by David Meynell

Trade finance has seen significant changes in the past 25 years. Banks have continually sought to improve efficiency, reduce cost and paper and provide enhanced solutions along the supply chain. The effects of these developments have been most notable in terms of technology, workflow and integration, all of which have been geared to optimize the use of digital data. And this is the key to future success - not least because it has the potential to transform transaction banking.

The advances thus far have been considerable. A large number of technology initiatives have helped to develop the e-commerce offering, with varying degrees of success. These initiatives have come hand-in-hand with the introduction of proprietary online trade banking solutions that have created workflow opportunities for banks ranging from centralization to outsourcing.

Expanding on this in-house development, a number of banks have also been able to make significant inroads in terms of integrating the physical and financial supply chains and bridging the gap between trade finance and cash management, which have conventionally been treated as discrete banking areas despite their natural synergies.

Yet even in the face of such progress, until now no one approach has obtained the critical mass required to constitute global cross-industry standards. Transaction banking has yet to achieve the critical combination of factors that will provide clients with a new instrument in a multi-banking environment that covers the full spectrum of their trade needs.

Key demands

In addition to trade finance practitioners' traditional requirements, two key demands have more recently emerged. These are an increasing desire to move away - as much as possible - from paper-based processing, and the need to handle increased open account financing for clients. Efforts to meet these requests have been hampered by a lack of common industry standards.

For example, we have seen success with the adoption of ISO 20022 message standards for Single Euro Payments Area (SEPA) - which has ensured that there will be a common understanding of shared digital information for payments. But this has yet to penetrate the trade side, even though these standards are already in existence. Numerous attempts have been made over the years to achieve these aims, but these have met with varying degrees of success.

The Bank Payment Obligation (BPO)

With this background, SWIFT in 2005 outlined plans to develop a Trade Services Utility (TSU), which would use SWIFT's infrastructure, standards and structured messaging service to access a central data matching and workflow engine, one that compared and matched a subset of data from trade documents and provided a transaction workflow associated with the matching process.

A number of members of the ICC Banking Commission were involved in the early development of this solution, which led in turn to the development of the Bank Payment Obligation (BPO). The BPO, as André Casterman explains in the previous article, is an irrevocable undertaking given by one bank to another that payment will be made on a specified date following the successful electronic matching of data - thereby providing the benefits of automation to all parties concerned. This approach will enable banks to offer flexible risk mitigation and financing services across the supply chain.

Subsequently, as announced in 2011, SWIFT and the ICC Banking Commission signed a Declaration of Cooperation that will enable industry-wide adoption of the BPO1. This partnership has been described as one that will revolutionize global trade finance by leveraging electronic transaction data available from dematerialized business-to-business (B2B) processes, and by establishing paperless inter-bank practices2.

As a result of this joint declaration, a Drafting Group was established to develop ICC-BPO rules. The group comprised members from both the ICC Banking Commission and SWIFT, with the aim of producing a set of BPO rules that are both neutral and technology-independent. This supports one of the key findings of an ICC survey3, namely that there is an increased demand for broader ICC rules governing trade finance. Market feedback emphasized that the involvement of the ICC Banking Commission in developing such rules has generated strong interest in the BPO.

Increasing processing efficiency

In this digital age, corporates are seeking improved transaction times and workflows in traditional trade products such as letters of credit. They also require improved risk mitigation techniques for their open account (OA) business without having to pay the full L/C operating costs. The BPO is being developed, along with the associated ICC rules, to address these issues.

From an L/C perspective, using this approach will result in significant improvements in the document checking process. Today, documents are prepared and subsequently presented to a bank by post or courier, which causes delay. Once documents are received by a bank they are prioritized and are checked within a certain time frame. While many banks try to achieve same-day checking, the norm tends to be longer and can, under UCP 600 rules, take five banking days, further delaying the process.

Market feedback suggests that the percentage of documents rejected on first presentation is still high, possibly an average of 65% globally, although this differs from region to region.

Figures from the ICC Global Survey show that:

- 34% of respondents experienced an increase in the number of refusals by issuing banks in 2010,

- 85% of respondents, when acting in the capacity of a nominated bank, reported they had experienced an increase or no change in the number of spurious/questionable refusals,

- 34% of respondents indicated an increase in the percentage of documents refused on first presentation. Respondents reported an average 48% refusal rate when they were the issuing bank and 53% when they were acting as a nominated bank. These figures seem to be on the low side when compared to other market gathering exercises,

- 17% reported an increase in the number of spurious discrepancies in 2010.

In light of these findings, the introduction of an automated data matching and a workflow solution will, at the very least, ensure enhanced efficiency, reduced cost and improved cash-flow. Further, the introduction of the BPO, supported by ICC-BPO rules, will allow banks to broaden OA offerings to their client base, while cross-industry standards will support multi-banking development and alleviate existing communications issues.

Rules and frameworks

As stated, a key factor when introducing any new trade instrument is to ensure it is supported by robust independent rules. This is the aim of the ICC-BPO Rules Drafting Group. A significant amount of work has already been completed in the formulation of ICC's Uniform Rules for Bank Payment Obligations (URBPO). A preliminary outline of this work was presented to the ICC Banking Commission at the October 2011 meeting in Beijing, and a further progress report was presented at the March 2012 meeting in Doha.

In order to ensure alignment with previously published rules, it is also important that any new rules draw upon the experience and knowledge gained by ICC in the formulation of the UCP and the eUCP, which have been used as primary sources of information. Other sources included other ICC rules, TSU guidelines and service descriptions, the existing BPO rulebook and market practice (to the extent it exists).

Looking ahead

The establishment of the rules is progressing quickly, with formal approval by the Banking Commission proposed for the first half of 2013.

It is important to note these rules will not stand in isolation. In addition, raising market awareness of the BPO and its benefits has to be an ongoing process. Commercialization efforts by member banks will have to accelerate in the coming months - after all, it is not often that we have the opportunity to introduce a transformational global product to our clients.

It is worthwhile highlighting a recent comment from a technology provider, which states that reaching critical mass for any service is always complex, but that the technology transition to BPO will be relatively simple with quickly proven benefits 4.

With this in mind, I can only endorse the comment made by the Chair of the ICC Banking Commission, Kah Chye Tan, who stressed that it is important that all banks involved in trade finance, irrespective of size or geographical coverage, work together and facilitate the introduction and successful implementation of the BPO. In doing so, they will leverage both SWIFT's initial concept and the work now underway in ICC 5.

David Meynell is Head of Product Management, Trade Finance Financial Institutions at Deutsche Bank, UK.

His e-mail is

1 ICC Banking Commission press release 21st September 2011.

2gtnews: 'Accelerating Global Trade Finance', André Casterman - SWIFT, 23rd January 2012.

3ICC Global Survey 2011 "Rethinking Trade Finance".

4gtnews: "BPO and ISO20022 A Technology Perspective", Olivier Berthier - Misys, 25th January 2012.

5gtnews: "Bank Payment Obligations: The Way Forward", Kah Chye Tan, 19 January 2012.