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Financial message provider Swift and the Banking Commission of the International Chamber of Commerce signed a cooperation agreement at this year’s Sibos, with the intention of encouraging industry-wide adoption of the Bank Payment Obligation. Rebecca Spong reports.

The Bank Payment Obligation (BPO) was launched by Swift at the beginning of last year as a way of providing an alternative means of settlement in international trade.

Move forward a year and half to Swift’s Sibos conference in Toronto, the new initiative is really beginning to gain some traction in the market.

Or as one banker rather bluntly put it to GTR following a seminar on the BPO, it was “like throwing meat in front of dogs”.
He added: “Everyone came out of that room and all I heard was ‘how soon can I have this’”.

A total of 17 banks have already started to adopt the BPO, with the first live cross-border BPO transaction conducted last year and announced at Sibos 2010.

This first transaction involved the Bank of Montreal issuing two BPOs in favour of the Bank of China, with the purchase order financing being extended to a large Chinese textile exporter.

To encourage further market take-up of this product, Swift signed a cooperation agreement with the ICC Banking Commission in a signing ceremony held at Sibos this year. Swift is hoping that with ICC’s approval and support of their BPO scheme, they can achieve a uniform adoption of the solution.

As Tan Kah Chye, global head of trade and working capital at Barclays Corporate, and the chairman of ICC Banking Commission, comments in an official release: “It is vital that the industry aligns on enhanced rules and tools in support of trading counterparties whether large or smaller.

“The ICC Banking Commission views the development of the BPO rules and the related ISO 20022 messaging standards as strong foundations for banks to provide modern risk and financing services with today’s technology evolution.”

The BPO is certainly gaining fans, with Swift able to attract two corporates, BP and the Brazilian mining company Vale to speak at the Sibos seminar about the benefits of using the new system.

Bankers are also eager to work with clients on the new initiative.

“We want to work closely with Swift on its interoperability on trade, whether it is via the TSU or the BPO. We want to be actively involved in that. It is something that conceptually clients should be happy with,” remarked Adnan Ghani, global head of trade, global transaction services, at RBS to GTR at Sibos.

Ashutosh Kumar, global head of corporate cash and trade product management at Standard Chartered, added: “We are involved in this [the BPO]. I think it is reaching a point now where we are starting to see increased interest.”

Another banker remarked to GTR that he’d had some productive talks during Sibos with two international corporates about setting up a BPO transaction. “If we are able to make this happen, it would be the biggest gain out of Sibos,” he said.

One thing holding back the widespread adoption of the BPO is the speed at which the ICC will give its approval and define a set of guiding rules. Another issue is how new banking regulations such as the Basel III recommendations, will treat the BPO in terms of how much capital should be set aside for these types of transactions.

At the moment, the deadline for the final set of rules is set for spring (Q1/Q2) 2013, and some bankers say Swift and ICC have to move faster than this or corporates will look for other financing solutions.

Bruce Proctor, managing director and head of global trade and supply chain finance, at Bank of America Merrill Lynch tells GTR that the corporate demand for this solution [the BPO] will speed up the process: “The corporates will drive the adoption of BPO, so we’ve got to find a way to make this work more quickly.

“The industry does want the support of the ICC. However, I’m doubtful the world is willing to wait three years for a solution to be introduced. The trade community needs to accelerate the implementation of BPO, and other emerging solutions, or people will look for other applications.”

Aims of BPO

Interest in the BPO is fuelled by the fact that it promises to get rid of the slow, paper-driven and administration-intensive processes associated with letters of credit (LCs).

It is also a means by which banks can remain relevant to their corporate clients, particularly those large international clients that are moving an increasing proportion of their trade business on to open account terms and therefore doing away with the need for bank involvement in the transaction.

The BPO could help avoid the disintermediation of banks and help create a new source of fee and commission-driven income for financial institutions.

The way the BPO works is not too dissimilar to an LC. It is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after a specified event has taken place.

This event is evidenced by a match report generated by Swift’s Trade Services Utility (TSU), a centralised matching programme that processes various documents such as commercial invoices.

This BPO provides the exporter with assurance that they will get paid and can be used as a risk mitigant for all parties involved. It could also be potentially used as collateral for the provision of working capital.

It offers the same risk mitigation properties as LCs, but aims to do it in a more efficient, cost-effective automated way. Currently the BPO is only available to financial institutions that subscribe to Swift’s TSU but once the ICC review and adapt the existing Swift rules governing BPO, the solution should be able to be delivered via any underlying technology platform that is capable of using ISO 20022 open messaging standards.

Corporate feedback

The impact the successful implementation of the BPO could have on international corporates is significant, and feedback from those companies testing out the solution has been positive.

Jose Carlos Guedes, corporate finance manager at the Brazilian mining company Vale told delegates at Sibos that the use of BPO has the potential to reduce Days Sales Outstanding (DSO) and release extra working capital.

He explains that the average volume of sales by Vale to China based on at sight LCs is US$18bn a year, and around US$1.5bn a month. He believes that by using the BPO, he can reduce the DSO to less than 15 days, which will produce an estimated financial gain of US$37mn for Vale.

Guedes added that the BPO would also help free up around US$600mn in working capital, reduce document delivery costs and reduce the risk of discrepancies.

David Vermylen, global credit manager at BP Chemicals, notes that most of the corporate’s LCs are on deferred terms so there is no direct advantage in presenting documents early. But he notes that the number of export LCs at sight is beginning to grow, and therefore the benefits of the BPO become more relevant to the company.

He estimates that the adoption of the BPO could reduce the risk of discrepancies, improve speed of handling, improve the customer offer by offering more flexible payment options, and reduce the need for confirmation cost which would free
up banking lines.

Next steps

Although the official declaration of cooperation between Swift and the ICC was signed at Sibos, the ICC BPO working group has been active since February this year, working to define the set of rules for the use of BPO and ensure its wider use outside Swift’s TSU platform.

To date, draft rules have been sketched out and the aim is to present a first draft at the ICC’s spring 2012 meeting usually held in the first quarter. The deadline for the second draft of these rules is the autumn ICC meeting next year, and then depending on the status of the rules it is hoped that a final set of rules could be presented to the ICC commission for approval in early 2013. GTR