Can Swift’s BPO be an alternative to the Two-Party Factoring Model?

When companies trade cross border on open terms, it presents risks and usually extended terms, especially in emerging markets. In fact, the U.S. has become particularly risky in certain sectors – one only has to look at the recent news around RadioShack.

So when a company sells to a foreign buyer and wants paid early, one possible alternative is to use a two-party factoring model. Many lenders may not want to enter the realm of foreign receivables and choose to exclude them all together when developing a lending program.

The two-factor model is an interesting model. The International Factors Group (IFG), a global trade association that represents and promotes factoring, invoice financing and asset based lending industry, provides the servicing platform and legal infrastructure to assist their members to handle a transaction. The factor supporting the seller will request through IFG a factor in the buyers country to handle the credit risk of the buyer. If agreed, fraud and dispute risks still are retained with the seller. Payment is made to the Import Factor and the Export Factor finances the invoice like a domestic receivable.

Sounds pretty straightforward and simple and an innovative way to expand cross border sales without the worry of credit risk.   But there is no doubt these transactions are far from straightforward. Take the case of a Chinese supplier to a German manufacturer. You require a Shanghai Factoring company to pay and have the appropriate licenses, and you need the German Factor to manage collections, euro currency, etc.

So how can SWIFT’s Bank Payment Obligation (BPO) be an alternative to this model? I’ve written quite extensively about this new instrument here, here and here.

It continues to struggle in its current design to intermediate the banks back into the open account trade flow world and offer various risk mitigation and finance opportunities. But perhaps the SWIFT organization can rebrand and remake the instrument, although that would not be without its challenges. For example, Bob Blower, head of Trade Channels at Bank Abu Dhabi, mentioned four issues that has prevented any real take-up of the BPO.

  • First, BPO is a bank-to-bank commitment and the rulebook does not cover contractual company to company transactions
  • There is no standardization around the corporate part of the transaction and this goes contrary to the efforts of ICC in standardizing definitions for open account - banks will make up their own flavor which potentially confuses the end user
  • Because BPO is a new mechanism it does not carry the same history in terms of common law; the Letter of Credit has hundreds of years of commercial law judgments to guide courts in the event of a dispute
  • Because the BPO has no default history to speak of, the risk exposure is immeasurable. Accordingly credit risk and capital are difficult to measure, which means pricing is also difficult.

There are more in my posts. But my advice is if you have a portfolio of foreign receivables you are interested in monetizing, you may want to talk to a bank that offers receivables purchases. There are active players here, including Deutsche Bank, Citibank, Banco Santander, and HSBC as as servicing platforms like Demica, Finacity and Global Supply Chain Finance. These programs usually call for you to purchase credit insurance first and then sell the bank (or a Structured Purpose Vehicle) the insured receivables.

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First Voice

  1. William Laraque:

    Private equity supplemented by export credit insurance can also be used to finance export receivables. One does not have to wait for bank reintermediation to finance the several scenarios provided by David.
    The most important area was not addressed unless I missed it. Export control violations can be the death knell for both exporters and importers. Banks have been hammered by everything from money laundering to sanctions violations.
    Private equity has stepped in to fill the financing chasm left by banks which are hapless in engaging in international trade finance. Each private equity firm specializes in certain products and geographical areas.

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