Can SWIFTS BPO be the Catalyst for Pre Shipment finance?

Transiting-Inconjuncts1

There has been a big effort on the part of a number of vendors to find ways to bring trade in the digital era.

One of the recent successes has been around the electronic Bill of Lading (eBL).  A quick reminder of what purpose the B/L serves is :

  • it is evidence that a valid contract of carriage exists
  • it is a receipt by the carrier confirming goods received match descitpion, and
  • it is also a document of transfer (but is not a negotiable instrument)

There are a few vendors that have made much progress moving this document to an electronic format, chiefly EssDOCS and Bolero (if I left anyone out, please let me know). Both EssDOCS and Bolero have users numbering in the thousands and an increasing number of trade transations originating from large Fortune 1000 users of letters of credit (ie, big commodity trading companies).

But the point of this piece is that the finance processes that support this trade still lag behind.

Right now, most of the B2B working capital finance is centered on approved invoices. We touched base on why purchase order finance is a much harder nut to crack hereGT Nexus and their partner Seabury TFX are making a digital play.

Another potential solution has been around for awhile but has been challenged on many fronts. SWIFT’s Bank Payment Obligation has been trying to become a new payment instrument around open account that can enable finance.   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.   Note the between banks part. There is no Corporate – Bank part of the BPO; that is a separate agreement.

The coverage of SWIFTs BPO has been enormous for the amount of traffic and volume generated. Michael Vrontamitis of Standard Chartered argues 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."

That’s a big claim, especially for an instrument that relies on data matching. There is no precedence for when problems happen, as there is a big difference between something ratified by the ICC and a case tested in a court of law.

While the business case for the BPO rests on displacing existing settlement methods, especially convincing trading parties to shift from Open account to the BPO, there is still a strong camp of bankers that believe the BPO is really a digital Letter of credit. Michael Vrontamitis commented, 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.

The reason that the BPO has not had any traction with open account flows is that once a company moves to settle on open account, it has made a conscious decision not to use a credit and document intensive letter of credit (or documentary collections), and has accepted more risk and less options for finance. BPO’s value proposition is much weaker for Buyers, essentially providing the tactical opportunity to extend payment terms to their supplier base or to significantly improve their L/C document handling process. The offering has better risk mitigation and liquidity features for exporters.

SWIFT will be going to their annual SIBOS conference and I am sure the BPO will be a big part of the agenda. While the collective banking industry is far from moving fast, here a few suggestions for SWIFT to reenergize this instrument:

  • In this age where banks are reducing their Correspondent Networks and onboarding suppliers in different regions presents major hurdles, the BPO can provide a way to solves a piece of the supply chain finance problem – pre-shipment financing. The Recipient Bank may offer pre-shipment finance to the Seller based on a PO commitment to pay.
  • There is general confusion around what the BPO really is – is it trade service facilitation, supply chain finance, a risk mitigation tool to replace credit insurance, overall the industry is still not clear. It has not helped matters the SWIFT organization has branded the Bank Payment Obligation as the BPO (highly confusing to the corporate world who use that term to define Business Process Outsourcing) or been promoting it as a Supply Chain finance option. It’s time to get focused.
  • If this instrument is a digital LC, then it’s a digital LC. Forget trying to be an open account solution. Most believe the horse has left the barn on that one. Focus on those Large Corporates who find the L/C process cumbersome and are looking for pre shipment finance solutions for their emerging market suppliers, especially in light of the shrinking Correspondent Network.

What do others think? Is this really a solution for the future or on the highway to nowhere?

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First Voice

  1. William Laraque:

    BPO alone does not address the risks accociated with pre-export financing. Guaranties for lenders and export credit insurance for exporters provide the mitigation of the risk of non-payment due to political and commercial Events. These are of critical necessity to sustainably engage in international trade.

    BPO and SWIFT mitigate the cybersecurity risk and SWIFT’s KYC are of great help in dealing with export controls. SWIFT’s efforts to reach down to the SME are commendable. 99% of the enterprises in the world according to the World Bank Group are MSMEs, Micro and Small, Medium-size Enterprises.

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