With 15 banks now ‘live’ with the bank payment obligation (BPO) GTR decided it was time to revisit the dialogue on the two issues plaguing the instrument of late: its potential and its positioning in the market, matters which the trade finance industry is seemingly only now getting to grips with.

 

BPO POSITIONING
Most of the global banks are now singing from the same hymn sheet: the BPO is not a “solution in a box”, but rather a mechanism that the industry uses to drive solutions to customise clients and markets. But is the industry at large in agreement with this verdict? GTR asked individuals at Sibos in Boston for their thoughts.

 

Paul Johnson, director, senior product manager, global trade and supply chain products, Bank of America Merrill Lynch

“The BPO essentially moves country and credit risk from one bank to another, and you can use that in a supply chain finance solution, or receivables finance – or any kind of risk mitigation. Whereas in the early days it was positioned as the solution to all your trade questions and problems.

The messaging today from the ICC and Swift accurately reflects the nature and the value of the BPO as an enabling instrument that is an important, but modest, development in the long evolution of digital trade. It was positioned a few years ago, maybe by accident, as something far more encompassing. The BPO is a bank to bank discussion on how best to achieve what clients are looking for in a 4-corner model. To me, there is a very limited need for a discussion with corporates around the mechanics of the BPO; it’s an enabler, not a product. I think the banking community generally now has its head around that idea.

Banks need to realise that clients are never going to come to them and say: ‘I want the BPO’. They’ll say: ‘I want to provide financing to a supplier in an emerging market where I don’t have a presence.’ And then the bank works out how to do that – it’s a paradigm shift in the process: it’s taking a client need and then engineering an appropriate solution. Because if you wait for your clients to ask for the BPO, you’ll wait forever.”

André Casterman, global head corporate and supply chain markets, Swift

“Within the ICC working group, two years ago we developed a common ICC presentation to clearly position the BPO as a new option in the trade portfolio for banks: not to replace the letter of credit, because that market is too small for banks to make huge investments; it’s for corporates to use alongside other instruments.

It has been clear from the start, however, just because we out it on paper, doesn’t mean that everyone has really absorbed this concept. We identified from the start that there was a risk for misinterpretation.

My take on it is that banks want to use the BPO to get new transactions from the open account space and leave their LC transactions where they are. The reality is that they will not keep all of those LCs. It’s better that those LCs move to BPO than to credit insurance, which is the extreme case where banks lose everything.

There is also confusion because banks are not used to innovating trade on the technology side. Some banks are confused because it’s not easy to create new services with new contracts based on new rules and new messaging formats and moving to very structured data: we are going from one extreme to another, so I accept that it takes a bit of time.”

David Hennah, head of trade, Misys

“One of the unfortunate things about BPO adoption is that almost all of the corporate early adopters that have embraced it have implemented BPO as a replacement for LC – and that’s not what it’s intended for, and that’s not what the banks wanted at all. Banks certainly don’t want to promote it in that light, and I think it’s forced some of the banks to take a backward step and say ‘we don’t want to lose our LC business’. The early corporate adopters of BPO did so because they thought they could save money on LC confirmations. That had a negative impact on market perception and market adoption.”

 

 

BPO POTENTIAL
At Sibos, GTR also asked individuals if the BPO is suffering an identity crisis of sorts, in that people are unsure of exactly what it is, and what their thoughts are for the industry-wide adoption of the instrument.

 

Paul Johnson, director, senior product manager, global trade and supply chain products, Bank of America Merrill Lynch

“The digital trade conversation seems to start and be ring-fenced around the BPO, which in my mind is back to front. It’s a payment instrument – it’s lightly used, but has tremendous potential. It’s wonderful as a long-term “gold standard” for the banking industry to aspire to, but there’s a tremendous amount we‘re already doing with digitisation that doesn’t get as much attention.

The current digital solutions are important to clients because they can accelerate cash flow, but they may not be as revolutionary as the BPO. We’re quite hopeful, but you have to catch corporates at the point where they’re motivated, as over time, other priorities emerge.”

Chris Bozek, head of global trade and supply chain product team, Bank of America Merrill Lynch

“There is increasing interest from financial institutions in the BPO, and we’re having constructive dialogue with corporates in all the regions. A by-product of these discussions is renewed interest in the digitisation of traditional transaction flows. It’s a healthy dialogue on how to remove paper from the process on multiple fronts.”

Michael Vrontamitis, regional head of product management, North Asia, transaction banking, Standard Chartered

“The BPO is an efficient and cost-effective way of exchanging data that enables the right decisions for financing transactions in the supply chain. However, I don’t think the matching engine quite operates in the way it needs to. We need to figure out what the solution is – it’s definitely something that can be solved.”

Thierry Roehm, global head trade of services, Société Générale

“The BPO is a wonderful concept – but it is still a concept. It’s wonderful because LCs can be considered by companies as a burden.

The BPO is an innovative solution, but there are several issues. Firstly, it is less secure than the LC.

With the BPO, I’d prefer to be the bank of the exporter than the importer, because there is no document to secure it. Risk of fraud is higher. I’m not an old school guy, but there is security in having the actual documents, which you don’t have with the BPO.

When using the BPO, you need to write down an agreement to be discussed with the bank counterpart, which is fine for most banks, but what happens when it comes to dealing with a local or second or third-tier bank in some countries? I would like to see the first dispute for the BPO between an international bank with a domestic bank and how the local judge will react to the BPO.

What’s more, the main part of healthy business is done in Asia. Why? Because the exporters are using the LCs as a mean of financing – and the question of financing is not solved with the BPO: you need once more a legal agreement with the bank for the financing.”

David Hennah, head of trade finance, Misys

“There are more than 3,000 banks in the world that do trade finance, yet only 4% of those banks are subscribed to the TSU. There is a huge gap of lower tier banks not subscribed to TSU who can’t offer BPO to the market, and as such, this is denying access to the BPO for a huge proportion of the SME market that could potentially benefit the most from it – those most exposed to working capital deficits.

I see the probability that there will eventually be other transaction matching applications in the market – in addition to the TSU – perhaps hosted by individual banks. They may be closed user groups, but I think that may help to open the market up to those banks and corporates that can take most advantage of it.

I still think the BPO has the potential to obtain market share similar to the LC, but that’s not something that’s going to happen overnight. We could be another five or six years away from achieving critical mass.”