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André Casterman is Head of Corporate and Supply Chain Markets at SWIFT and is Co-Chair of the BPO Project that developed the recently adopted ICC/URBPO rules and related SWIFT messaging standards.

DCI: Some commentators have called the BPO the most revolutionary development in trade finance for some decades. But the question still arises: apart from the largest banks, how aware are most banks of the BPO, and what it can mean to their business?

Casterman: There is a growing awareness in the market. More and more banks now understand what we are doing, in terms of ICC and SWIFT helping them to accelerate the inter-bank traderelated processes. We see more banks all over the world joining the SWIFT trade matching application called the Trade Services Utility (TSU) to adopt the BPO and to operate BPO transactions on behalf of their corporate clients. We try to help banks structure their commercial efforts.

On the corporate side, there is still much more to achieve to raise awareness. This awareness can be achieved, not by focusing on the BPO as a payment instrument, but rather by advertising the value-added services that banks can offer on top of the BPO, such as payment assurance, pre-shipment finance and post-shipment finance.

DCI: The BPO was conceived in part as an electronic solution to the increasing move to open account. Is this change to open account common to all regions or are there still some where the letter of credit still dominates trade finance transactions?

Casterman: Asia is a region where letters of credit remain a key instrument for the majority of the trade transactions. It is hard to quantify how much the L/C is securing trade in Asia, but what we can see from SWIFT's traffic statistics is that 70 per cent of the letters of credit have a leg in Asia. 80 per cent of those are intra- Asian letters of credit.

DCI: People have been forecasting the end of paper-based trade finance for some time now. When ICC developed the eUCP rules, for example, there was talk of electronic trade finance becoming dominant within a decade, but that has not happened. Why is the BPO any different from what has not happened with the eUCP?

Casterman: The L/C is here to stay. No one really wants to eliminate or replace it. It will remain the preferred instrument for parties to secure a trade transaction when the level of trust is low or zero. But as soon as trading parties have more confidence in their relationship, they will ask their banking partners to be more flexible and efficient when offering risk mitigation and financing.

And this is where the BPO starts to make sense, when risk financing is required but efficiency becomes critical for the exporter to be more competitive or for the importer to pay suppliers faster, for example.

The BPO does not aim to replace letter of credit transactions, and the real challenge for banks is to attract transactions that have moved away from the L/C to open account and that are secured with a partial advance payment, a payment guarantee or credit insurance. These are the transactions the banks can win back with the BPO.

With the BPO, they will be able to do more than with the payment guarantee, and if they attract transactions from the credit insurance world, they will be winning the competition against the insurance sector.

DCI: In that regard, as of June 2013, how many banks have indicated that they are prepared to use the BPO?

Casterman: At this time, 50 banking groups have confirmed to the corporate market that they are adopting the BPO. But on the technical platform, we have more than 80 banking groups connected to the platform in order to operate BPO transactions. That number is continuously increasing.

DCI: So, you are satisfied with the pace of growth of the BPO adoption?

Casterman: I'm very satisfied on the bank side given the progress made by various banks. The next challenge we face is on the corporate side, to attract more corporates to adopt the BPO. This is happening thanks to a dozen of banks at this time.

DCI: Let's look at some of the impediments banks face before deciding to use the BPO. The first is cost and specifically the cost of technology to implement the BPO. One DCI writer said - and I quote - "Some market participants question whether it's worth spending a large amount of money on this, particularly when a bank may not find a trading partner who can provide a similar electronic set up". Is this a valid point and what's the typical technology cost for a bank to offer the BPO?

Casterman: The minimum technology investment for the bank to operate a low volume of BPO transactions is between 10,000 and 27,000 euros. This includes being connected to the SWIFT platform, which is a bank-to-bank messaging and matching tool to operate BPO transactions.

That is the cost to the bank. Once the volume materializes, banks need to increase their internal automation, and there they have to talk to their vendors to take advantage of the BPO functionality that their trade finance lenders are supporting. That is an additional cost. Those costs can be offset by the additional fees that the banks can charge corporates as they do now on the letter of credit transactions.

DCI: Is it fair to say that only very large banks are likely to take on these costs willingly?

Casterman: Fifteen of the top 20 trade banks are connected to the Trade Services Utility. But we also have many smaller banks from various countries such as China, Argentina, Chile, Korea, Morocco, Jordan, Belgium, etc., that are seeing the benefits of the BPO and want to market it to their clients. The innovation is not only relevant to large banks and large clients. And the bank may offer those services over a paper channel to their clients or using their internet portal. Corporate-to-bank flows do not need to be on SWIFT, only the bank-to-bank flows.

DCI: There is another impediment to BPO adoption, and that is the conflicting legalization and compliance requirements in different countries. Since compliance and sanctions requirements have increased and countries may have these conflicting standards, isn't this a hindrance for banks in those countries wanting to offer the BPO?

Casterman: Compliance requirements are growing, and they are as valid for L/Cs as for BPOs. Whatever the underlying instrument, these requirements are valid across the board. They may hold back banks from entering geographic areas or may encourage banks to pull out of some areas. That would, as a whole, limit their trade payments and trade business in those areas, including the BPO. However, the BPO makes it easier to adhere to sanctions screening because the data must be more structured.

DCI: Now that ICC and SWIFT have now teamed up to produce rules for the BPO, is this likely to help make standards more uniform internationally?

Casterman: Yes, definitely. That is something that banks expect from any new initiative: that all of the innovations be based on common standards. The banks do not want to operate with multiple formats. With clients, of course, it is the commercial aspect that counts. They will accept any kind of format.

But on the bank-to-bank segment, there is really a need for uniform standards. These standards are not only the messaging standards that SWIFT developed over 40 years, but also the legal standards that ICC has been developing for 80 years.

The two sets of standards have to go well together, and that is why the BPO is so special. For the first time, the ICC/ URBPO rules mandate the use of common messaging standards between banks and a centralized matching application, the TMA, which is SWIFTissued today. but which could be in another system in the future.

That is how banks can easily focus their efforts on the corporate-to-bank commercial proposition, which includes corporate-to-bank contracts, corporateto- bank commercial pricing and commercial offerings that rely on highly standardized bank-to-bank standards.

DCI: On the question of supply chain finance and the BPO, can you explain how that works for some of the banks that may not be familiar with it?

Casterman: The topic of supply chain finance is an important innovation that has arisen in the last several years. As defined by banks a few years ago, the use of electronic flows has been basically linked to automated financing. The bank receives electronic data of approved payables from a large buyer and with those approved payables it will manage the risks of future receivables and will automatically offer discounting to suppliers.

The bank makes a margin out of this intermediation between larger buyers and their suppliers. That is quite interesting for suppliers looking for early payment at a discounted rate defined on the basis of the buyer's credit standing, which is usually better than the supplier's.

So, essentially we are talking about a situation where we have a large buyer and smaller suppliers. This is a very interesting development because it shows that financing can be automated.

The limitations of that scheme are that it has been developed by large banks in support of large buyers and in a very proprietary way, where there are no standards. The bank works on its own, not with local banks that already have the suppliers as customers. The buyer's bank takes on board all those suppliers, which leads to more know-your-customer, onboard processes.

These are issues not usually advertised by banks. But thanks to the work ICC and SWIFT have done, we're enabling the buyers' bank to work with local banks and to avoid having to take on board all of those suppliers by working with the local banks that have already done so on their Web banking systems.

We are enabling the market to move from a single non-standardized bank setup to a standardized two-bank set-up. That will remove the know-yourcustomer issues for the buyer's bank, and it will increase the role for local banks supporting those suppliers. It will also enable the banking industry as a whole to extend what is now called approved payables finance to the very early stage of the transaction, which can be called purchase order finance or pre-shipment financing.

That is what we aim to do, and we have found that the large banks are looking for this kind of collaboration with local banks.

DCI: What do you say to banks that may fear that using the BPO will cannibalize the revenues they currently earn from their traditional paper-based lc business?

Casterman: We tell them that the BPO will definitely cannibalize some of their letter of credit revenues, but that is basically good for banks. First, they will keep those transactions in their shop rather than losing them to competitors that offer alternative risk mitigation services.

They will be able to charge the risk fee, which is the most important value-added banks can offer the corporate: to take on the risk of these future payments, with conditions, of course.

They will be able to remove costs not adding value - such as courier costs, manual processing costs, etc. - resulting from paper-based processes. With these costs removed, the margins will increase, but also their competitiveness will improve because they won't have to charge those costs to their clients.

In short, they will be able to retain the trade transactions in their trade business whilst continuing to offer their main value-added service, which is risk mitigation, and possibly financing. Whereas if they continue only with letters of credit and do not have the tools such as the BPO to offer with their service, they might lose the L/C business and lose their role in those transactions as well.

DCI: Looking ahead, let's say to 2020, would you think that in that time frame, there would be a generalized acceptance of the BPO, by both smaller banks and those with the resources now to adopt it? How widespread would you expect BPO use by the end of this decade?

Casterman: Looking to the 2020 milestone, I would expect BPO use to be as widespread as that of L/Cs, because as corporates discover the BPO, they will be asking their banks to develop payment assurance and financing services. And we know that banks can act very quickly when the corporate demand is there.

Hopefully, by 2020 the BPO will support more trade transactions than the letter of credit because the L/C has virtually disappeared in some regions, and banks want to win back transactions that moved to partial advance payments or payment guarantees which are not welcomed by importers or to credit insurance, which is not good for banks. n

André Casterman's e-mail is andre.casterman@swift.com