The BPO is a compelling settlement tool. But how can corporates harness its potential? It’s a question of finding a strong business case and a committed set of partners that can offer support at every stage – starting with internal stakeholders and moving right through to corporate counterparties and banks, says Herbert Hertnagel, Head of Financial Risk Management at ZF Friedrichshafen AG.


In December 2014, we at ZF Friedrichshafen AG completed our first ever Bank Payment Obligation (BPO), using UniCredit as the partner bank for the transaction. The process was fast, convenient and well-executed – requiring only minimal disruption and setting us up to replicate the transaction many times in the future. This initial transaction alone demonstrated the key advantages of the BPO – most significantly, the benefits of bank intermediation combined with the speed of an entirely digital process.

Ultimately, this transaction had a transformative effect on our relationship with the client in question – increasing volumes of trade afterwards. The net result has been a compelling business case for BPO settlement, which is something we will seek to apply in our dealings with other clients. But of course, none of this would have been possible without the help of our committed and experienced partners – and in particular, our banks.


A learning experience

We were introduced to the BPO at a very early stage, through presentations outlining the procedure on a theoretical level. But to be sure of its value, we needed a test case – a situation that would demonstrate the advantages of a BPO without compromising our existing workflow. Our first attempts in this area were unsuccessful – scuppered by the fact that the banks we contacted were not yet ready to oversee a BPO transaction.

Some months later, however, one of our clients, along with its bank, approached us to request a BPO transaction. This was ideal – an opportunity where all would benefit from the transaction, and a chance to see how the BPO works in practice.
Once again, we contacted a number of banks to enquire about their BPO services, and once again we had little success at first. Yet after a while of looking, we received a short message from UniCredit that changed everything. The message read, quite simply: “We have a match”. It was this that elevated UniCredit above its competitors – it had already found and overseen a successful BPO match. In our opinion, this experience put it at a considerable advantage over its peers.

And sure enough, after a detailed discussion with the UniCredit team, we were convinced that we were dealing with a market leader in the BPO field – endowed with the expertise and commitment to guide us through our first foray into this new method. From here, it was an easy decision to appoint UniCredit as our partner bank for this transaction, and we set about the process straight away.


The implementation process

It was an impressively efficient operation, lasting just three weeks from first point of contact through to completion. That’s quicker than the processing time of the average letter of credit. And that’s despite the need to implement an entirely new settlement method before carrying out the transaction – a process that gave rise to many challenges.

For a start, implementing a BPO requires firms and their partner banks to deal with new and innovative technology – which differs significantly from the standard equipment, with next to no precedent to draw upon for experience.

Similarly, UniCredit had no previous experience with our client’s bank – leaving them once again in uncharted waters. We were highly impressed, however, by the speed with which they were able to establish an effective working relationship with this new counterparty. Indeed, they demonstrated considerable commitment in this respect – even convincing the client’s bank to make several small changes in order to facilitate a smoother transaction.

We were also able to experience UniCredit’s collaborative skills first-hand. Its team was instrumental in educating the relevant areas of our company about the impact of BPOs – both on the firm and on their particular roles.

What’s more, UniCredit was most impressive in helping us integrate BPO processes into our existing workflow. This was a daunting challenge. Our operations are highly standardised, and any disruption to these systems can cause problems for our sales, procurement and financing departments. It was therefore crucial to keep any alterations to a minimum in order to win the backing of our internal stakeholders. Fortunately, UniCredit’s strong understanding of our workflow meant that it was able to find a highly efficient way of integrating BPO processes into the existing system – ultimately suggesting only a few minor small changes.

Perhaps most impressive, however, from a client-experience point of view was the help UniCredit gave us with our client, who was interested in using the BPO transaction in order to help them cover their costs during their long production cycle. The difficulty was that our company operates with 30-day net payment terms, but the client’s six-month production cycle meant they would often require an extension in order to fulfil the payment.

The 30-day payment window is integral to our company’s business model and late payments constitute a significant drawback. For this reason, offering extensions or refinancing services are not viable solutions for us. However, UniCredit was able to solve this problem by offering to refinance the client’s bank – a move that was critical to the success of this project and meant that both we and our client could transact on a sustainable basis.


BPO implementation: A transformative experience

It bears repeating that all these challenges were met within three weeks of our initial phone call. And having overcome them, we were able to see the advantages of the BPO for ourselves.

Of course, the principal advantages are already known. Thanks to its use of bank mediation and electronic – rather than paper – methods, the BPO is both fast and secure. Yet while these benefits should not be understated, they were expected. We were also struck, however, by several benefits that we had not foreseen.

The key to these was our strong business case. We had a clear situation in which the BPO offered the best solution for all parties. And as a result, the successful completion of the transaction led to a much better relationship with our client. Having settled our difficulty over payment terms, the new BPO arrangement also triggered greater volumes of business from the client.

Indeed, with a strong business case, and a successful trial under our belts, we are well placed to secure more business from other counterparties too – especially in target emerging markets that are keen for more-exotic payment methods. To this extent, implementing the BPO has been a transformative experience for us. Not only has it improved the efficiency of our payments processes – both in terms of speed and cost – it has also given us the cachet of a front runner in the field of innovative payments.


Looking to the future

Given the advantages on offer, there is little doubt that the market will eventually come round to adopting the BPO en masse, but I don’t see this happening for at least another two to three years. There is still a need for education to take root across industries and companies, with many firms having not yet fully explored the method as a possibility.

Of course, this slow uptake accentuates the advantages for market leaders, making them the stand-out choice for innovative payment methods.
For those ready to make the move, the key will be to find a suitable business case in which all parties can benefit from trialling the BPO. It will also be important to involve all relevant departments in the transaction, including sales, logistics, finance, and the key account management team. This comprehensive internal support is vital to success: a BPO won’t work unless all departments act in concert.

Finally, of course, choosing the right partner bank to oversee and mediate the transaction is critical. To this end, firms must satisfy themselves of their partner’s BPO expertise, its commitment to their goals, and its ability to support them throughout the process. In time, there will be many banks who can offer this service, but most banks currently have little experience in the area and – for my money – there is currently only one place to go: UniCredit.

Markus Wohlgeschaffen comments on ZF’s use of the BPO: “The BPO is an innovative settlement method that offers many advantages – combining the security of letters of credit with the digital speed and efficiency of open account transactions.

“ZF is ahead of the field when it comes to implementing this new tool, and were very quick off the mark in establishing a business case for its adoption. When it came to finding a partner, ZF’s priority was experience. That’s where we came in. Once our contact heard the news of our first match in Germany, he was on the phone within the hour, and we were very pleased to be able to oversee a successful match on their behalf – and in a short time frame.

“Of course, most companies are not at the same advanced stage as ZF. And while it will take time for companies to educate themselves about the nature and benefits of this new tool, I’m nevertheless confident that by the end of 2020, we will see a massive increase in uptake of the BPO.”