BPO and Supply Chain Finance: The Perfect Symbiosis?

In the past couple of years, treasury technology and
standards have made enormous progress. Reasonably up-to-date supply chain
management (SCM) applications, both for the physical and the financial supply
chain (PSC/FSC), as well as enterprise resource planning (ERP) systems have no
problems understanding and processing different file formats and data
structures, keeping data losses and truncations to a minimum.

Communication standards have overcome the barriers between different
industries; in particular SWIFT’s Trade for Corporates, the MT798 – also dubbed
‘The Trade Envelope’ – has facilitated corporate-to-bank and bank-to-corporate
communication fairly significantly. Thanks to this recent progress in both
technology and standard setting, the stage is set for the FSC finally to catch
up and match speed with the PSC.

So, how is it that the PSC and its
management still often outpace the FSC and the services provided therein?
‘Outpace’ in this context can actually be taken literally: often the delivery of
services and goods has already taken place although the corresponding financial
transaction is far from being completed. Ironically, this is mostly the case in
international trade where goods travel far around the world and delivery takes
significant time.

A major reason for this situation is the current state
of banking regulation. As a consequence of the global financial crisis of
2007-08, national and supranational regulators have tightened the regulatory
framework, above all for banking activities and also impacting neighbouring
areas such as factoring and credit insurance.

So while financial
services could significantly pick up speed where pure technology, processing
and service is concerned, activities have been slowed down – especially in the
international arena – as soon as financing components come into play. It is no
coincidence that the supply chain finance (SCF) industry still lacks
standardised and easy-to-use multi-entity SCF solutions that span the world.

From the corporate perspective, it is hardly acceptable that bankers
become very evasive when asked about a truly harmonised, worldwide SCF
solution. Given the current regulatory framework, however, it is evident that
banks will have to cope more and more with local, unharmonised laws,
regulations and reporting standards – both in terms of providing liquidity and
complying with know your customer (KYC)/ sanctions requirements.

this mean that corporates have no chance but to be locked into fully
proprietary banking solutions?

The ‘Four Corner Model’ of

At the International Chamber of Commerce (ICC) Banking
Commission meeting, held in Lisbon on 17 April 2013, the Uniform Rules for Bank
Payment Obligation (URBPO) were adopted. A Bank Payment Obligation (BPO) is an
irrevocable undertaking, given by one bank to another bank that it will pay on
a specified date after a pre-agreed event has taken place. This event is
evidenced by an automated matching of data in a so-called transaction matching

This straightforward concept can be considered the most
promising instrument to bridge the gap described above between technological
and regulatory momentum and give SCF activities a completely new impetus.
Current observations confirm that the concept of the BPO is being well-received
in the market. More than 50 banking groups have already confirmed their
willingness to offer BPO to customers.

So, where is the connection
between SCF and BPO?

It is undisputed that more than ever, corporate
customers are asking for cooperative SCF solutions. SCF in this context is not
limited to the notion of so-called ‘reverse factoring’ programmes but, in line
with the Bankers’ Association for Finance and Trade/International Financial
Services Association (BAFT-IFSA) definitions on open account trade finance, as
“a combination of technology and services that link buyers, sellers, and
finance providers to facilitate financing during the life cycle of the Open
Account trade transaction and repayment“.

‘Cooperative’ in this context
acknowledges the fact that corporates recognise they benefit most when each
party in the value chain contributes what it is most suited to providing – not
only in terms of the goods and services offered but also with regard to their
role in financing the whole value chain.

Thus, large and well-rated
buyers no longer leave their suppliers alone in their efforts to acquire
reliable and affordable funding. These companies are willing to contribute by
enhancing their suppliers’ financing options. Most commonly this happens by
approving invoices, but also by giving payment commitments if certain
prerequisites are met, for example if the production or the shipping of goods
has been evidenced in a pre-agreed way. It is at this point that the BPO kicks

Instead of letting one bank or financial institution take care of a
complex, multi-party international supply chain end-to-end, BPO enables banks
to cooperate on an industry standard that allows each party to be serviced by
the bank that is suited best for this task: that is its local bank – ideally
equipped with an established track record and deep knowledge of its local
client’s business needs.

That is how it works in practice: So far, a
supplier who wishes to join an SCF programme will conclude an agreement with
the buyer’s bank. The buyer’s bank is, typically, located in a country foreign
to the supplier. He thus has no choice but to use the terms and conditions, the
technical infrastructure and sometimes the language of a foreign bank. He will
also have to comply with the foreign bank’s KYC- and other regulatory
requirements that in many cases significantly differ from the standards he is
familiar with.

Additionally the buyer’s bank has several challenges to
overcome with the foreign supplier: Not only must it ensure that it complies
with the laws and regulations of the supplier’s country, but also – a greater
impediment – it has to provide complete customer service to a typically small
corporate that is not located anywhere in the buyer’s bank’s network. Many
large multinational supply chain programmes, which started promisingly enough,
ultimately failed because of these seemingly trivial aspects.

With BPO,
however, the buyer can agree with his local bank at what stage in the value
chain he is willing and ready to undertake payment. This can, as in the
traditional approach, follow approval of the supplier’s invoice but may be much
earlier as examples of evidencing production start, production end, dispatch
and the like show. In this context, BPO offers great flexibility; the parties
are by and large free to agree upon which event the BPO shall switch from a
conditional to an unconditional obligation to pay.

Equipped with
this knowledge, the supplier can agree with his local bank on various financing
options: Either he uses the BPO as a credit enhancement for simple working
capital lines or he sells his BPO-supported trade receivables to his local bank
– enabling it to offer attractive pricing as the BPO eliminates any
supplier-related risk, as demonstrated below in Figure 1

Figure 1: Using the BPO to Eliminate
Supplier-Related Risk.

UniCredit BPO Figure 1

While not far removed from traditional SCF
offers, the beauty of this concept is that each party, both corporate and
banks, acts locally and benefits from its local footprint and mitigating supply
chain risk.

In the so-called four-corner interoperable model, as
illustrated in Figure 2, the cross-border part of aspect of the SCF programme
takes place exclusively between the banks. The corporate is not involved with
the implications of cross border finance activities described earlier and there
is, by default, a sufficient degree of automation in the bank-to-bank

Figure 2: Four-corner
Interoperable Model.

UniCredit BPO Figure 2
Source: SWIFT

So, it is highly
likely that the date of 17 April 2013 will come to be remembered as the
beginning of a new era in global SCF.


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