Will SWIFT’s Bank Payment Obligation ever become a real option for corporates?

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.  Compared to the past, SWIFT’s Bank Payment Obligation is building on the adoption of global standards via the International Chamber of Commerce (ICC).  This increases the chance for greater adoption, if and only if real value is perceived by corporates.

To date, the adoption rate remains lower than initially expected since the BPO rules were published on April 2013.  SWIFT has not released transaction data, and while there are a few banks that have promoted the BPO aggressively (JPMorgan, RBS, Standard Chartered are a few), the vast majority are in ‘wait and see’ mode

Ray Zabarte from RBS recently noted in an article in the Trade & Forfaiting Review that the “Barriers holding adoption back include technology, legal, risk and compliance hurdles and a lack of critical mass.”

I would go one step further.  Building a better mousetrap around technology is fine, but has to demonstrate real value.

In the BPOs case, the value is not being a substitution for paper intensive Letters of credit (which is where the pilots are) but to intermediate the banks back into the open account trade flow world and offer various risk mitigation and finance opportunities.  To do this, 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 is challenging, as banks cost of capital is increasing and trading partners have already found open account solutions, some using supplier networks we have written about on Spend Matters – see Jason Busch's commentary on the market, E-Invoicing 2014 Forecast.

The big issue with using the BPO instead of open account is Credit.   There I go again. I keep bringing this up to technology folks, it’s not just about a better mousetrap.  BPO takes credit just like a Letter of Credit as the corporation is substituting its own credit for a bank. See You Want a Letter of Credit, Really?  So why would a corporate want to do that unless there is a strong value proposition?

One banker I spoke to noted, “SWIFT avoids saying the BPO will replace the L/C but be complementary to it, and open the door to new business.  That’s the marketing SWIFT is doing.  Still difficult to convince clients to shift from open account and shift to the BPO, same as L/C except you won’t see the documents.”   Another banker commented, “In my view, the BPO is still a concept.”

Corporate readers of Trade Financing Matters should consider the following when evaluating the BPO to see if it could provide value

  • Do you do export/import product in emerging markets on an open account basis where having payment protection would be of value relative to alternatives?
  • Does the BPO help develop payment assurance, efficiency, and liquidity options to stand alongside the existing settlement and risk products you use today?
  • How would the BPO impact your credit needs?

SWIFT needs to position the BPO in a broader context of a client’s supply chain strategy and focus on how data gets exchanged with their trading partners, their payment terms, working capital requirements in their supply chain, etc.  A key factor is to what extent trading partners are making electronic presentation of data a priority.   We know from speaking with ePresentation vendors in the market (eg. Bolero) that many of the top commodity traders (Glencore, BHP) are making this a priority. But for your mid level manufacturer, or technology company, electronic presentation currently is not a priority.

If the BPO is to have more widespread adoption, SWIFT needs to better understand the world of supplier networks and where they are heading.

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First Voice

  1. Phillip J Brutus:

    I am a commodities broker. The question l have is how can i intermediaries be paid if the BPO is only between the two banks? So we have to chase our principals to get paid after a deal closes? I’d appreciate a prompt comment. Thanks!

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