To simplify supply-chain finance for import-export, the International Chamber of Commerce (ICC) and SWIFT have come up with Bank Payment Obligations, or BPOs. The idea with BPO is to have a payment instrument that's less risky than an open-account transaction and more automated than traditional letters of credit.
In a "Virtual Sibos" online session, Ashutosh Kumar, global head of corporate cash and trade for Standard Chartered Bank identifies the BPO as a boon for banks involved in global trade. "We have a huge opportunity in Asia, because most of the [trade] corridors are growing at a very fast pace," said Kumar. "The Bank Payment Obligation can be one of the solutions to help us capture that opportunity."
An open-account transaction occurs either when a buyer pays in advance, or when a seller ships the goods in advance of payment. Either way, one side is open to the risk of default or non-payment by the other side. The open-account approach also limits the banks involved to a very limited role as a transaction processor.
Banks have a more central role when buyers and sellers use letters of credit, which is (as defined by the US Department of Commerce's Trade Finance Guide) "a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the [letter of credit] have been met, as verified through the presentation of all required documents."
That's all well and good, but to mail, inspect, and process the paper documents involved with letters of credit is a time-consuming and expensive process. Even if the shipment of goods takes only a day, handling the paperwork may take a week or more. For that reason, many firms have shied away from letters of credit in favor of open account, despite the protections of LoC-based approach.
Over the past decade or so, there have been several initiatives to bring letters of credit into the Internet age through the electronic exchange of information, but these efforts have tended to run into the hurdles of low adoption and venue fragmentation. It's one thing to create an electronic exchange for trade data, and yet another to get an importer, an importer's bank, an exporter, and an exporter's bank -- not to mention tying in the intermediary firms and customs entities involved in shipping, transportation, and logistics -- onto the same platform.
Compared to these previous efforts, BPO has two key differentiators in its favor: the adoption of global standards and the possibility of using electronic matching venues.
The reliance on global standards ensures greater interoperability and increased the possibilities for adoption. The BPO standard is built on the message formats defined in ISO 20022, an international standard for financial messages. This ensures that modern, ISO 20022-compliant solutions can process BPO data without significant customization. Furthermore, the business rules underlying the BPO data are compliant with ICC Uniform Customs & Practice rules for documentary credits, which are widely followed in international trade.
SWIFT, the financial messaging entity, was instrumental in the creation of BPO, and also offers an electronic matching service through SWIFT's Trade Services Utility (TSU). Yet unlike previous business models for electronic trade finance, transaction matching doesn't necessarily have to occur within the TSU. As an ICC standard, the format and rules can also be applied not just through TSU, but also through any transaction matching application equivalent to TSU. While the greatest adoption in terms of bank participation, trade volume and message traffic will almost certainly occur through TSU, the open standard makes it possible for other players to offer their own implementations of transaction matching, opening up the door to any number of value-added services and features.
This is exactly the kind of business that banks should be devoting their energies to providing to their customers. By working with buyers and sellers in an increasingly global economy, banks can avoid the trap of being a provider of commodity banking services, while also staying away from the kind of financial engineering-based business models that proved disastrous in the global financial crisis. Instead, with BPO we have an example of banks facilitating trade, which in turn increases economic activity and overall wealth.
My only problem with it is the nomenclature, considering the potential confusion with the "original" BPO, business process outsourcing. I can easily imagine a cloud-based outsourced service for banks that want to offer trade finance to their customers without having to hire new people or deploy in-house technology -- a BPO for BPO, or BPO-squared.
In the comments, I'd love to hear from people who currently conduct business on open account, or who have found themselves limited by the slow documentary procedures involved with letters of credit. Would the BPO service appeal to you? Also, from a technology perspective, what kind of extra features from a transaction matching application might be interesting to you? Any other thoughts are also most welcome.