With the recent publication of the URBPO, Liz Salecka examines what banks and corporates must do next to prepare for trade finance transactions using the newly-standardised, electronic payment guarantee and risk mitigation instrument.


In April this year, the International Chamber of Commerce (ICC) launched the Uniform Rules for Bank Payment Obligation (URBPO), a set of globally standardised rules for the BPO, giving rise to expectations that this will encourage its wider – albeit gradual – adoption.

Today, as many as 17 banks are either live – or ready for – BPOs, which offer corporate exporters and importers an alternative to letter of credit and open account-based trade transactions.

“The BPO is certainly likely to prove cheaper than other trade finance instruments. It is a 21st century product and will be a lot cheaper than letters of credit,” says Tan Kah Chye, vice-chairman, corporate banking at Barclays and chairman of the ICC banking commission, which approved the URBPO.

“There will probably be a few more revisions to these rules before this instrument reaches a level of maturity. Like any other product it will require continuous revisions, and these will be done by the ICC banking commission in response to corporate client and bank needs,” he says.

The publication of the URBPO has provided banks globally with a level playing field for fully-automated BPO trade finance transactions.

For banks that want to deploy it, one of the first steps is to raise their corporate clients’ awareness of how they can use it to secure, and finance, their trade activities as of the initial stage of a transaction – the purchase order. Banks must also consider how they position the instrument in terms of the BPO-enabled services they will offer, which span payment assurance, pre and post-shipment finance.

“One of the first things banks need to do is to consider their customer base, in terms of who they support and their trade finance strategy. This will establish what kind of service is most relevant to their clients,” says Andre Casterman, head of corporate and supply chain markets at Swift. “They also need to explain why corporates should move away from existing trade finance instruments, and this may take time.”

He adds that the BPO is best positioned by banks as a payment support tool for recurring trade flows, which are typically seen in industries such as commodities and retail.

“Where you have two smaller companies in, for example, Asia, which only do a few trade transactions per year, the drawbacks of using letters of credit and the paper process this entails may not be such an issue, and the additional benefits of BPO will be less remarkable in terms of increased efficiency.”

Preparing for rules-based BPOs

For banks and corporates looking to engage in BPO transactions, based on the URBPO, there are three important initial considerations: the technological investment required; the pricing of BPO services; legal aspects of the BPO.

While the BPO will require investment in technology by banks over the long-term, this is unlikely to prove a prerequisite in the early days.

Casterman explains: “There may be a requirement for greater investment in technology by banks once they start to experience higher volumes of activity, but they can start using the BPO very easily using the Swift infrastructure.”
Similarly, Sriram Muthukrishnan, global head of trade finance, banks segment at Standard Chartered, points out that banks need to engage in internal dialogue on how they can link up their internal systems to Swift’s Trade Services Utility (TSU) to take advantage of the BPO. The cost of linking to the TSU, he says, will not be excessive.

“It is possible that some banks will take a ‘Big Bang’ approach while others take a step-by-step approach, and much will depend on the philosophy of the bank. Large banks are expected to go all-electronic from day one, but smaller banks are more likely to look to players like us to help them develop their systems internally so that they can hook up electronically to the TSU,” he says.

Likewise, for corporates looking to take advantage of BPO-enabled services, the cost of technology is unlikely to prove an issue.

“The cost of preparing for the BPO will not be prohibitive – even though this is a premium product,” says Ashutosh Kumar, managing director and global head of corporate cash and trade at Standard Chartered. “For SMEs, working with large savvy banks, all they will need to do is log onto their banks’ electronic banking platforms. They will not need to invest in any other technologies to conduct BPO transactions.”

Corporates using third-party vendor trade technologies should also be able to leverage on their investment in these solutions for BPO transactions in the near future.

“One option that will become available to corporates that use multi-bank trade solutions is the opportunity to extend these solutions to accommodate BPO transactions, alongside letters of credit and other trade finance instruments,” explains Casterman, explaining that trade finance platform vendors were advised of the importance of accommodating BPO transactions in their solutions in late 2011. “As of this year, Swift’s certification programme for corporate applications requires the support of the BPO services.”

Pricing of BPO services

What banks charge for the BPO services they make available, and the cost savings corporate importers and exporters can anticipate if they switch from letters of credit, are also expected to play an important role in the new instrument’s adoption.
While the level of risk banks take on when offering BPO services to individual corporate clients in different countries is expected to be a key factor in how much they charge, market forces will be one of the biggest determinants of their pricing policies.

“By design, the BPO was always intended to fall into the competitive space. Banks will build products around it and what they charge for these products will be based on competition grounds,” says Tan. “This is something that neither the ICC banking commission nor Swift will play a role in.”

Similarly, Casterman points out that as the URBPO is an enabler, the rules do not specify how to commercialise the BPO. He explains that while the BPO offers payment assurance, it is a risk mitigation instrument so there will be a risk mitigation fee that banks charge to corporates – similar to that charged for the risk mitigation service offered with a letter of credit.

“The BPO will work in a similar way to letters of credit in that the importer will be a charged a BPO issuance fee, because there is a line of credit involved, and the exporter will be charged a BPO confirmation fee for the risk mitigation provided by the seller’s bank,” he says.

“In a BPO, banks will firstly levy a charge for risk-taking, and then secondly a charge for their operational costs,” confirms Kumar. “Banks will then take this price into the market to see if it is acceptable. This will ultimately decide pricing.”
However, the charges that corporates engaging in BPOs face should be significantly lower than the overall costs involved in using traditional trade finance instruments.

“In terms of the costs associated with letters of credit, such as document presentation costs, the use of a courier and processing fees, we can expect these to be much lower, if not completely eradicated with the BPO,” says Casterman. He adds that the BPO will also enable exporters and importers to better manage relationships with their trade counterparties. “An exporting company will be able to make sure that the buyer receives goods on time and can take delivery of them. There have been cases in the past where goods arrive on time but the paper documentation required has not, and this delays the buyer’s ability to take charge of the goods.”

Legal aspects

Meanwhile, the way in which the BPO is legally effected is expected to be no different to other banking commission products such as letters of credit and collections.

Barclays’ Tan explains that the URBPO is a set of rules – rather than legal documentation – and when two banks conducting a BPO agree to follow these rules, they will enter a legally-binding contract between themselves. “Two banks involved in a BPO, based in different jurisdictions, will have to decide which jurisdiction’s local laws they will abide by and this is no different to the way they approach other types of trade finance agreements such as letters of credit – they are used to it,” he says.
“The URBPO as a rulebook needs to be linked into each country’s legal system, and as it is now part of the ICC instruments this should not prove to be a difficult process,” adds Casterman.

Room for smaller players?

While both global and regional banks now have every opportunity to take advantage of the newly-standardised BPO to speed up the provision of trade finance for corporate clients, there have been concerns over whether smaller, country banks and their mid-sized and SME clients will adopt it as readily.

“There is no one prescribed strategy for use of the URBPO between a buyer’s bank and supplier’s bank, but we have noticed that so far a lot of the banks getting involved in such transactions do represent multinational corporations,” says Tan. “It is likely that BPOs will be most prevalent initially where either the buyer or supplier is an MNC, seeking the advantage of the security that the BPO offers.”

He nevertheless refutes that the size of a bank conducting a BPO – or for that matter the size of a corporate – will present a restriction, but notes that they will have to be technologically astute. “The BPO does not involve paper and involves data exchange – smaller companies and smaller banks will have to support data exchange.”

However, Muthukrishnan at Standard Chartered is confident that smaller, local banks will be able to engage in BPO transactions. He notes that, as a standardised instrument, the BPO offers a level playing field for all participants. “As banks’ understanding of the BPO grows and we see volumes of transactions grow, it will become easier for small and mid-tier banks to get involved,” he says.


Supporting emerging market suppliers

Despite concerns over the engagement of smaller banks in BPOs, the standardised instrument is expected to play a pivotal role in helping emerging market SME suppliers gain access to pre-shipment finance sooner – and via their local banks.
As Tan at Barclays explains, by engaging in BPOs, emerging market banks can access the purchase order information they require more efficiently to make local pre-shipment finance available sooner to their SME customers.

“An SME that is, for example, manufacturing shoes for a global retailer, which is in need of pre-shipment finance, would typically need to go to its local bank with the purchase order to access finance to cover the cost of raw materials, production and labour. However, the local bank concerned may have concerns about whether the purchase order is real – and request the original document,” he says.

“In a BPO, the local bank would get the purchase order information required directly from the bank representing the retailer in data format. This is much more secure and could possibly result in a cost-saving to the local manufacturing company requiring pre-shipment finance.”

The engagement of local banks in BPO transactions is also expected to further strengthen supply chains in emerging markets, with suppliers’ suppliers benefitting from faster access to working capital resources too.

“The BPO represents a big step forward in getting pre-shipment finance to suppliers sooner, and ensuring that this financing trickles down the supply chain,” says Kumar at Standard Chartered, pointing out that while pre-shipment finance can be arranged using letters of credit, the BPO is much faster and can avoid issues of duplication.
“Where pre-shipment finance is arranged, the suppliers’ suppliers get paid sooner – and this makes the entire supply chain more robust.”

He adds that the BPO can generate huge cost savings for emerging market SME suppliers by reducing the amount of time working capital financing is needed by five to seven days.

This is particularly pertinent in regions such as Asia, where interest rates are as high as 7 to 8% in some markets, meaning there is a cost to pay if a company needs external financing.

An alternative to SCF?

The engagement of local emerging market banks in BPO transactions could also represent a potential alternative, in some instances, to the establishment of buyer-led supply chain finance (SCF) programmes, aimed at making early financing available to SME suppliers.

“We believe that many large corporate buyers and their banks will seek to take advantage of the BPO to eliminate some of the difficulties they face in their SCF set-ups – particularly in relation to the onboarding of multiple SME suppliers in emerging markets,” explains Swift’s Casterman.

“The BPO will allow a large buyer’s bank to work more closely with local banks, which have relationships with the SME suppliers. A BPO issued by a large buyer’s bank will enable local banks to extend finance to these SMEs, thereby eliminating the need for supplier onboarding.”