Doubts about whether the bank payments obligation (BPO) will be cheaper than letters of credit are affecting its success, trade finance experts argue.
The BPO has been at the centre of supply chain finance (SCF) discussions for some time now, but according to Adnan Ghani, head of transaction services at RBS, some bankers are still reluctant to use it because of uncertainties over how much it will cost.
He tells GTR: “There is a challenge on how to price it, which depends on capital treatment. There is a segment that it can attract, half way between a letter of credit and an open account transaction, but its cost should be lower than that of letters of credit, which is something that regulators have yet to confirm. That for me is the core reason why it hasn’t picked up yet.”
Ghani adds that the standardisation of BPO rules, expected to be agreed by the International Chamber of Commerce by March 2013, is likely to help matters, but that as long as regulators haven’t agreed on how much BPO transactions will cost banks, the product will struggle to take off.
According to him, SCF demand is growing exponentially as the implementation of the EU’s late payment directive looms. The directive, to be transposed into national law in all 27 member states by March 16, 2013, implies that buyers have to pay their EU suppliers within a maximum of 60 days (30 days for public authorities), failing which they will be subjected to a late payment interest rate of 8% over the European Central Bank’s reference.
“In that context, buyers are likely to resort to SCF solutions to pay their suppliers on time and maintain their own cashflow flexibility,” Ghani says.