The world of trade finance is looking forward to 1 July when
the Paris-based International Chamber of Commerce (ICC), in association with
SWIFT, will launch a set of Uniform Rules for Bank Payment Obligations (URBPO)
as a preferred method for settling trade payments. The drivers for this
innovation are the decreasing use of existing payment modes and to give a fillip
to supply chain finance (SCF).
The traditional methods of making trade
payments are open account and letters of credit (L/C) besides advance payments.
In open account the bank’s role is confined to payment processing, while in L/Cs
the bank’s undertaking to pay is conditional on physical presentation of
Open account is operationally simple, although it
puts the seller at a disadvantage as payment is optional for the buyer and goods
have been dispatched with the shipping documents. Non-payment or non-acceptance
of the documents presents a problem for the seller. The banks involved do not
get to add much value other than routing payments and with limited SCF options
in the absence of clear commitments from parties.
L/Cs on the other hand,
while they assure payment are operationally complex and document heavy with an
intricate set of rules – Uniform Customs and Practice (UCP) 600 – governing
their preparation and content. Its electronic equivalent, e-UCP, had difficulty
in finding market acceptance and never really took off. Pointing out technical
or even spelling discrepancies, in otherwise well-prepared documents, happens
regularly and holds up settlement until resolution or waiver. This adversely
impacts working capital optimisation at both ends of the trade chain.
Defining a Bank Payment Obligation
The Bank Payment Obligation (BPO)
being launched next month via URBPO is positioned between open account and L/C
as an additional settlement mode complementing the existing ones. While there is
a commitment to pay by the bank issuing the BPO, payment is triggered upon
electronic matching of data sets extracted from key trade documents. BPO will
also become a new payment term in the ICC model sales contract.
A BPO is
defined as an irrevocable and independent undertaking of an obligor bank to pay
or incur a deferred payment obligation and pay at maturity a specified amount to
a recipient bank in accordance with the conditions specified in an established
Following the introduction of URBPO, a BPO will be a bank-to-bank
obligation that payment will be made on a specified date after a specified
‘event’ has taken place (as defined in the established baseline). The event will
be, specifically, matching data extracted from the invoice on the seller’s side
and the purchase order on the buyer’s side, as well as data from other trade
documents covering transport and insurance plus certificates.
platform/engine will be the trade services utility (TSU) provided by SWIFT,
which will implement the URBPO rulebook and use ISO 20022 XML messaging
standards in a multi-bank environment. Payment will be triggered by the obligor
bank based on successful data matching on the TSU of the purchase order and
shipping information or according to the baseline agreed between the parties.
TSU is SWIFT’s cloud application for SCF.
The TSU match report will
confirm that the description of goods shipped precisely matches the description
of goods ordered, at which point payment will be triggered. The exporter thus
gets paid upon data matching electronically via the TSU and not on a physical
examination of the documents under the L/C scenario which, despite
well-established rules, can be interpreted ambiguously leading to locking
liquidity and shipment delays.
Advantages of the BPO
The advantages of
using the BPO include its use as a collateral tool for financing, and as a risk
management instrument, besides payables and inventory control for the buyer and
seller respectively. Representing as it does purchase order-based processing,
BPO opens up opportunities for pre- and post-shipment finance plus the ability
to offer factoring and reverse factoring services. Also, it substantially does
away with the paper trail and has the benefit of removing subjectivity in
physical document checking. BPO based on a data set match actually improves the
quality and objectivity of documentary compliance verification.
challenge for banks could be the capital treatment meted out to BPO under the
Basel III capital adequacy regime. Being positioned as a commitment of the
issuer bank, it bears a resemblance to an L/C in being a short-term contingent
liability and an off-balance sheet item. However with trade instruments such as
L/Cs and guarantees not qualifying for concessional capital provisioning under
the new capital regime , it remains to be seen how BPO will fit in.
paper-based to data matching payment determination, BPOs represent a good start
by the ICC and SWIFT in coming to terms with market reality where 80% of trade
terms traffic is on an open account basis with L/Cs’ share being around 10%. For
customers this is operationally simple, while for banks it could open up new
revenue streams and transactional income.
In anticipation of URBPO, banks
such as Banco de Brasil, JP Morgan Chase, Standard Chartered and Bank of Tokyo
Mitsubishi UFJ now include BPO in their trade portfolio.
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