SWIFTs Marathon to make the Bank Payment Obligation a success

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For the last several years, SWIFT has been working with the International Chamber of Commerce (ICC) on a product to enable banks to handle some of the $15 trillion in world trade financed directly by corporates.

The SWIFT Bank Payment Obligation (“BPO”) initiative was designed with one purpose in mind – to capture a portion of the roughly 80 percent of world trade that is not bank mediated.

This initiative started over ten years ago, when SWIFT built what they called a Trade Service Utility (“TSU”) to help match Purchase Orders and Invoices..  The TSU created a standard and data formats around POs, invoices, matching services, etc. to provide services to corporate and commercial customers through banks. Almost ten years on, and the Bank Payment Obligation rules engine has been built on top of the TSU matching engine.

Notwithstanding the poor choice of an acronym (the corporate world all associates BPO with Business Process Outsourcing), the BPO is less a product and more a Bank to Bank financial instrument which can be used to complement a variety of value propositions.   We will explore these more in upcoming posts.  For example, if the seller needs some form of payment assurance, the BPO could be an alternative to credit insurance, standbys or payment guarantees. It's also an alternative to Letters of Credit in the sense that it can provide not only an assurance of being paid but being paid on time. Experience suggests that L/C users in most cases know they will get paid but rarely get paid on time, often 5/10 days late because of discrepancy management.

As bankers know, the initiative to bring trade transactions from a document based environment to a data environment has run into severe challenges in the past, with low corporate adoption, and fragmented efforts.  It is not a trivial exercise to exchange trade data with multiple bank and intermediary firms.  Whether the BPO is different remains to be seen.  Compared to the past, the BPO is building on the adoption of global standards via the ICC.  This increases the chance for greater adoption, if and only if real value is perceived by corporates.

Commercializing the BPO

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 have already found solutions. So far, only a few large exporters issuing many Letters of credit have taken the step to pilot and justify the business case (see BP Chemicals, OMRON Automotive Electronics Korea).  And the pilots to date have been almost entirely in the Asia Pacific region.  As for Banks, they cannot determine any realistic volume/revenue projections.

So much work still has to be done, and SWIFT and the ICC are pushing hard to make this new payment instrument a success.

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