BPO: Time for the industry to commit

Bank Payment Obligation (BPO) has enormous potential to support supply chains and provide a secure source of funding to small and medium-sized enterprises, facilitating growth in global trade. However, there are challenges to overcome. The instrument must be re-thought and, as importantly, the banking industry must change how it markets the benefits of BPOs, writes Michael Vrontamitis, head of trade at Standard Chartered Bank.

BPOs have received many thousands of words of coverage in recent years, with attention increasing significantly following the ratification, by the International Chamber of Commerce (ICC), of the Uniformed Rules for Bank Payment Obligation (URBPO) on July 1, 2013. Articles about BPO divide neatly into those lauding its ground-breaking nature and heralding it as the future of trade finance and those that are pessimistic and see it as a wasted opportunity.

The reality, as always, is somewhere in between. A BPO is an irrevocable undertaking between banks that payment will be made on a specified date after successful electronic matching of data, according to a set of industry-wide rules. As such, it clearly has the potential to help to propel part of the trade finance business into the electronic age, reducing costs and improving visibility for all parties. However, the greatest potential benefit of BPOs has been largely overlooked to date.

BPOs present an opportunity to provide pre-shipment financing to small and medium-sized enterprises (SMEs) at an attractive rate. While numerous non-bank providers have entered the trade finance market in the past decade, all target post-shipment financing. By focusing on the ability to offer pre-shipment financing solutions, BPOs can not only be a more efficient method of payment in trade but also an instrument which enables the flow of liquidity necessary to facilitate trade flows. In that respect, their impact could be as great as the emergence of letters of credit (LCs) in 1500s.

 Work still to do

While the possibilities presented by BPOs are exciting, it is important to be realistic about their shortcomings. There is a fundamental flaw in the design of the BPO because it is positioned so that data – extracted from the commercial invoice, purchase order, insurance or transport documents – is matched on SWIFT’s Trade Services Utility (TSU); payment is then effected upon a dataset match. This arrangement works if the companies involved are large and familiar with each other.

However, for trade parties with no prior trading record, or for the many SMEs involved in global trade, the inability to authenticate the data provided means there is a significant fraud risk for the counterparty. With BPO being such a new instrument, and without the case precedence of LCs, this poses uncertainty for the corporates and banks involved.  Authentication could be provided by capturing other documents independently generated in the supply chain, such as an electronic bill of lading, for example, to verify the data from the supplier. Fortunately, efforts involving a multi-bank trade finance platform are now underway to rectify this problem. Further efforts to improve data quality, perhaps involving national Customs agencies will be helpful, but need to be standardised globally.

The TSU poses additional challenges. The current design accommodates fixed trade prices, rather than the moving prices – referenced, for example, to a benchmark index – used in some industries. In addition, the BPO still faces regulatory challenges in some jurisdictions, where there may be insufficient experience to allow both exports and imports using BPOs: some markets can only receive rather than issue BPOs. Another regulatory complication is that while the legal framework for BPOs has been ratified by the ICC, it has yet to be tested in a Court of Law.

Less troublesome – though still a barrier to adoption in the short term – is the difference in how a BPO works compared to an LC or open account transaction. Ostensibly, a BPO functions like an LC, with a promise to pay once pre-agreed conditions have been met: all that differs is that checking is electronic and automatic rather than paper-based and (potentially) manual. However, that similarity masks a significant difference: under a BPO it is the bank, rather than the named company, that is paid. This difference is straightforward, but industry efforts are still needed to educate corporates.

More generally, the scale of change management required of banks and corporates to be able to electronically extract the required information from trade documents is not to be underestimated. To date, the potential benefits of using BPOs have not been articulated sufficiently to corporates to encourage them to commit the necessary resources. As a result, corporate interest has been limited and, of the 50-60 banks capable of completing a BPO, just a dozen are thought to have done so.

An important barrier to uptake by banks is the current high cost of setting up a scalable BPO proposition. Banks need to invest significantly  before seeing viable returns, even as they try to incentivise corporates to adopt the new instrument. BPO is unlikely to gain critical mass among banks – and therefore among corporates – until this disincentive is removed. Reducing the access cost to the TSU for banks, at least until there is tangible growth, would be a good first step. 

Cautious optimism

Standard Chartered has been a pioneer in the use of BPOs. It was the first bank to perform a fully automated electronic BPO transaction with BP Aromatics and Octal in Singapore and Oman respectively in 2012. The following year, Standard Chartered conducted the first live end-to-end BPO transaction following the URBPO ratification with PTT Group, solidifying its position as a market leader.

However, while the bank is enthusiastic about the opportunities presented by BPOs, it is realistic about the challenges that must be overcome if it is to succeed and volumes are to grow. Chief among these are the practical issues relating to the BPO instrument and verification of data: corporates will not adopt a new payment term unless it is demonstrably as safe – or safer – than existing methods such as LCs or open account trade. The regulatory uncertainty around BPOs must also end: banks (and others) need to continue to lobby governments to allow BPOs to use the same regulatory framework as LCs.

Just as important as fixing the BPO product is the need to build awareness among corporates. SWIFT, and those few banks that are promoting BPOs, need to take a more holistic view of the potential benefits of the instrument. BPOs clearly offer speed, reliability and convenience, which by eliminating paper, reduces costs and improves accuracy – all while providing assurance of payment. However, for many corporates assessing the evolving trade finance solutions world, BPO is just one among many new solutions competing for their attention.

If the banking industry believes in BPOs – and is prepared to address the challenges associated with them – then it must also change its pitch to clients. BPO is unique among current offerings because it solves a piece of the supply chain finance problem – pre-shipment financing – that is not addressed by other supply chain solutions in the market that focus on post invoice acceptance.

SWIFT and banks involved in BPOs should emphasise the potential for BPOs to lower the cost of managing the supply chain, reduce costs for all within that chain, and improve its stability. Ultimately, such an outcome would be beneficial for companies worldwide – and especially for SMEs, which can have trouble gaining access to cost-effective, flexible financing – and help the global economy at a time of continuing uncertainty.