Amidst all the blockchain hype, you might be forgiven for thinking that the bank payment obligation (BPO) – a previous attempt to digitise trade – was dead and buried. Indeed, in roundtables, conversations and white papers, the BPO largely comes up as a cautionary tale of a great idea that failed to gain traction. But far from abandoning the solution, a small but determined number of banks want the rest of the industry to ramp up adoption efforts. GTR spoke to them to find out why.

Launched amid great fanfare in 2013, the BPO is a hybrid instrument between the letter of credit and open account. It combines legally-binding rules with electronic messaging and matching capabilities through Swift’s trade services utility (TSU), with benefits including providing companies with assurance of payment at the due date, faster handling of goods, and earlier receipt of trade documents.

But take-up has been sluggish, leaving many who got on board unable to carry out transactions. “It’s like when you’re the first one using a cell phone,” one banker tells GTR. “This is a wonderful tool, but who can I call?”

The BPO commercialisation group, made up of representatives of ANZ, MUFG Bank, BNP Paribas, Commerzbank, JP Morgan, Standard Chartered and UniCredit, wants to change all that. The group’s key aim is to promote BPO adoption among corporates and banks alike, and to this end it has proposed an update to the uniform rules for BPO (URBPO). Currently, the URBPO only address regulation and protocol for the obligor bank and the recipient bank – not the corporates between which the transaction is taking place. They hope that by changing this, more corporates will seek BPO transactions, pushing banks to adopt the instrument.

“We need new rules independent from technology that are applicable to payment commitments such as BPO,” says Angela Koll, Commerzbank’s product manager of trade and supply chain finance and innovation. “The existing URBPO are very much focused on the Swift TSU matching application. Only recently, the ICC has agreed to develop rules for the payment commitment, which are technology-agnostic. These rules will also apply to the BPO, and long term, the URBPO could merge with the new set of rules. As a member of the working group developing  these rules, we aim to prevent silos in the regulatory framework due to different technologies.”

Time for a reset?

As part of the group’s efforts, Commerzbank has published a white paper entitled The bank payment obligation: leading the path of digital evolution. It quotes Alexander Malaket, ICC committee deputy head, as saying: “The viability of the BPO requires a reset – both around market awareness and perception, and around the practicalities of value proposition and implementation. At its core, the BPO framework offers clear potential in advancing the financing of global commerce, and can complement broader digitisation initiatives in the industry.”

Not everyone in the industry is convinced about how effective a “reset” would be. “We have a lot of history with BPO, but it’s probably more scar tissue,” says another banker. “All the feedback about it at Sibos was completely negative.”

The reasons for this negative feedback are manifold. Many trade finance departments spent considerable effort on getting their banks to adopt the BPO, only to lose face when the solution failed to deliver. Several lay the blame at Swift’s door for what they perceive as a lack of promotion and presentation to corporates and financial institutions alike.

“We started to deal with BPO in 2013,” says Ali Gülhan, assistant manager of foreign trade operations at IŞbank. “We expected to do more transactions than we have done so far, but finding a counterparty bank is not so easy. However, there are more banks involved in Swift’s TSU system than are live on BPO, so I think marketing is a part of the issue.”

Another barrier to take-up is Swift’s pricing model, which critics say made it nigh-on impossible for peripheral banks to join BPO. “The big issue here is the cost of entry. If you’re a bank in, say, Vietnam, who has got a supplier to a company who is on BPO, it doesn’t make economic sense for them to pay €12,000 to handle half a dozen transactions a year with that one supplier. The unit cost is phenomenal. The model would be more successful if the pricing model was adjusted,” says Michael Quinn, managing director of global trade and loan products at JP Morgan and member of the BPO commercialisation group.

This past poor experience with BPO has made many reticent to consider any other form of trade digitisation, for fear of getting burnt again. “In my conversations with some banks about blockchain, some have specifically mentioned that they invested considerable political and economic capital in BPO as a digital innovation. But once it was live, there just wasn’t enough demand for it. The fact that it didn’t scale is affecting some banks’ appetite to invest in future types of innovation,” explains Alisa DiCaprio, head of trade and supply chain at blockchain firm R3.

However, BPO’s proponents stress that, despite its chequered history, the industry needs to take another look at the solution. Davide Sant, trade finance manager at UniCredit and member of the group, says that the demand for BPO remains strong. He estimates that just 30% of his bank’s BPO negotiations with customers were able to turn into live transactions as a result of the counterparty bank not being enabled on the service. “More banks need to adopt the tool in order to drive critical mass. In the meantime, we are working to promote the BPO within our own network.” He adds that UniCredit is currently live on BPO in Italy, Germany, Bulgaria, Romania, Croatia, Hong Kong, Singapore and the UK and is working to add Turkey this year. For 2019, UniCredit projects that it will see a 30% increase in live customers on BPO, with volumes up by as much as 60% and revenues up by as much as 50% versus previous years.

MUFG’s head of e-trade product, Daisuke Kamai, also a member of the commercialisation group, echoes Sant’s comments. “We are still pushing BPO because of demand from clients,” he says. “Digitising trade will be a benefit for our clients. But when many of our clients come to us asking about our activity around blockchain, we explain about BPO as well. Many of those clients will say, ‘Why didn’t you tell me about this earlier?’ So, for our clients, BPO is something that can be used as a starting point of digitised trade.”

BPO versus blockchain

Will this be enough, though, to convince banks to divert a proportion of their digitisation budget away from the newer, shinier blockchain solutions?

“BPO has been leapfrogged by distributed ledger technology,” one banker tells GTR. “Whilst it’s not there yet, why should we continue to invest into a tech that never gained traction, knowing that there’s something else coming down the line, when the incumbent, which is the LC, works perfectly well?”

“Many of today’s blockchain solutions in trade finance include a BPO-like orchestration,” adds R3’s DiCaprio. “This underscores the fact that the idea behind the instrument made sense, but the technology was not well suited.  Blockchain introduces a technology that allows the network of users to scale without dependence on a single operator.”

But the BPO commercialisation group are keen to point out that, unlike blockchain solutions which are still in pilot phase, BPO exists today and can be leveraged upon.

“We need to get people to realise that in fact BPO is still the best digital tool for trade available today. The consortiums are doing their thing, but as we have articulated, they are not replicable, they are not scalable, and they have a number of challenges, so while those challenges are being worked out, you should be using BPO. A bird in the hand is better than two in the bush,” says JP Morgan’s Quinn.

The group also stresses that BPO and blockchain are not either-or options, and both should be thought of as parallel threads to continue the march to digitisation.

“Regardless of what path you take in digitisation, you still need to organise your infrastructure,” says Koll at Commerzbank. “If banks invest now in changing or at least expanding their back-office facilities for the purpose of the BPO, that infrastructure may be used for other solutions which are very similar to the BPO, such as the blockchain payment commitment, so it’s not a double investment. You invest today, and you can use part of it in the future as well. Blockchain initiatives such as Marco Polo, which we are involved with, will also need to spend time and effort to gain market adoption – it’s all part of digital evolution.”

But with Swift in discussions about the future of the TSU, and the ICC working group on digitalisation in trade finance deciding late last year not to revise URBPO in favour of developing new rules for the emerging distributed ledger technology environment, the BPO commercialisation group faces an uphill struggle in garnering enough industry support for the instrument. Nonetheless, the group remains confident that – at least for now – rumours of BPO’s demise have been greatly exaggerated.