Bank Payment Obligations – a new way to trade
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Bank Payment Obligations – a new way to trade

A new payment instrument could be about to transform global trade – but are banks and corporates prepared?

Not to be confused with business process outsourcing, the bank payment obligation (BPO) is a new payment instrument intended to exist alongside letters of credit (LCs). A BPO is intended to provide the benefits of an LC, in that it is an irrevocable undertaking from one bank to another that payment will be made once specified conditions have been fulfilled. But unlike an LC, which requires documents to be matched manually and is prone to delays, a BPO matches data electronically using ISO 20022 messages and via Swift’s Trade Services Utility (TSU) or a similar transaction matching application. Market players say banks need to wake up to the instrument's potential and develop associated products.

By using a standardised format, the BPO offers additional benefits above and beyond those provided by LCs. According to a report published by Swift, the messages used for BPOs can be adapted for communication between banks and corporate clients and will “enable end-to-end straight through processing with corporate ERP systems.”

John Bugeja, head of trade sales at Lloyds Bank Commercial Banking, says the new instrument will bring benefits.

“Using the BPO, banks will be able to offer pre and post shipment finance in collaboration with partner banks based on a standard set of rules rather than bespoke, bi-lateral documentation,” he says.

Gareth Watts, Global Treasury
Solutions, BofA Merrill

The BPO also has the potential to remove several days from exporters’ days sales outstanding under document-based open account trades, “thus improving working capital positions,” says Gareth Watts, head of trade and supply chain finance product and structuring, Global Treasury Solutions, EMEA at Bank of America Merrill Lynch. “Once the BPO has been issued to the exporter’s bank, it can act as a security of payment for that bank based on relatively simple data delivery processes by the exporter, thereby facilitating pre-export financing,” he says.

Writing the rulebook

Following a decline in the use of LCs in recent years, most global trade is now conducted on open account, meaning that the supplier simply invoices the purchaser after goods have been delivered. While BPOs offer some advantages over LCs, the new instrument is not being positioned as an alternative to LCs but is primarily intended to be used by companies that would otherwise trade on open account.

BPOs are already in use and have been piloted by companies including BP Chemicals. However, a major milestone forthe new payment instrumentis expected to come in April, when the ICC releases its Uniform Rules for Bank Payment Obligations (URBPO).

The BPO began life as a Swift initiative but during the course of its development, Swift decided that responsibility for the rules governing the use of BPOs should lie with the International Chamber of Commerce (ICC), which is already responsible for the rules governing letters of credit transactions. The UCP first published the Uniform Customers and Practice for Documentary Credits (UCP) in 1933 and the latest version of the rules, UCP 600, came into effect in 2007. ICC is working to establish similar rules governing the issuance and use of BPOs and these are expected to be released in April.

Gaining momentum

Will the arrival of URBPO kick-start a revolution in global trade? Not to start with, according to Marcus Hughes, director of business development at Bottomline Technologies.

Marcus Hughes, director of
business development
at Bottomline Technologies

“Although the ICC's URBPO will mark an important milestone in granting international recognition, this will not result in some big bang adoption of this new payment term,” he says. To what extent is the industry ready for BPOs? “With budgets for discretionary spend being scarce and whilst excited by the compelling business proposition, most banks have not yet invested in proprietary BPO platforms,” says Hughes. He adds that market awareness in the corporate and banking communities is still inadequate, and that banks are still deciding what products they can develop on the back of the new instrument.

Nevertheless, as the release date for the URBPO nears, the new payment instrument is attracting more attention.

Watts says that there is a good deal of support for BPOs in the market and that Bank of America Merrill Lynch has “been talking to clients about it for some time, so we’re well-prepared for when the ICC rules come into place and are investing in our BPO solutions.”

“It is important to remember that these initiatives are based on a Swift platform with which many corporates and banks are already familiar,” he adds. “There is therefore a baseline of preparedness in place for BPOs.”

Meanwhile, Volante Technologies this week announced the launch of its Middle East & Africa Supply Chain Finance readiness survey. Among other things, the survey will assess the extent to which banks and corporates in MEA are prepared for BPOs.

According to Mick Fennell, Volante MEA’s general manager, “It is important that organisations in the region make the appropriate plans and prepare to support the new instruments.”

Bugeja says that demand for the BPO will grow rapidly once the rules are introduced – as long as corporates believe that the instrument offers them real benefits.

“The bottom line is that there has to be a benefit to the trading parties in order for them to switch to a BPO backed supply chain finance solution,” he says.

Bugeja adds that such benefits could include “access to higher levels of funding enabling them to grow their business and more effective risk mitigation – relative to open account - enabling them to transact more securely.”

The new instrument offers considerable benefits and once the ICC’s rules are published they will be subject to the same level of guidance as LCs.

As Bugeja concludes, “Logic suggests that the BPO will gain traction – but the jury is still out!”

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