The Bank Payments Obligation (BPO), Swift’s electronically-transmitted rules-based instrument, looks set to become a mass market reality next year. Liz Salecka examines how it is being developed.


plans to transform the BPO, an instrument used to guarantee payments in trade transactions, into a globally-standardised trade finance solution are gathering pace as a result of collaboration between Swift and the International Chamber of Commerce (ICC) Banking Commission.

Presently the BPO’s use is exclusive to transmissions over the Trade Services Utility (TSU), a commercial inter-bank messaging system owned by Swift. However, the two parties are making rapid progress in plans to create industry-standardised rules for the instrument and make it technologically independent of the TSU.

The adaptation of the BPO rules, phase one of the process, was completed in March this year and the adapted rules
are now being reviewed in 25 countries. The full publication of final rules is anticipated in early 2013. “The ICC Banking

Commission and Swift are working together to ensure that the BPO rules and standards are adapted and developed so that they are industry-owned and technology-neutral,” explains André Casterman, head of banking and trade solutions, Swift, pointing out that the goal is to encourage widespread adoption of the BPO. “This means that the new rules and standards will be made available to other independent technology providers who, by supporting them, will enable BPO transmissions over their own platforms for inter-bank messaging.”

He adds that while independent providers of trade finance solutions such as Misys and China Systems already offer solutions that are BPO-enabled, providers of reverse factoring solutions are now also being encouraged to adopt the new industry-wide standards when available.

Meanwhile, David Meynell, director, trade finance FI product management, Deutsche Bank, who is a long-standing supporter of the BPO and actively involved in its ongoing development, points out that although there are many trade finance solutions available, not one is truly global – and this is critical.

“The collaboration between Swift and the ICC Banking Commission will result in the collaborative electronic tool that has been sought for some years,” he says.

“It is important to be aware that corporates and banks do not remain restricted to the TSU for BPO transactions. They will soon be able to use any vendor platform – and banks too will be able to use their own platforms for BPO transactions. This will result in more competition and competition can be a good thing.”

Casterman confirms that the new rules will enable intra-group transactions within banks that are looking after the needs of both the importer and the exporter in a trade finance transaction. “These banks will be able to transmit the BPO internally – between their branches. This is very relevant to large banks once they witness high volumes of this type of traffic.”

The tipping point for BPO

Many other banks have also welcomed the Swift/ICC Banking Commission initiative for its potential to spearhead the BPO’s global take-up.

“By having a clear set of rules for the BPO, we will make this solution much more efficient – and will see the growth of the product,” says Adnan Ghani, head of transaction services origination, UK (international), network and trade, RBS, which already supports the BPO as a Swift TSU instrument. “The full commercialisation of the BPO requires a set of rules that everyone can see and feels comfortable with – and this will drive its legitimacy.”

Meanwhile, at Bank of America Merrill Lynch, which is not a TSU member, Paul Johnson, director, senior product manager, global trade and supply chain products, believes that having a new set of industry rules that all banks can adhere too will be the “tipping point”.

The bank, which has its own proprietary format of the BPO called Payment Assurance – will replace this with the industry-standardised BPO.

“We do support the new model of the BPO that is now being developed, as opposed to the one originally devised. As the BPO is now being separated from the closed technology of the TSU then we will definitely become a party to it,” he says. “The focus now is on a standard BPO format and a common rulebook, and less so on a proprietary Swift technology application.

This means that the BPO can now be used by the broader Swift network. It will become available to 8,000 banks – not just those that use the TSU technology.”

Ashutosh Kumar, global head of corporate cash and trade product, transaction banking, Standard Chartered also notes that the take-up of the BPO has been low so far because it is a relatively new concept, and has not benefited from the existence of an industry-wide standardised agreement.

However, he also points out: “Ultimately, separating the BPO from the TSU is not the big change. What’s key is that we are now seeing the creation of new BPO rules (that are based on industry-wide IS0 20022 standards for financial services messaging) which will place a firm obligation on the buyer’s bank to pay.

“Going forward, we are likely to see that the TSU will continue to be used as the main medium for BPOs. The BPO needs consistency – and there are few messaging systems that can offer the data matching capabilities required for a BPO.”

There is already evidence of greater banking support for the BPO.

As many as 90 banks are now members of the TSU, and 31 of them are getting ready for BPO transactions. Two banks – Bank of China and Bank of Tokyo Mitsubishi – were involved in the first live BPO transactions, and are now participating in regular BPO transactions between themselves and with other parties. Others supporters such as Standard Chartered, Deutsche Bank and JP Morgan are at the implementation phase.

“On the commercial side, we are already exploring the BPO as a proof of concept with corporate clients and partner banks, and testing has already taken place. The feedback has been very positive,” confirms Meynell at Deutsche Bank, but he notes: “There still has to be a huge educational programme put in place to increase awareness of the BPO. Securing greater corporate involvement is critical to the success of the BPO – and this will not be achieved without their support.

“As more banks take this forward, and more corporates understand the business case for the BPO, there will be a ‘domino effect’ in its take-up.”

Casterman agrees: “Buyers and sellers need to be persuaded to move away from the use of letters of credit or open account trade to using the BPO, and put in place the set-up required for such transactions.”

He points out that BP Chemicals, a major exporter, is currently encouraging its buyers to participate in BPO transactions to accelerate settlement for trade transactions.

“So far, we have seen most of the BPO transactions take place in Asia but that is not really because of the nature of the region – rather because two of its banks were more advanced and ready for BPO transactions,” says Casterman.

“Once we see BP Chemicals conducting BPOs, there will be a much stronger focus on the Middle East – as well as more BPO traffic across the Europe, Middle East and African region as a whole.”

The BPO is expected to find a strong market among sellers involved in open account trade – particularly those seeking a degree of risk mitigation.

“There are lots of companies using open account trade which want to mitigate some of the risk without having to meet the cost of a letter of credit. The BPO is more efficient, cuts costs and can help with working capital management,” says Meynell.

Ghani at RBS adds: “Some corporates are comfortable with the risk a buyer presents because they have been working with that buyer for a long time and are happy to just wait for payment. But in other situations they may not be 100% comfortable and this is where the BPO presents an ideal solution.”

Responding to corporate needs

Standard Chartered’s Kumar also believes that the BPO fills a gap for corporates looking for the efficiency and flexibility of open account trade, while ensuring a degree of payment certainty.

“For corporates moving to the BPO from open account – or even letters of credit-based transactions – it offers the best of both worlds,” he says.

It is also very likely that many corporates will look to replace letters of credit with the BPO so that they can remove the inefficiencies of paper-based processes, according to Swift’s Casterman.

“The BPO offers faster processing; removes the need for paper documents to transit through banks; carries all the information needed; allows the buyer to reduce duration of credit lines and also allows the buyer/importer to take receipt of goods faster,” he says.

However, there is also a general consensus that letters of credit still have a vital role to play.

“Corporates looking for new buyers in more challenging emerging markets will always seek letters of credit,” says Ghani. “Much depends on the customer. Where the trading relationship dates back over 10 years, an exporter is likely to feel comfortable working on an open account basis, but with a new buyer, the exporter may want to play safe and request a letter of credit.”

Bank of America Merrill Lynch’s Johnson too believes that letters of credit are here to stay: “More and more transactions are now completed in the open account space – with or without the BPO – but there are still a number of parties that cannot dematerialise paper documentation, many of which are restricted by government insistence that they use paper,” he says.