UniCredit has become the first bank in the world to replace open account trade finance with the bank payment obligation (BPO), GTR has learnt.
The German lender has gone live with a fully-automated deal with Bank of Tokyo-Mitsubishi (BTMU) (the first between Germany and Japan), for a transaction between seller Rühr- und Verfahrenstechnik (RVT), a Bavaria-based producer of industrial mixers, and buyer Mitsui & Co. Plant Systems (MPS), which provides equipment and facilities to the Japanese industrial sector.
According to a statement by the bank, the transaction will see UniCredit buy insured receivables from RVT, covering the company’s payment risks, whilst enabling it to increase sales volume by providing MPS with more attractive payment terms. The transaction will enable MPS to avoid on-sight payment for products, instead being able to convert bank debt into trade debt.
In an exclusive interview, global head of trade products at UniCredit, Markus Wohlgeschaffen, tells GTR about the benefits of the BPO for open account lending.
“There is a limited capacity of credit insurers to cover payment risks,” he says. “The BPO can add value by better enabling sellers to mitigate those risks.”
“Since there are always payment risks to be digested, sellers usually impose a capped ceiling to their related counterparties. So even if buyers would like to purchase more on an open account basis, most sellers can’t do it because of internal credit limits,” he tells GTR.
“Sellers want to instantly liquidate receivables in order to unleash trapped liquidity. The BPO can do this perfectly.”
For Wohlgeschaffen, and most others in the market, the BPO should not be considered a substitute for letter of credit (LC) business, and the instrument’s take-up by banks should reflect the trend towards open account trade financing more generally.
“The BPO should be for ongoing, revolving and established relationships between sellers and buyers,” he tells GTR. “LC transactions are mainly used for one-off deals, or to initiate a commercial relationship.”
“With the BPO, we are focussing on the global structure of world trade,” he adds. “Recent World Trade Organisation (WTO) data puts the value of world trade at around US$20tn, with some US$14-15tn done on open account terms.”
Wohlgeschaffen feels the BPO still suffers from a conceptual lack of understanding amongst the market, with many banks remaining unclear about how best to use it.
“Banks have to explain to clients how the BPO can fit into their value chains. Without knowing this, it’s difficult to demonstrate its benefits. This is a new way of looking at our clients’ needs, and some banks have a way to go on that.”