Are you BPO-ready? We are!

The Bank Payment Obligation (BPO) is an important milestone in the digital transformation of trade finance business. With the launch of a major new white paper, ‘Leading the path of digital evolution’, Angela Koll, Vice President Specialist Product Management, Supply Chain Finance & Innovation at Commerzbank, answers the key questions.

Q: Why have you released this white paper?

AK: The white paper does not just outline how the BPO works and its range of benefits to companies, it also argues that increased market adoption could help spur the digitisation of trade. Importantly, it’s a crucial part of our ongoing appeal to the trade finance industry to get on board with the instrument, in order to better meet our corporate clients’ requirements for faster, more transparent and digital process flows.

Q: So can’t many banks offer the BPO at present?

AK: Commerzbank certainly can, and has done since 2014! The volume of BPO transactions is steadily rising among both importers and exporters. As companies’ interest, readiness and demand grow, so too will the number of banks committed to being able to transact with the instrument.

However, market adoption remains slow – not least due to the effort, vision and communication required. We need to arrive at a “tipping point” for the BPO, at which investment begins to match rising demand for innovation. Until then, the global lack of BPO-ready banks will be a bottleneck for further growth.

Q: What are you doing to boost market adoption?

AK: Boosting corporate knowledge and appeal for the BPO is essential. That’s why, at Commerzbank, we’ve put a great deal of effort into raising awareness of the instrument and its benefits – the whitepaper is just the latest step in this direction. It’s only with corporate demand that banks will start to notice and we’ll reach a “critical mass” of BPO-ready institutions.

Q: What are the top reasons why companies should consider the BPO?

AK:

The buyer gains:

• a certain security that goods will be received as expected;

• the offer of flexible financing options for their sellers at several stages of the supply chain;

• controlled input into the specifics of the payment conditions; and

• early receipt of documents directly from the supplier, which can help avoid storage charges at the port of discharge.

The seller gains:

• full payment security from the outset, guaranteed on a specified date;

• flexible financing options at several stages of the supply chain; and

• a lower implied cost of funding than other financing structures.

Both companies gain:

• fast, automated, paperless and seamless transaction settlement processing;

• risk mitigation and financing for open account transactions;

• flexibility over the conditions of payment and BPO amendments;

• more transparency on the trade transaction;

• a more-efficient working capital cycle;

• a reduction in the complexity involved with paper-based processes; and

• enhanced long-term trading relationships.

Q: What does the BPO mean for supply chain finance?

AK: The BPO can serve as an enabling framework for supply chain finance – optimising liquidity and working capital while minimising payment risk. Its irrevocability and given maturity date can help with the provision of supply chain finance both before and after shipment. The successful matching of data within the physical supply chain provides solutions along the financial supply chain, and therefore enables a convergence of both supply chains in a digital environment.

Q: Everyone’s talking about blockchain at the moment – where does the BPO fit in?

AK: Blockchain certainly has the potential to transform the trade finance industry and will allow the BPO data to be matched within an advanced digital network in the future. As it will take some years to commercialise blockchain solutions on a broader scale, it is beneficial, if not crucial, for the banks to continue adopting the BPO in parallel. Becoming familiar with the BPO’s data handling and matching is also important to understanding the data-heavy processes of blockchain.

After all, the transition from paper-based to data-based processes has only just begun; for digitalisation to work effectively, banks need to employ proven tools already available on the market – such as the BPO – that can improve the overall conduct of trade. That’s why the instrument is such a milestone in the evolution of trade finance.

Q: What do you see as the future of the BPO?

AK: Encouragingly, efforts are underway to apply the BPO’s underlying framework to DLT systems. This will support the transition to emerging technologies that are not dependent on the SWIFT TSU but rather rely on smart contracts and the definition of conditions which constitute a commitment to pay.

Work is also being undertaken to develop front-end software through which companies can input and upload their trade data to the TSU matching engine directly. This should enhance end-to-end, digital communication – as well as save time and resources by removing the need for manual entry.

Another exciting proposal is to merge the data-matching of the BPO with the issuance and provision of an electronic Bill of Lading (eB/L). This would improve the authentication and digital handling of trade data. The same data for the eB/L would be provided for the BPO, and – by the time of successful data matching – the eB/L would become available for the buyer immediately.

Published with the approval of SWIFT, ‘Leading the path of digital evolution’ includes insights from the ICC Banking Commission, JP Morgan Chase, and OPUS Advisory Services International.

July 2018

Watch our short BPO explainer video Link: https://www.corporates.commerzbank.com/portal/en/cb/de/firmenkunden/services/media-center/erklaerfilme/erklaerfilme.html

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