SMEs unlikely beneficiaries of bank payment obligations – analysts
Bank payment obligations (BPO) – touted as an innovative new payment instrument to transform global trade – are more likely to benefit multinational corporations, and more consultation with corporates is needed, say analysts, after the July unveiling of technical rules for the product.
Launched on July 1 by the ICC Banking Commission and Swift, the uniform rules for bank payment obligation (URBPO) were intended to “establish uniformity of practice in the market adoption of the BPO and the related ISO 20022 messaging standards”, according to the ICC’s website.
|Ashutosh Kumar, at Standard Chartered|
Originally developed by Swift, the BPO performs a similar function to a letter of credit – but unlike a letter of credit, data are matched electronically via a transaction-matching engine such as Swift’s Trade Services Utility (TSU). The focus of the initiative has been on trade transactions – which are carried out on open account – rather than on those using letters of credit.
André Casterman, head of corporate and supply chain markets at Swift, says “BPO adoption continues to expand” after the publication of URBPO.
He adds that examples are due to be presented at an ICC supply chain finance briefing on Monday, including Dubai Trade’s BPO adoption plan and Bank of Tokyo-Mitsubishi UFJ’s BPO corporate case study in the iron ore industry.
Banks have likewise seen an increase in activity. “Since the approval of the ICC rules, Standard Chartered has seen increased client interest, and also conducted BPO transactions,” says Ashutosh Kumar, global head of corporate cash and trade, transaction banking at Standard Chartered Bank.
He says that more than 50 Asian or Asia-based banks have expressed an interest in providing BPO services.
“Certain industries lend themselves well to the use of BPOs because they tend to involve longer-term relationships and standard items,” says Kumar.
“For instance, energy and petrochemicals have been active, and there has also been interest from auto manufacturers, both as buyers when purchasing from component suppliers and as suppliers when selling finished vehicles to their dealership chains.”
|Gareth Watts, at Bank of America Merrill Lynch|
Gareth Watts, head of trade and supply chain finance product and structuring, GTS, EMEA at Bank of America Merrill Lynch, agrees that the launch of the URBPO has triggered an increased level of interest with corporates. “As a result, we have been engaging with clients more frequently on this topic, particularly with large, multinationals which may be more aware of the technology elements of the product offering and what benefits they may be able to achieve,” he says.
Watts points out that by removing the need for bilateral agreements between banks and their clients, URBPO has alleviated some of the perceived barriers to adoption associated with the BPO.
However, while interest continues to grow in the BPO, some industry commentators believe the BPO represents a missed opportunity to support a wider range of corporations in their trade transactions.
“The BPO solves the wrong problem,” argues William Laraque, managing director at US-International Trade Services in a recent LinkedIn discussion. Speaking to Euromoney, he says the BPO and many of the features of trade finance apply largely to multinational corporations and large, publicly rated companies – but less so to small and medium-sized enterprises (SMEs).
According to Laraque, this is particularly the case in the US, which unlike Europe does not have a long tradition of using trade finance techniques, such as forfaiting and credit insurance to provide working capital and liquidity to SMEs.
With trade between North America and emerging markets expected to grow rapidly in the coming year, Laraque says export credit agencies are “neither prepared nor structured to pick up this increase in trade, especially in regard to SMEs”.
The BPO could have represented an opportunity to address this shortfall, but Laraque does not believe it is likely to do so. “The TSU and the other functionalities of Swift are primarily aimed at large multinational corporations,” he says. “The BPO does little to change that.”
Enrico Camerinelli, senior analyst at Aite Group, says for SMEs the technical changes needed to automatically run the BPO through a transaction matching engine can be problematic, particularly if different clients want to use different instruments to exchange invoices and purchase orders with their SME suppliers.
Camerinelli believes corporations were not consulted sufficiently when the BPO was developed – and as a result, the benefits that the instrument can bring are limited.
“The intentions are good, but the execution of the BPO might not be as good,” he says. “Like with the TSU, banks are trying to expand the BPO to the corporate market as it is seen as a way for banks to generate more transactional revenue with corporates.”
Camerinelli argues that if banks want to use the BPO in this way, they should be asking what clients want. “From that they could build something that small enterprises can plug and play more easily,” he says.
“However, for this approach to succeed, corporations would also need to be more proactive in terms of providing their input on the topic – thereby avoiding a passive approach which too often characterizes their behaviour toward innovative bank solutions.”
While opinions might differ about the usefulness of the new payment instrument at this stage, there is agreement between different parties that communication will play an important role in driving future adoption.
As Watts concludes: “The key for growth in interest within the corporate client community is for participating banks to present compelling value propositions to their clients and to show how the BPO can complement their existing trade finance and payments activities.”