How to get the Bank Payment Obligation out of the Mud

mud boots

The Bank Payment Obligation (BPO) has been propped up as an alternative settlement instrument for cross border trade. What SWIFT did through the ICC is develop a set of BPO rules and related ISO 20022 messaging standards. But are corporations adopting them?  The short answer is no, so far volume is minuscule. See SWIFT’s Bank Payment Obligation continues to struggle.

To me, the BPO was designed to keep the banks intermediated in the cross border trade flow. That is not necessarily a bad thing. The chief reason is that finance can be enhanced because, for many corporate and commercial clients, the average supply chain would involve very high KYC costs to inject liquidity. It is too expensive to do, even for many of the strategic suppliers for a client. And, it is certainly too expensive for most banks without a global footprint. This is where the BPO can add real value.

You see, the BPO provides the essence of the letter of credit (and all its settlement, risk mitigation, and payment services, see – So You Really Want an Letter of Credit?) but just in an electronic world. That can be valuable to many, particularly large scale exporters (or small) that need the added protection of selling in emerging markets but don’t want the delays associated with paper documentation.

But it is stuck in the mud and I believe it needs to go private for a better chance of success. In a large bureaucracy like SWIFT that must coordinate with its bank members/owners, things sometimes just don’t move fast enough. I think if there are commercial owners, they would need to understand the world, and adapt to it. For example, how B2B and supplier networks are changing the way data and documents are exchanged, and how real-time payments are happening.

While privatizing the BPO may not be easy since the TSU Matching Engine is used to match original purchase order data with information coming from suppliers, it is doable.

I think commercial owners would quickly understand you need third party service providers to help push this along. One area where the service provides can help is straight-through-processing to truly make the BPO a cost effective bank-to-bank instrument and low-cost trade settlement product alternative for corporations. This involves:

  • Corporate-to-bank integration
  • Bank-to-TSU Matching engine
  • Bank-to-internal systems

Perhaps SWIFT’s bank partners will raise this issue. There is precedence here. SWIFT spun off Bolero who has since gone on to provide both a multi-bank application and ePresentation solution to the market.  It's time this issue gets raised at this year's Sibos in Boston.

First Voice

  1. William Laraque:

    In a sense this is actually happening…without SWIFT. Your comments are on point David but institutionalizing the process with SWIFT has not occurred.
    Cross-border trade settlement today is increasingly done via mobile payments and credit cards. Cell phones make payment accessible everywhere. Banks are involved in these processes but in a disconnected way. The U..S. company which sells overseas may wish to keep proceeds overseas in order to lower the tax consequences. Why else would U.S. multinationals keep an estimated $3 trillion offshore?
    David you are absolutely correct that SWIFT needs to join the game but unless and until the tax laws are made compatible with the repatriation of funds as a result of cross-border sales, banks will continue to play a bit part in the panoply of global trade flows. If Apple products, to provide an example, are deemed to be of Chinese origin, why would Apple in drop shipping these goods to Africa “recognize” the sales in USD onshore when the same funds can be kept offshore in a way that minimizes U.S. taxes? The issue involves corporations and SWIFT. It also involves international taxation.

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