SWIFT’s Bank Payment Obligation continues to struggle

Andre Casterman, Global Head Corporate and Supply Chain Markets for SWIFT, was kind enough to share some transaction volumes with me regarding SWIFT’s Bank Payment Obligation (“BPO”).  For those of you wondering what the BPO is see – Will SWIFT’s Bank Payment Obligation ever become a real option for corporates?

There has been a lot of fanfare and coordination around the establishment of rules to help banks re-intermediate themselves back into international open account trade flows. The BPO is a payment instrument that enables banks to do so and wrap valued added financing services around the instrument, both on a pre shipment and post shipment basis. The International Chamber of Commerce approved BPO rules back in the Spring 2013.

So far, while there are more than 30 corporates live on BPO/TSU (including companies like VALE, Omron, BP, and 7Eleven) volumes are still very small.

As SWIFT defines it, new established transactions are new Purchase Orders that are being entered into the TSU for risk / financing services. In the first half of 2014 there were 340 new transactions compared to 249 for the first half of 2013. The TSU pricing structure includes a monthly fee for all open transactions (POs) being processed in TSU. So for one PO handled on TSU for 3 months, the fee would be 1.5 EUR x 3 months = 4.5 EUR charged to both banks involved in the transaction.

While 58 banks have adopted the BPO (as at 16th July 2014) including 18 of the top 20 Trade banks, it does not appear adoption is translating into transaction flow yet.  The question really is why the BPO is not taking off ? I remember working as an associate in consulting when one of my partners said the world changes every two years. That was two decades ago. It seems the world changes even faster today. Most of us are not good at marathons. If a banker believes this initiative is years away from any significant impact on revenue stream or bonus structure, then why put time into it.

Bottom line, it appears we are finding a challenge to a strong value proposition across the network of Recipient Bank, Obligor Bank, Seller and Buyer. I am not surprised. The business case for the BPO rests on displacing existing settlement methods, especially convincing trading parties to shift from open account to the BPO. This will be challenging, as banks cost of capital is increasing and trading partners are finding new ways to do business, particularly using supplier networks.

Perhaps the sweet spot will be emerging market and South-South trade flows, but even here banks are retracting their Correspondent networks due to compliance costs.

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