Standard Chartered has completed the first end-to-end automated trade finance transaction for BP Petrochemicals via the Bank Payment Obligation (BPO).
The BPO was launched by Swift in 2010 and offers a middle ground between conducting trade finance via letters of credit (LCs) or on an open account basis. The Standard Chartered transaction is the first of its kind as it is the first to be automated at both ends of the process.
“It is the first end-to-end automated transaction which differentiates it from previous BPO transactions where transaction details were manually logged into the system,” comments Ashutosh Kumar, global head of corporate cash and trade product management at Standard Chartered in Singapore.
Designed to make trade transactions faster and more efficient, the BPO removes the need to process paper documentation. Conducting a transaction via the BPO means that an electronic payment undertaking is made between two banks, ensuring that a payment will be made on a specific date after a successful electronic matching of data according to industry-defined ISO 20022.
David Vermylen, global credit manager, petrochemicals, BP tells GTR that 50% of the company’s business is conducted on an LC basis, which can prove quite inefficient.
“We have a global model where we can deliver from many locations in the world to our customers. That requires a lot of documentation and getting the right people to look at the documents so they arrive on the customer’s desk on time.
“We end up very often not being commercial because we cannot get the documentation to the customer on time.”
He adds: “This also sometimes means that we end up adding risk to our model where we didn’t expect to have risk. What happens when we sign letters of indemnity is that we basically deliver on open terms and that premium or that risk element is not included on the margin we make on some deals.”
He adds that with a documentary LC there is often the requirement to have four or five sets of documents that comply with the LC to make a successful presentation to a bank and secure payment. “This is an extra hurdle in accessing the money (or obtaining timely payment),” notes.
Vermylen tells GTR that he envisages 10% of BP’s European trade finance business will eventually move on to the BPO system with the next year. “The long-term goal is to have as many LCS going via the BPO as possible,” he states.
Standard Chartered’s Kumar believes that interest in the BPO among corporate clients is growing.
“People are very enthusiastic about the idea and a lot more clients want to talk about it more compared to 12 months ago,” he notes.
“BPO brings the best of both worlds. It brings companies like BP the flexibility of an open account transaction because they can decide to submit documents directly to the buyer and still have payment certainty at the end,” he adds.
The ICC Banking Commission is lending its weight to the promotion of the BPO having signed an agreement with Swift last year to establish a set of rules governing the new payment solution. These rules are expected to be ready by early 2013.
According to Standard Chartered, the BPO is a particularly useful tool in the commodities industry such as oil, gas or petrochemicals where the dependence on documents is not intrinsic to the trade. It also works well in industries where the supply chain linkages are strong and there is a repeat flow of business between the buyer and the seller.