by André Casterman

The BPO: set to revolutionize trade finance

The partnership between ICC and SWIFT will revolutionize global trade finance practices by leveraging electronic transaction data available from dematerialized business-to-business processes and by establishing paperless inter-bank practices

A unique partnership

In my initial Opinion Piece entitled "Collaborative supply chain finance - A few more steps to go" published in SWIFT's Dialogue magazine of October 2010, I advocated that the time had come for "the International Chamber of Commerce (ICC) to embrace the BPO rules and help the industry establish best practices in supply chain finance". I also suggested that "a set of ICC rules governing collaborative supply chain finance will be a key milestone for the trade banks, as such rules will offer a legally binding, valid and enforceable risk mitigation instrument for financing open account transactions".

One year on, at Sibos in Toronto, ICC and SWIFT confirmed their joint ambition and action plan to provide the global trade industry with new rules and tools in support of international trade in the 21st century.

ICC was established in 1919 to facilitate the flow of international trade. It was in that spirit that the Uniform Customs & Practice for Documentary Credits (UCP) were first introduced in 1933 to alleviate the confusion caused by individual countries' promoting their own national rules on letter of credit practice. The objective was to create a set of contractual rules that would establish uniformity worldwide. The ICC rules on documentary credits, UCP 600, are the most successful privately drafted rules for trade ever developed.

SWIFT is a member-owned cooperative through which the financial world conducts its business operations. SWIFT provides a worldwide communications platform, products and services that allow customers to connect and exchange financial information securely and reliably. SWIFT also acts as a catalyst to bring the financial community together to shape market practices, define standards such as the ISO 20022 financial messaging standards and develop global technology solutions such as the SWIFTNet messaging and transaction matching services.

The recently signed SWIFT/ICC partnership is now well underway with an ambitious timetable aiming to establish the new "Bank Payment Obligation" rules by Q2 2013. The goal of both industry-owned organizations is to enable banks to extend the benefits of the letter of credit to the open account world by re-using electronic transaction data available from their corporate customers. Using the BPO, sellers will benefit from timely payments, and buyers will be able to support the pre-shipment finance of their strategic suppliers without conceding advance payments.

Opportunity for the industry

The physical supply chain has significantly increased efficiency through the use of new technologies and business models. In 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 in shortening order and delivery processes from an average of 20-plus days to same-day execution. However, on the banking side, most of the supporting global trade finance processes have not been optimized sufficiently due to paper-based practices slowing down key processes such as handling of discrepancies.

Now the time has come for the trade finance industry, using electronic transaction data, to link the delivery of financial services to what is actually happening in the physical supply chain. The emergence of trading hubs (e.g., South Korea, Taiwan, Hong Kong) and business-to-business e-commerce/e-invoicing platforms (e.g., Ariba, GXS, PayModeX, Peppol, Tradeshift) have significantly increased the dematerialization of business-to-business processes - such as sourcing, negotiation, quotation, ordering, shipping and invoicing. New electronic business-to-business processes are creating a new paperless world where efficiency gains and cost reduction are achieved to the benefits of both buyers and sellers. These trading partners now expect their banking partners to follow suit.

Leveraging electronic transaction data

Dematerialized business-to-business processes offer banks the opportunity to extend today's paper-based trade finance services to new services based on electronic transaction data.

The co-operation between ICC and SWIFT will deliver a complete package of new rules (the Bank Payment Obligation) as well as new messaging standards (ISO 20022 standards) and a new SWIFT cloud application for supply chain finance (termed the Trade Services Utility or TSU). The new rules and messaging standards will enable banks to leverage electronic transaction data available from the business-to-business world.

Using data representing the purchase order, the invoice, the certificates and the transport documents offer banks the ability to accelerate global trade finance processes and increase visibility on transaction details (e.g., line items) to better mitigate risk and finance transactions.

ICC BPO: a modern instrument

There has never been an equivalent instrument to enable an exporter to trade on open account (OA) terms with the same degree of confidence that a payment is executed in accordance with letter of credit terms. The BPO is an irrevocable undertaking by one bank to another bank that payment will be made on a specified date, after a specified event has taken place. This "specified event" is evidenced by feeding the relevant data elements taken from a range of associated OA documentation - such as purchase orders, commercial invoices, advanced shipment notices, bills of lading, etc. - into a shared matching application that then generates a "match" report to show that the description of goods shipped matches precisely the description of goods ordered.

The BPO places a legal obligation on the issuing bank to pay the recipient bank subject to the successful matching of compliant data. In short, the BPO delivers business benefits and security equivalent to those previously obtained through a commercial letter of credit, whilst at the same time eliminating the drawbacks of manual processing typically associated with traditional trade finance.

Certainty of payment not only facilitates access to flexible forms of financing; it also supports the more efficient management of working capital, enabling the release of substantial volumes of cash which might otherwise be trapped in the supply chain. Whereas banks have attempted in part to plug the gap, for example through the issuance of conditional payment guarantees or standby letters of credit, the BPO acts as an electronic inter-bank conditional promise to pay, offering a comprehensive and cost-effective risk mitigation and financing tool to all trading counterparties.

Extending the scope of supply chain finance

Although data-driven supply chain finance (SCF) solutions are widely available from large banks and from some third-party vendors, most are limited to the last mile of the transaction, such as using the invoice approved by the buyer to finance the supplier's receivables. Although this addresses suppliers' working capital issues, it only represents a small - though relevant - step when considering the potential of supply chain finance across the full transaction lifecycle.

With the BPO, banks are involved as from the very early stage of the trade transaction, i.e., from raising the purchase order throughout the transaction lifecycle. This is a key difference for banks that wish to provide, for example, payment risk mitigation and/or pre-shipment finance in a secure, efficient and collaborative way. These services represent much higher value for corporates.

Both large and mid-caps sellers will enjoy timely payments when dealing on OA terms, since payment will be made by their own bank independently of effective payment by the buyers. When necessary, buyers with strong credit ratings will be able to facilitate pre-shipment finance to support their critical suppliers without using their own capital as is often the case today.

Contrary to today's reverse factoring services, which are driven by large buyers, the BPO will offer an industry-wide multi-bank instrument relevant to any type of corporate in any industry.


By addressing cost pressures in the face of increased automation and changes in the regulatory environment, ICC and SWIFT believe that by working together and leveraging their respective positions in trade finance, the BPO will play a key role in the development of international trade in the 21st century. Using electronic transaction data, the banking industry can better respond to their corporate clients' need to accelerate financial processes and optimize working capital.

The time has come for banks to prepare for this innovation and start extending their supply chain finance services from invoice-based processing services (e.g., e-invoicing, factoring and reverse factoring) to PO-based services such as payment assurance, risk mitigation, pre-shipment and post-shipment finance. In doing so, banks will be able to better tackle key issues for sellers - such as delayed payments - whether using letters of credit or open account. They will also be able to speed up processing, enable buyers to optimize credit lines and reduce handling costs and inventories. Moreover, buyers will be able to avoid supplier defaults by facilitating pre-shipment finance without using their own capital.

Banks adopting the Bank Payment Obligation (February 2012)

Banco do Brasil

Bangkok Bank

Bank of China

Bank of Communications

Bank of Tokyo-Mitsubishi

BMO Capital Markets

BNY Mellon

China Citic Bank

China Minsheng Bank

Commercial Bank of Dubai


Deutsche Bank

First National Bank

Hua Nan Bank

JP Morgan


Korea Exchange Bank

National Bank of Greece

Qatar National Bank

Standard Bank of South Africa

Standard Chartered Bank

As of February 2012, some 21 banks (see above) had confirmed their decision to adopt the BPO. As corporates discover the benefits of the BPO, they will expect their banking partners to react quickly. Waiting for the ICC/BPO publication of rules in Q2 2013 and missing the opportunity to get ready in 2012 would - in my view - be a mistake banks ought not make.

André Casterman is Head of Banking and Trade at SWIFT and Co-Chair of the BPO Project at ICC. His e-mail is