Sometimes new processes can take a while to become fully established. SWIFT’s BPO is a case in point. The first end-to-end automated trade finance transaction using the BPO was carried out, with the help of Standard Chartered, between Belgium-based BP Aromatics and Oman-based Octal Petrochemicals as far back as 2011. But since then, uptake has been gradual at best.

There are good reasons to believe this will change in the next 12 months, however. Last year, a milestone was reached when the International Chamber of Commerce (ICC) published uniform rules and technological standards for the BPO, giving users of the solution the legal clarity they previously complained was lacking. Over the past year, SWIFT has also invested considerable time and resources in an educational campaign to communicate the benefits of the BPO to corporates, banks and other important stakeholders.

On the banking side, at least, the campaign appears to be paying off. According to the latest data from SWIFT, a total of 12 banking groups are now ready to go live with the solution, with a further 56 – including 15 of the top 20 trade banks – currently in the process of adopting the BPO.

The opportunity for banks

One reason why BPO uptake has been slow thus far may be the threat some bankers perceive the solution poses to the letter of credit (LC) – a revenue stream for banks which they are naturally keen to retain. But Jim Bidwell, Global Head of Documentary Trade Product Management at Barclays, believes these fears are misplaced. At Sibos, SWIFT’s four-day user conference hosted last year in Dubai, he attempted to set the record straight. Although banks will inevitably see some business move from the LC to the BPO, the migration will only be partial and will certainly not eliminate demand for LCs entirely, he told assembled delegates at a breakfast briefing hosted by Barclays.

Indeed, what the banks might lose in LC business, over time, is likely to be far less significant than what they are poised to gain from being able, with the BPO, to re-intermediate themselves through financing in the Open Account space. “For banks that think deeply about the BPO, commit to it, and put their propositions together, I think the opportunities in Open Account far outweigh that which might be lost on the small part of the LC business,” says Bidwell.

Uncertainty about how the BPO would be used in practise has also hampered uptake, according to Bidwell. All the while that the BPO was an initiative exclusive to SWIFT it was always going to be very difficult to reach critical mass in terms of bank adoption. But there is hope that the ICC’s rules, by bringing the BPO in line with other trade finance products such as the LC, documentary collections (D/Cs), and guarantees, will now facilitate an increase in bank confidence in the technology. “Now the banks have a clear set of standards to work with,” he explains, “which means that banks don’t need to have separate agreements with SWIFT and other parties, as everyone knows the rules to play by. That was a very important step.”

Moving forward, Bidwell would like to see greater collaboration between banks. This, he notes, is absolutely imperative if the BPO is to be a success. To explain, Bidwell uses an example of a financing opportunity involving a supplier based in an unfamiliar market. “If Barclays were the obligor bank in a transaction, we would find it very difficult to provide pre-shipment finance to a supplier in a country such as Taiwan, for instance, where we do not operate. But what we could do to help our client finance their supply chain is to work with a local Taiwan-based bank and encourage them to use the BPO to provide pre-shipment finance for the supplier, based on the fact that Barclays is guaranteeing the payment risk in its role as obligor bank.”

Fortunately, the BPO’s design supports interoperability between participating banks, making the collaboration Bidwell speaks of relatively straightforward. This interoperability is made possible through the use of a standard set of ISO 20022 messages, each of which reflects events that have taken place in the physical supply chain, and, according to SWIFT, “creates trigger points for the provision of financial services”.

Building a business case

In terms of adoption, another argument the banks are often heard making is that they want to see corporate demand become more established before they go live with the BPO. So far, only a small number of corporates have experience of using the solution (mostly commodity players such as OCTAL Petrochemicals) but the feedback from that sample has nevertheless been largely positive. If there are any challenges for corporates using the solution, most of these are internal and not directly connected to actual BPO processes.

“It is something which I think many companies who use the BPO will find,” says Gary Slawther, Corporate Treasurer at OCTAL. “Trade finance people – logistics departments, for instance – know what they like and like what they know. They are generally experienced and have been using LCs for years, and trying to get people to change and use something new can therefore be quite a challenge.”

For adoption among end-users to increase, it is vital that the benefits of the BPO are fully appreciated. For that to happen, the simplification which the solution can bring to trade operations needs to be more effectively communicated. Should that not happen then the level of corporate demand that banks need to take their propositions forward may never materialise. “If it is just seen as a bank product then there is a strong possibility that it will just wither on the vine,” says Slawther.

Enrico Camerinelli, Senior Analyst at the Aite Group, agrees. In his opinion, the near exclusive focus on what the solution has to offer for banks is one of the reasons why the development of the BPO has been so protracted. “There is a tendency from banks to believe that if they solve their own problems the benefits will somehow ripple down to corporates. But that is not always the case,” he explains.

The benefits are definitely there, however (see the box on page 20 for a refresher). The challenge for SWIFT and the banking community in the year ahead will be making sure that message is effectively communicated to corporate clients. “That means listening to their views and helping them build a business case for their involvement,” says Camerinelli. If that important step is taken, then we should begin to see the solution adopted more widely in the year ahead, although it may still be some time before corporate use approaches critical mass.

Spreading the word

With eyes fixed firmly on presenting the BPO “in a more corporate-centric way”, André Casterman, Head of SWIFT’s Global Strategy and Business Development in the Corporate and Trade markets, admits that a fresh look at how it is promoted is needed.

Source: ICC Education Group, September 2012

For Casterman, “it is no use talking about how it works” to corporates because corporates have no need to know – in the same way that a mobile phone user does not care how their network operates, only that it works when it is needed. So how is SWIFT going to drive interest in this potentially very useful trade product? Playing on the sheer practicality of the solution is a good place to start, it seems.

“What we will be doing in 2014 is working on industry-specific value propositions,” says Casterman. There is logic to this focused approach. In certain geographies – intra-Europe, for example – the transportation of goods is rapid, but the paper trail is not. The traditional letter of credit (LC), as a paper-based document, will often land on the relevant parties’ desks after the shipped goods have docked. It slows down the supply chain and receipt of payment to the point where letters of indemnity, much-disliked by the shipping protection and insurance (P&I) clubs –because they are complex and yet offer little real protection – are used to try to expedite flows.

To begin with, companies trading in commodities will remain the main focus for SWIFT in 2014. Casterman explains that typical deals in this space are sizeable, recurring and are typically between large corporates that have already established a high level of mutual trust. The market is also intensely competitive to the point where banking fees “are a secondary interest” when it comes to maintaining client relationships and thus anything that can speed up the trade flow and receipt of goods is welcome.

SWIFT is also seeking to demonstrate that regardless of the duration of the physical transportation process, the BPO will be beneficial for buyers. When a purchase order is agreed, if an LC is to be used it must be opened immediately because the documentation process is slow.

As an electronic document currently presented between banks via SWIFT’s TSU, the BPO ensures that an LC can be opened at a much later point, where perhaps the exporter needs only to manage its risk as the shipment arrives – if the order is cancelled pre-delivery the shipment can be re-routed to a new buyer.

Source: Euro Banking Association at EBA Day

“We are aligning the use of credit lines to the real risks in the physical world,” says Casterman, adding that over time the system under-pinning the BPO “will shift entirely to e-banking”. Integration of trade solutions will be essential and SWIFT’s commercial partners are being co-opted into the process. Trade finance solution vendors, such as Surecomp and Global Trade Corporation, already have SWIFT certification for their products. In order to keep that status, all vendors will need to combine the BPO – perhaps as a separate module – with the other instruments such as LCs and Guarantees.

So, perhaps the BPO has now found the problem to its solution, but convincing corporates of that fact will still take time.

BPO refresher: the essentials

The BPO is essentially an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date, following a successful electronic matching of data. It functions in a way which is similar to both the letter of credit (LC) and open account settlement, but there are a number of crucial differences (see Chart 1).

For corporates, the BPO offers benefits in three main areas. The first benefit is improved risk mitigation (see Chart 2). In terms of documentary risk, the BPO has significant advantages over traditional trade finance products which are often vulnerable to discrepancies. For example, when using an LC, a participant in a trade may find the goods descriptions on their documents differ from that of their counterparty’s.

However, with the BPO, purchase orders are agreed at the very outset using a data matching application – such as SWIFT’s Trade Services Utility (TSU) – thus minimising the risk of confusion arising between counterparties further down the line. As this action is performed automatically, without the need for manual input, it also has the advantage of not requiring a large team to approve documents exchanged between the buyer and seller.

Next is the assurance the solution provides for sellers that they will be paid in full and on time. Unlike trade on open account, which offers no such assurance, the BPO functions rather like a confirmed LC. This leads in to the third main benefit – the opportunity for the seller to use the BPO as possible collateral for pre and post-shipment financing. Once the obligor bank has issued the BPO, the recipient bank knows that, providing their client ships the goods, repayment is covered.

At this stage, even if the shipment has yet to take place, and might not do so for months, the recipient bank could be prepared to provide its client with a percentage of the value of the BPO as pre-shipment finance. After the goods have been manufactured and shipped, data arrives from the supplier which is matched with the purchase order baseline and, at that point, the obligor bank’s obligation to pay is crystallised.

This also has potential benefits for the buyer. Now that the seller is able to obtain pre-shipment finance, using the BPO as collateral, the buyer may be able to negotiate more favourable contract terms than would have been feasible previously.