ICC Banking Commission approved the URBPO contractual rules, which was brought into effect on July 1st 2013.The announcement created ripples in the financial services industry. Herein we shall review what BPO means, what are the uniform rules (the UR in URBPO) mandated by ICC, and what would be the implications of these rules on international trade.
WHAT IS BANK PAYMENT OBLIGATION (BPO)?
BPO, as defined by financial messaging service provider SWIFT and the banking commission of ICC is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after successful electronic matching of data, generated by SWIFT’s Trade Services Utility (TSU) or any equivalent Transaction Matching Application, based on Uniform Rules for BPO issued by ICC. In other words, Bank payment obligation (BPO) is an irrevocable undertaking given by an Obligator Bank (typically buyer's bank) to a Recipient Bank (usually seller's bank) to pay a specified amount on a agreed date under the condition of successful electronic matching of data according to an industry-wide set of rules adopted by ICC.
Bank payment obligation is a new payment method in international trade. Main payment methods in international trade so far was cash in advance payment, documentary collections, documentary credits and open account. As we know each payment method have strenghts and weaknesses. For example open account and cash in advance payments are very easy to use. They are simple but they are risky either for the importers or the exporters. Documentary credits are secure payment methods but they are complicated and expensive. Does international trade finance need another payment method? Can bank payment obligation be the right answer?
Essentially, BPO is an alternate payment instrument to settle international trade with automated processing and reduced risk (assurance of payment to the seller). It offers:
Automated and secure processing
Standard set of ISO 20022 messages that enable interoperability between participating banks, thereby helping them extend global market reach Straight through Processing (STP): As the ISO 20022 messages are extended to corporate users, the same can be adopted for communication between Corporates and their Banks. This message will enable end-to-end straight through processing with corporate ERP systems. An assurance on payment to the seller similar to a confirmed letter of credit, which helps mitigate risk across of the parties of the trade Flexible financing options from banks based upon confirmed purchase orders and invoices on pre-shipment and post-shipment finance respectively
How does BPO differ from traditional trade finance instruments?
In case of traditional trade finance instruments like Letter of Credit (LC), the undertaking on irrevocable payment is between the banks and their corporate clients, whereas a BPO is an irrevocable payment undertaking between the buyer’s bank and the seller’s bank.
Legacy trade finance processing and matching are paper based, manual, time consuming and expensive; whereas BPO processing is automated (electronic processing and matching) with the global standard ISO 20022 messages. While a LC guarantees exchange of goods for payment based on physical presentation of compliant documentation, a BPO guarantees exchange of goods for payment based on electronic presentation of compliant data.
Traditional trade finance instruments are characterized by high cost due to manual processing, frequent discrepancy handling and liquidity pressures. On the other hand, a BPO’s automated processing and matching reduces the processing cost and enables banks to offer competitive rate to corporate for the BPO transaction. Timely delivery of matching reports on POs and invoices enables corporates to have quicker access to liquid resources.
How will Banks benefit from BPO?
For a BPO transaction, the bank will be involved in all stages of an open account transaction, starting from the initial baseline submission and it will reduce the overall operational cost associated with the trade transaction. Banks can also offer value-added services like financing, cash forecasting, liquidity and working capital management to their corporate clients based on underlying trade transactions and reporting. Large banks can also offer white label processing tools for the banks that would not like to build their own BPO processing tool.
How will Corporates benefit from BPO?
BPO will benefit corporates operationally as there is no manual processing like document creation, verification, validation, tracking and reporting. It will also result in significant cost savings for the corporate through:
What will be the capital and accounting treatment of BPO?
Based on the initial reference of ICC Banking Commission, the BPO has the characteristics and behavior of contingent liability and at the time of issuance; this would be an off-balance sheet item for the obligor bank and characterized as unfunded (The execution of a BPO is contingent upon agreed transaction terms between the obligor and recipient Bank). The BPO, once utilized, will be removed or liquidated from the books and balances of the obligor and the recipient bank upon the execution of a BPO for a payment “at sight”. It will be on-balance sheet item if the deferred payment undertaking changes into definitive undertaking at the time of data set match by the transaction matching application.
What could be the potential shortfalls of this system?
Banks that are willing to offer BPO services need to invest in technology infrastructure/system capable of supporting and communicating with ISO 20022 compliant messages as well as the Transaction Matching Application. Else, they may not be able to provide BPO services to their clients.
BASEL III 100% Credit Conversion Factor (CCF) - The 100% CCF in calculating the leverage ratio for contingent trade finance exposures is applicable for most of the off balance items, and it will impact the cost of trade finance instruments like Standby LC, Trade LC and BPO. Physical trade documents are required under local legislation and to release the delivery of goods from customs.
The current state of International Trade
According to a recent WTO press release, world trade growth in 2012 fell to 2% from 5.2% in 2011 and is likely to remain at a sluggish 3.3% in 2013 due to the ongoing economic crisis and slow growth in developed economies. Slow growth in international trade has a direct impact on the balance of payments for economies and profitability of corporates, thereby exacerbating the economic slowdown. On the other hand, an HSBC trade forecast predicts that:
World trade will grow by 73% in the next 15 years and companies across the world will increase their trade activity by a combined 4.1% between 2011 and 2025. Merchandize trade volumes in 2025 will hit 41.04 € trillion, compared to today’s 23.01 € trillion.
To enable a favorable international trade growth outlook and to build confidence among international traders, financial messaging service provider SWIFT and the banking commission of ICC have jointly introduced an innovative bank assisted trade instrument—BPO, a potential game-changing innovation shaping supply chain finance and international trade in coming years.
Some important definitions of Bank Payment Obligation (BPO)
"Obligor bank" means buyer's bank under Bank Payment Obligations. Obligor bank issues the legally binding, valid, irrevocable but conditional and enforceable payment undertaking to Recipient Bank. Obligor bank is an equivalent term of issuing bank under letters of credit definitions. "Recipient Bank" means seller's bank under Bank Payment Obligations.
"Trade Services Utility" (TSU) means a centralised matching and workflow engine providing timely and accurate comparison of data taken from underlying corporate purchase agreements and related documents, such as commercial invoices, transport and insurance. The URBPO, the Uniform Rules for Bank Payment Obligations ICC publication No. 750. URBPO; also referred to as ICC URBPO or ICC BPO. are the rules of Bank Payment Obligation adopted by ICC banking commission.
How does bank payment obligation work?
Bank payment obligation and letter of credit have some characteristics in common. Firstly banks play a key role on both payment methods. Secondly banks are giving irrevocable payment undertaking.
Bank Payment Obligation (BPO) transaction based on two main assumptions or expectations:
The use of minimum fields, the buyer, the seller and respective banks agree on the payment terms and conditions and on the minimum trade information required to assess the credit risk; The dispatch of documents, such as the bill of lading, certificate of origin and certificate of quality, from the seller directly to the buyer. Given the limited information required by the banks and the accelerated document exchange, corporate can expect a lower rate of discrepancies and an acceleration of the settlement process.
WHAT IS BANK PAYMENT OBLIGATION (BPO)?
BPO, as defined by financial messaging service provider SWIFT and the banking commission of ICC is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after successful electronic matching of data, generated by SWIFT’s Trade Services Utility (TSU) or any equivalent Transaction Matching Application, based on Uniform Rules for BPO issued by ICC. In other words, Bank payment obligation (BPO) is an irrevocable undertaking given by an Obligator Bank (typically buyer's bank) to a Recipient Bank (usually seller's bank) to pay a specified amount on a agreed date under the condition of successful electronic matching of data according to an industry-wide set of rules adopted by ICC.
Bank payment obligation is a new payment method in international trade. Main payment methods in international trade so far was cash in advance payment, documentary collections, documentary credits and open account. As we know each payment method have strenghts and weaknesses. For example open account and cash in advance payments are very easy to use. They are simple but they are risky either for the importers or the exporters. Documentary credits are secure payment methods but they are complicated and expensive. Does international trade finance need another payment method? Can bank payment obligation be the right answer?
Essentially, BPO is an alternate payment instrument to settle international trade with automated processing and reduced risk (assurance of payment to the seller). It offers:
Automated and secure processing
Standard set of ISO 20022 messages that enable interoperability between participating banks, thereby helping them extend global market reach Straight through Processing (STP): As the ISO 20022 messages are extended to corporate users, the same can be adopted for communication between Corporates and their Banks. This message will enable end-to-end straight through processing with corporate ERP systems. An assurance on payment to the seller similar to a confirmed letter of credit, which helps mitigate risk across of the parties of the trade Flexible financing options from banks based upon confirmed purchase orders and invoices on pre-shipment and post-shipment finance respectively
How does BPO differ from traditional trade finance instruments?
In case of traditional trade finance instruments like Letter of Credit (LC), the undertaking on irrevocable payment is between the banks and their corporate clients, whereas a BPO is an irrevocable payment undertaking between the buyer’s bank and the seller’s bank.
Legacy trade finance processing and matching are paper based, manual, time consuming and expensive; whereas BPO processing is automated (electronic processing and matching) with the global standard ISO 20022 messages. While a LC guarantees exchange of goods for payment based on physical presentation of compliant documentation, a BPO guarantees exchange of goods for payment based on electronic presentation of compliant data.
Traditional trade finance instruments are characterized by high cost due to manual processing, frequent discrepancy handling and liquidity pressures. On the other hand, a BPO’s automated processing and matching reduces the processing cost and enables banks to offer competitive rate to corporate for the BPO transaction. Timely delivery of matching reports on POs and invoices enables corporates to have quicker access to liquid resources.
How will Banks benefit from BPO?
For a BPO transaction, the bank will be involved in all stages of an open account transaction, starting from the initial baseline submission and it will reduce the overall operational cost associated with the trade transaction. Banks can also offer value-added services like financing, cash forecasting, liquidity and working capital management to their corporate clients based on underlying trade transactions and reporting. Large banks can also offer white label processing tools for the banks that would not like to build their own BPO processing tool.
How will Corporates benefit from BPO?
BPO will benefit corporates operationally as there is no manual processing like document creation, verification, validation, tracking and reporting. It will also result in significant cost savings for the corporate through:
- Early access to pre and post shipment finance needs.
- Risk mitigation, as the undertaking is between buyer and a seller bank.
- No need to reissue the document in case the shipment happens at a different location, due to external factors such as natural disasters.
- No banking fees on document discrepancy handling and tracking.
- No verification and amendments charges.
- Early liquidity/working capital management due to faster transaction processing and settlement for the exporters
- Importer can access the goods early, as he will receive the documents quickly.
What will be the capital and accounting treatment of BPO?
Based on the initial reference of ICC Banking Commission, the BPO has the characteristics and behavior of contingent liability and at the time of issuance; this would be an off-balance sheet item for the obligor bank and characterized as unfunded (The execution of a BPO is contingent upon agreed transaction terms between the obligor and recipient Bank). The BPO, once utilized, will be removed or liquidated from the books and balances of the obligor and the recipient bank upon the execution of a BPO for a payment “at sight”. It will be on-balance sheet item if the deferred payment undertaking changes into definitive undertaking at the time of data set match by the transaction matching application.
What could be the potential shortfalls of this system?
Banks that are willing to offer BPO services need to invest in technology infrastructure/system capable of supporting and communicating with ISO 20022 compliant messages as well as the Transaction Matching Application. Else, they may not be able to provide BPO services to their clients.
BASEL III 100% Credit Conversion Factor (CCF) - The 100% CCF in calculating the leverage ratio for contingent trade finance exposures is applicable for most of the off balance items, and it will impact the cost of trade finance instruments like Standby LC, Trade LC and BPO. Physical trade documents are required under local legislation and to release the delivery of goods from customs.
The current state of International Trade
According to a recent WTO press release, world trade growth in 2012 fell to 2% from 5.2% in 2011 and is likely to remain at a sluggish 3.3% in 2013 due to the ongoing economic crisis and slow growth in developed economies. Slow growth in international trade has a direct impact on the balance of payments for economies and profitability of corporates, thereby exacerbating the economic slowdown. On the other hand, an HSBC trade forecast predicts that:
World trade will grow by 73% in the next 15 years and companies across the world will increase their trade activity by a combined 4.1% between 2011 and 2025. Merchandize trade volumes in 2025 will hit 41.04 € trillion, compared to today’s 23.01 € trillion.
To enable a favorable international trade growth outlook and to build confidence among international traders, financial messaging service provider SWIFT and the banking commission of ICC have jointly introduced an innovative bank assisted trade instrument—BPO, a potential game-changing innovation shaping supply chain finance and international trade in coming years.
Some important definitions of Bank Payment Obligation (BPO)
"Obligor bank" means buyer's bank under Bank Payment Obligations. Obligor bank issues the legally binding, valid, irrevocable but conditional and enforceable payment undertaking to Recipient Bank. Obligor bank is an equivalent term of issuing bank under letters of credit definitions. "Recipient Bank" means seller's bank under Bank Payment Obligations.
"Trade Services Utility" (TSU) means a centralised matching and workflow engine providing timely and accurate comparison of data taken from underlying corporate purchase agreements and related documents, such as commercial invoices, transport and insurance. The URBPO, the Uniform Rules for Bank Payment Obligations ICC publication No. 750. URBPO; also referred to as ICC URBPO or ICC BPO. are the rules of Bank Payment Obligation adopted by ICC banking commission.
How does bank payment obligation work?
Bank payment obligation and letter of credit have some characteristics in common. Firstly banks play a key role on both payment methods. Secondly banks are giving irrevocable payment undertaking.
Bank Payment Obligation (BPO) transaction based on two main assumptions or expectations:
The use of minimum fields, the buyer, the seller and respective banks agree on the payment terms and conditions and on the minimum trade information required to assess the credit risk; The dispatch of documents, such as the bill of lading, certificate of origin and certificate of quality, from the seller directly to the buyer. Given the limited information required by the banks and the accelerated document exchange, corporate can expect a lower rate of discrepancies and an acceleration of the settlement process.