15 banks from the top 20 trade banks (according to SWIFT traffic statistics).

Within this group, a total of seven banking groups are already live on the BPO payment method. These include the following banks: Bank of China, Bank of Tokyo Mitsubishi UFJ, Korean Exchange Bank, Standard Chartered Bank, Siam Commercial Bank, Hua Nan Bank and Bangkok Bank.

Besides these seven early adopters, a total of 13 banking groups are operationally and commercially ready for live but not yet live with any client. These include Bank al Etihad (Jordan), Barclays, Byblos Bank (Lebanon), Commercial Bank of Dubai, Commerzbank, Deutsche Bank, J.P. Morgan, Kasikornbank (Thailand), RHB Bank, Standard Bank of South Africa, Sumitomo Mitsui Banking Corporation (SMBC), Turkiye Is Bankasi and UniCredit.

Finally, in terms of operational readiness on the Trade Services Utility (TSU), a total of 83 banking groups are connected to the platform to exchange BPO-related trade data to correspondent banks. As some banking groups are actually present in many countries, a total of 144 banks (at country level and identified through distinct BIC8s) are reachable on the TSU platform.

Corporate adoption

Corporate adoption is a key objective in this innovation, as the BPO offers an enabler for banks to develop value-added services for their clients to benefit from increased efficiency in their trade flows. At the end of 2013, a total of 25 corporates were live on the BPO and working with one of the seven live BPO banks. Two recent examples were showcased by the leading BPO banks:

• In September, The Bank of Tokyo- Mitsubishi UFJ announced Vale's adoption of BPO for intra-Asian exports of iron ore. Vale's objective is to be paid on time f or at sight payments.

• In October, Standard Chartered Bank announced the use of BPO by PTT Polymer Marketing Company, a Thailand-based petrochemical marketing and distribution company. This implementation covers polymer (plastic films) exports from Thailand to the UAE. As a result, the importer pays lower banking fees thanks to issuance of payment obligation closer to shipment date, whilst the exporter gets paid on time and increases its competitiveness.

A winning combination: BPO and eB/L

In 2014, ICC and SWIFT teams will focus on increasing awareness of the corporate market for the BPO. The 20+ banking groups that are live or ready for live on BPO offer a wide set of BPO-based services around the globe, and we know this group of banks continues to grow. However, as the decision to use the BPO lies in the hands of corporates, it is vital to improve the understanding of this innovation across multiple industries. Today's BPO exists in three key industries: retail, automotive and chemicals, and there is no doubt other industries will soon discover the benefits of this new payment method.

In 2014, we will be looking at combining the BPO with another key trade-related innovation: the move to electronic bills of lading (eB/L). The bill of lading is an impor tant document that links the physical supply chain (and related business to business information flows) with the financial supply chain (and related bank-to-bank information flows). Whereas the BPO focuses on dematerializing inter-bank flows to support payment and risk mitigation, service providers such as Electronic Shipping Solutions (ESS) focus on dematerializing corporate-to-corporate trade documentation such as the bill of lading.

Through the respective value propositions of the BPO and the eB/L, we maximize the benefits for importers and exporters. Corporates and banks will be able to submit original data from the electronic bill of lading and supporting documents as trade data to be matched against the BPO payment conditions, as well as automate the release of original documents to the buyer on a BPO match. This integration of eB/L with BPO meets the full goals of BPO by providing automated processing of key data, reducing risk and accelerating the trade and finance processes for all four players involved in a BPO transaction.

The year 2014 promises to be an interesting one, which will expand adoption of the BPO by corporates on a global basis.

André Casterman is Head of Banking and Trade solutions at SWIFT and Co-Chair of the BPO Project at ICC. His e-mail is andre.casterman@swift.com