Regulatory and cost concerns crimping BPO adoption
Bank payment obligations (BPOs) could transform the transaction-services industry, but there is still caution in the market over associated costs and regulation.
BPOs for the past two years have been hailed by supporters as an innovative financing instrument. After all, while it is similar to letters of credit, it is electronic and so offers seamless payment processing through standardized or customized transaction-matching applications.
Since its launch, Swift has seen 58 banks sign up, and 45 corporates have now completed transactions. Although the benefits of using BPOs – from guaranteed payments to SME financing-solutions – have been acknowledged, there is still a reluctance to utilize the facility en masse. The issue of regulation has emerged as one area of concern, followed by costs.
Andre Casterman, Swift
André Casterman, global head of corporate and supply chain markets at Swift, explains. “Some nations are allowing the new scheme, but in the cases of India and the US, for example, the banks are waiting for a clear signal from the regulatory authorities.
"In some locations, this is less of an issue, as the banks are using the new ICC [International Chamber of Commerce] rules without having receiving approval.”
The ICC released its uniform rules for BPOs (URBPO) in July 2013.
In Europe and Asia, there have been several BPO transactions completed. However, US institutions have yet to use the BPO, despite a number of banks, including JPMorgan and Citi, having the capacity and institutional knowledge to do so.
The country’s regulator is yet to signal its verdict. Explicit pronouncements on the merits of BPOs and associated compliance concerns is not a pre-requisite for its adoption.
However, many banks, particularly in the EU and US, are keen to see regulators more engaged in discussions before they embrace the product.
Markus Wohlgeschaffen, global head of trade products at UniCredit, says: “As the awareness and volumes rise, and more people know about it, regulatory scrutiny of BPO may increase.”
UniCredit has completed numerous BPO transactions, including one for Italian manufacturer SPIG with one of its German suppliers. This was received through a purely open-account payment – a simpler form of transaction with fewer documentation requirements – rather than as a substitution for a letter of credit.
Before using the BPO, UniCredit took rigorous steps to ensure it met compliance standards.
Some banks are considering BPO adoption as a way to gain the competitive advantage
Markus Wohlgeschaffen, UniCredit
Wohlgeschaffen says: “We have taken numerous steps internally in the product-approval process and obtained sign-off from all departments involved in the handling of BPO, including risk management.”
This was a lengthy process, taking nine months to complete before UniCredit offered BPOs to its clients.
Casterman admits there is more for Swift to do to push the product, and persuade banks and regulators alike of its benefits.
“As an organization, Swift is ideally placed to work with both banks and regulators, in terms of helping them better understand the benefits of the BPO," he says. "There is the potential to work on a country-by-country basis, but we could be more proactive in larger countries where the BPO could play a role at a national level.”
It is possible some countries could choose to adopt their own version of the BPO rules to suit legal frameworks – Casterman cites the example of China, which has a unique form of letters of credit.
Aside from regulation, the issue of cost is also moderating the pace of BPO adoption since financial institutions are uncertain as to its demand. All parties involved in a transaction need to be on board for a BPO transaction to be completed, and the pool of available corporates and banks to draw from is small.
Casterman says: “Banks do not want to onboard when the regulations are making it very costly to implement.”
There are also fees associated with implementing Swift’s trade services utility (TSU), which is required to use the BPO.
Michael Vrontamitis, head of trade at Standard Chartered, says: “Not all banks will be ready to take the steps needed to be able to adopt BPO. For example, as Swift charges an annual fee for its TSU, the set-up cost might be a deterrent for banks – why would banks pay the fee to use this in the hope that users will come?”
Standard Chartered has been an advocate of BPOs, completing its first transaction for BP Aromatics and Octal in 2012, before the URBPO ratification. Even with the URBPO, Vrontamitis notes there might be some uncertainty from parties who are not confident of the outcome, should things go awry.
Vrontamitis says: “With URBPO in place, if there is a non-payment on the obligation, it can be tested if it is taken to court, though there is no precedent yet as there has been very few transactions completed.”
UniCredit's Wohlgeschaffen states that in a climate where risk management is becoming more important, BPOs offer this through automation and digitization. “Some banks are considering BPO adoption as a way to gain the competitive advantage," he says.
BPOs will only get off the ground once additional users come on board, but unless and until costs and regulatory concerns are addressed, it will be a while before end-users embrace the instrument en masse.