An industry spokesperson this week tells GTR that the stalled take-off of the bank payment obligation (BPO) may be due to it suffering an identity crisis, but Swift remains positive about the new instrument’s progress.
Associate at law firm Sullivan & Worcester, Hannah Fearn, tells GTR that the way the new digital payment instrument is being presented to the trade finance community is changing. “I’ve noticed a shift in the way the BPO is being described,” she says. “It’s being described as a bank assisted open account instrument, rather than as an electronic letter of credit (LC).”
According to Fearn, there are a number of factors that could be impacting banks’ willingness to take up the BPO, ranging from concerns surrounding financial crime regulation to confusion about how best to use it.
“The launch of the BPO came at a difficult time,” she says. “It coincided with the FCA’s thematic review into controlling financial crime risks in trade finance, which initially had banks very concerned about the level of due diligence expected from them, in relation to more familiar instruments like LCs.”
“The recently published updated FCA guidance is more helpful than banks might have expected, but I imagine the automated elements of the BPO is still a concern some banks.”
In addition, confusion between banks and corporates over the BPO’s specific purposes could still be affecting the instrument’s take-off, as stakeholders on both sides wait for others to “make the first move”.
“Banks need to work out what benefits they can offer their customers through use of the BPO and then help to educate the market,” she says. “I suspect there is an element of assessing the potential for success in the market before investing time and resources in launching a new product.”
Failing to see how these considerations could amount to an identity crisis, Swift’s global head of corporate and supply chain markets, André Casterman, appreciates nonetheless that different approaches of banks and corporates to the BPO could be perceived as a source of confusion for the market.
“It’s not a black and white situation and things are happening in stages,” Casterman tells GTR. “We want to help banks grow the number of transactions they intermediate using BPO, but in the beginning, corporates are unlikely to look at open account as they use the BPO primarily to eliminate the inefficiencies of LC transactions.”
”The banks will ask for more open account transactions with BPO but the corporates will answer; ‘before you get that, I want to eliminate all the current issues on the LC’, that’s kind of an identity issue.”
A total of 13 banks have now ‘gone live’ with the BPO, five more than at the end of 2013, and Casterman predicts several more will follow in the next three-to-six months. In the near future, Swift intends to demonstrate the success of the BPO in both corporate-corporate and corporate-bank spaces to the wider trade finance market.
“The real innovation here is still being generated by corporates wishing to move to digital trade solutions,” adds Casterman. “It’s all about letting banks know that digitising trade processes is happening on the corporate side, and that new business networks can handle the whole purchase-to-payment process, so that if banks still expect corporates to provide a paper invoice or purchase order, for example, there may no longer be one.”