Jul 28th, 2015

Can SWIFTS BPO be the Catalyst for Pre Shipment finance?

There has been a big effort on the part of a number of vendors to find ways to bring trade in the digital era.

One of the recent successes has been around the electronic Bill of Lading (eBL).  A quick reminder of what purpose the B/L serves is :

• it is evidence that a valid contract of carriage exists
• it is a receipt by the carrier confirming goods received match descitpion, and
• it is also a document of transfer (but is not a negotiable instrument)

There are a few vendors that have made much progress moving this document to an electronic format, chiefly EssDOCS and Bolero (if I left anyone out, please let me know). Both EssDOCS and Bolero have users numbering in the thousands and an increasing number of trade transations originating from large Fortune 1000 users of letters of credit (ie, big commodity trading companies).

But the point of this piece is that the finance processes that support this trade still lag behind.

Right now, most of the B2B working capital finance is centered on approved invoices. We touched base on why purchase order finance is a much harder nut to crack here.  GT Nexus and their partner Seabury TFX are making a digital play.

Another potential solution has been around for awhile but has been challenged on many fronts. SWIFT’s Bank Payment Obligation has been trying to become a new payment instrument around open account that can enable finance.   A BPO is an irrevocable undertaking between banks that payment will be made on a specified date after successful electronic matching of data, according to a set of industry-wide rules.   Note the between banks part. There is no Corporate – Bank part of the BPO; that is a separate agreement.

The coverage of SWIFTs BPO has been enormous for the amount of traffic and volume generated. Michael Vrontamitis of Standard Chartered argues the greatest potential benefit of BPOs has been largely overlooked to date.

“BPOs present an opportunity to provide pre-shipment financing to small and medium-sized enterprises (SMEs) at an attractive rate. While numerous non-bank providers have entered the trade finance market in the past decade, all target post-shipment financing. By focusing on the ability to offer pre-shipment financing solutions, BPOs can not only be a more efficient method of payment in trade but also an instrument which enables the flow of liquidity necessary to facilitate trade flows. In that respect, their impact could be as great as the emergence of letters of credit (LCs) in 1500s.”

That’s a big claim, especially for an instrument that relies on data matching. There is no precedence for when problems happen, as there is a big difference between something ratified by the ICC and a case tested in a court of law.

While the business case for the BPO rests on displacing existing settlement methods, especially convincing trading parties to shift from Open account to the BPO, there is still a strong camp of bankers that believe the BPO is really a digital Letter of credit. Michael Vrontamitis commented, ostensibly, a BPO functions like an LC, with a promise to pay once pre-agreed conditions have been met: all that differs is that checking is electronic and automatic rather than paper-based and (potentially) manual.

The reason that the BPO has not had any traction with open account flows is that once a company moves to settle on open account, it has made a conscious decision not to use a credit and document intensive letter of credit (or documentary collections), and has accepted more risk and less options for finance. BPO’s value proposition is much weaker for Buyers, essentially providing the tactical opportunity to extend payment terms to their supplier base or to significantly improve their L/C document handling process. The offering has better risk mitigation and liquidity features for exporters.