SWIFT is aggressively rolling out a new form of trade payment called the Bank Payment Obligation (BPO). The new process could be a big help to banks, according to Tessa Teo, global account director, ASEAN for SWIFT.
Ms. Teo, speaking with International Treasurer at the 19th Annual EuroFinance Conference on International Cash, Treasury and Risk for Finance Professionals in Asia, in May, said the chief advantage of a BPO is that it will allow banks to back payment of their customers and thereby secure the transaction prior to all the paper-based trade documentation being processed. In short, SWIFT has developed a standard for banks to receive trade documentation electronically and issue a BPO based on approval of the electronic documents.
This latest SWIFT initiative is thus less ambitious than past efforts, such as Bolero, which sought to eliminate the extensive paper documentation required for international trade. Instead, the electronic transmission merely facilitates a bank’s obligation to pay. It’s like a letter of credit (L/C), but with electronic submission and risk mitigation features.
While SWIFT has been piloting BPO with a limited number of banks in Asia since 2010, it finally received International Chamber of Commerce (ICC) approval last month. The ICCs acceptance of BPO guidelines as the global legal standard is expected to trigger a much wider roll out. Corporate demand will also help, as many banks have been burned before by overhyped innovations in international trade finance.
An opening for banks?
The real opportunity for banks will be to use BPO to reinsert themselves into trade finance as credit arbiters and utilize BPO to extend supply chain finance offerings cross border. More and more international trade has moved to open account, with credit insurance used to mitigate some of the risk where needed. The principal reason is to decouple payment from the arduous processing of trade documentation with L/C and improve working capital. BPO will allow banks to provide an alternative that avoids the payment delays of an L/C. Like an L/C a bank will give an irrevocable obligation to pay the beneficiaries bank on a given date once a “specified event” has taken place.
With BPO the “specified event” can be evidenced by an electronic match report, as opposed to paper documents, delivered by SWIFT’s Trade Services Utility or an equivalent transaction matching application (e.g., Mysis). Once payment is secured, the supplier can elect to receive payment immediately at a discount as part of a supply chain finance offering.
With BPO, both corporates and banks have more flexibility to set the date of payment and the payment trigger, and this flexibility can help fit the payment form into more types of SCF programs, including pre-shipment and post-shipment (pre-invoice approval) financing. Thus, corporates may see the benefit to using BPO in order to boost the cross-border elements of the SCF programs.