Banks could be expecting too much from BPO
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Banks could be expecting too much from BPO

Almost a year on from the bank payment obligation (BPO) guidelines being released, the BPO is yet to take off in the market – but is too much expectation around what it can offer holding it back?

At the International Chamber of Commerce’s BPO – One Year On meeting at Standard Chartered’s London offices in July, a panel of BPO advocates from HSBC, Standard Chartered, Misys and Swift explained how conducting trade-finance transactions through the product could cut transaction times, reduce costs and automate trade from front to back.

BPO is an automated payment system to settle international trade transactions, and operates in a similar way to a letter of credit. It introduces a standardized set of rules for completing transactions with ISO 20022 messages sent between users. ISO 20022, defined by the International Standards Organization, aims to create a standardized framework for messaging across financial networks.

Unlike standard letters of credit, the payment undertaken is between the buyer’s bank and the seller’s bank, rather than between the bank and the corporates.

Andre Casterman-large
 Corporates need to move towards end-to-end automation based on ISO 20022, but this will not happen overnight

André Casterman

Projected volumes from Misys suggest the BPO has the potential to rival the market share of letters of credit by 2020, while also predicting world trade volumes will have reached $48 trillion from $33 trillion by then.

Swift has also argued the automated-payment platform can reduce risks and costs for both the exporter and importer on a transaction, as automation reduces the risk of human error and the potential for making changes that could fall foul of the regulator.

However, the assembled audience of bankers and lawyers emitted a healthy scepticism. Participants argued the BPO’s system is unable to meet compliance requirements on payments on an automated basis, with banks still having to complete the detailed work to ensure each transaction does not fall foul of the rules before it is passed through the payments platform.

There were also questions around the efficiency of the payments and a lack of clarity over demand from corporates that are still content with using paper.

And the numbers do indicate there is slow demand. Of 57 international banks that are ready to go live with BPO, just 12 have done so. While BNP Paribas, Bank of China and Bank of Tokyo-Mitsubishi are among those using BPO, JPMorgan, Bank of America Merrill Lynch and ING are still waiting to find a critical mass of clients looking to step away from the familiarity of the letter of credit.

Malaysia’s CIMB Bank became the latest bank to go live with BPO by completing an inter-bank transfer with China Citic Bank. This follows the trend of Asian banks leading the way, as they will regularly operate on an open-account basis, allowing the buyer to pay for transactions a set time after the goods had been received.

However, it is also an example of banks using the platform to complete transactions with other banks – missing the corporate space completely. 

Panel member Neil Chantry, global head of policy and compliance, global transaction banking at HSBC, said the bank is ready to go live with BPO, but admitted it has yet to have a single client come forward wanting to use the system.

Uncertainty over the cost is also holding some back, as there is no set level for the fees that are involved with using BPO, leaving it to the banks to decide how much they add. However, without a defined total, it has left some wary of the potential for high charges to be applied.

Swift believes the key to overcoming this is down to the banks and their relationships with their corporates to push the potential of BPO, rather than Swift itself needing to take the lead to get the corporates to realize the potential of using its service.

Complex and slow

Speaking after the event to Euromoney, Swift’s global head of corporates and supply chain markets André Casterman states that part of the reason for the slow take up is that the nature of the market does not allow for overnight change.

“Trade is a complex and slow moving market,” he says. “But a growing number of banks are starting to engage with many more clients on the BPO, and this is why we can report a total of 12 live banks on BPO now.”

On the questions around compliance, banks can use alternative compliance platforms, but replacing the need for banks to complete their internal compliance procedures was not something BPO was designed to do

Swift has its own cloud-based Compliance Analytics service, which compares individual institution’s traffic passed along the Swift messaging network with that of the peer group to look for irregular patterns – but this does not come as a standard component of BPO adoption.

Casterman points out the system is not supposed to replace the diligence that the banks need to carry out, including know your customer and sanctions screening. “Banks cannot delegate responsibility to another party to meet compliance requirements,” he says.

For Casterman, the move to BPO needs to be pushed by the banks. “The implementation of the BPO rules and processes is performed by banks and there is no immediate need for the corporates to have a connection with Swift – so the BPO implementation can be very light for corporates,” he says.

The main goal now for Swift is to get those who have been using the BPO to continue doing so, and assist with meeting ISO 20022 standards. Both the Single Euro Payments Area and the European Payment Services Directive are mandated to follow ISO 20022.

Casterman says: “The real objective for banks is to increase the number of BPO transactions. Corporates need to move towards end-to-end automation based on ISO 20022, but this will not happen overnight.”

It remains to be seen if this translates into the BPO gaining any notable market traction.

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