White Paper

The
Bank Payment A new start for
Obligation:
a new payment term Supply Chain Finance
to secure and finance
trade
In Q2 2013, the banking Industry standards are a Competitors are naturally reluctant
industry releases a unique set of critical foundation for any to interoperate given their short-term
competitive eco-system commercial goals and their preference to
legal and technology standards lock customers in their fully proprietary
to unlock the real potential solutions. In emerging industries,
of the Supply Chain Finance Faced with increasing pressure to meet commercial players therefore often try to
market. These standards short term liquidity needs, companies postpone the interoperability discussion.
are looking inward for ways to release However, agreement on common
enable banks to provide their
trapped cash from operations. Todays interoperability rules and standards is
corporate clients with Supply CFOs and treasurers are taking a fresh proven to develop the total size of an
Chain Finance services as look at how their physical supply chain industry. Interoperability should therefore
from the very start of trade is impacting their companies cash flow be considered as a key milestone for
transactions, i.e. when the and working capital management. an industry to grow to the next level of
maturity. A good example is the Global
sale contract is signed. This Supply Chain Finance (SCF) aims to
System for Mobile Communications
innovation extends the scope of improve the financial efficiency of the (GSM) standard which is embedded in
supply chain and substantially reduce
Supply Chain Finance to risk the working capital of both buyers
our mobile phones and interlinks the
mitigation and to pre-shipment mobile phone operators across 212
and suppliers. It allows buyers to
countries. Thanks to this standard, a
finance services. It also offers extend payment terms while providing
GSM mobile phone user can reach any
local banks and development suppliers access to better financing
person in a network of more than 5 billion
banks an opportunity to increase rates. It creates a true win-win for all people.
the parties involved as one of the most
their role in supporting a vital attractive tools for companies to diversify A key aspect when setting up industry
segment of the economy: the funding sources, enrich and solidify the standards is the need for such definitions
SME market. relationships with their trade partners. to be owned by non-commercial industry
organisations and to be available in the
For decades, technology has been
public domain. In financial services, 40
Key benefits for corporates impacting our lives on a daily basis. In
years ago, banks decided to create a
order to maximise the benefits, various
Working Capital and Cash Flow cooperative standardisation body to take
industries have identified the need to
Improvements up this role and SWIFT was born. Today,
define standardised ways to structure
SWIFTs standards cover a wide range
Easier Access to risk mitigation, pre- data and facilitate efficient exchange
of financial services such as payments,
shipment and post-shipment finance of information between counterparties.
foreign exchange, trade and securities in
Increased automation of payment, Also called industry standards, these
both the bank-to-bank and corporate-to-
reconciliation and forecasting technical and business protocols have
bank segments.
processes been as critical as the role of language in
communication between people. SWIFTs standards provide major
Win-win relationships between interoperability benefits to all parties
buyers and suppliers Over the last 40 years, industry
involved in financial transactions,
standards have proven to be an essential
including corporate clients. SWIFTs
foundation for many industries including
standards are used by close to 10,000
Key benefits for banks financial services. Firstly, standards
institutions in more than 210 countries.
provide end-customers with a baseline to
Reduced costs thanks to digital compare commercial offerings. Secondly, In supply chain finance, banks have
process they facilitate competition between also decided to develop new legal
Shortened transaction time thanks to commercial offerings whilst enabling and technology standards to address
accelerated data matching them to interoperate. interoperability challenges and to grow
the size of this emerging market.
New transactional revenue and
increased customer satisfaction
Focus on core competencies
 Extended SCF opportunity Current SCF scope

Ordering Production Delivery Invoice Goods Acceptance Payment Initiation

Transport
Purchase Order Certificates Invoice Issuance Invoice Approval Payment
Documents

Higher risk Low risk No risk

Payment assurance & financing services (Early) Payment services

Figure 1 - This figure shows the current scope of SCF services which are triggered very late in the transaction lifecycle, that is, once the invoice has been
approved whereas the customers needs start as soon as the Purchase Order is agreed, that is, when the supply chain starts.

Supply Chain Finance: todays Supply Chain Finance: todays Ideally, suppliers would be served by
offerings start at the end of offerings are reaching their their chosen often local banking
supply chains limits partner, not by their buyers banking
partners
Know-Your-Customer (KYC) costs.
The supply chain finance (SCF) market The progress made by banks in this Most banks require KYC checks to
the term used by banks to refer market has not been without challenges. be performed on such suppliers being
to approved payables financing or Most of the services have been enlisted as new customers, which is
early payment services has grown developed independently by each bank increasing the total processing cost
significantly over the last five years. and do not make use of any common and putting the business case for the
Such services have demonstrated their foundations. Typical drawbacks reported bank at risk
relevance and value to large buyers and by practitioners can be summarised as
their suppliers. The now widely available follows: Proprietary formats. Todays
SCF offerings offered by banks and non- offerings make use of proprietary
Late start. Approved payables formats which makes it more complex
bank technology providers have been built
financing services begin at the and costly for corporate clients to
on the fact that buyers and sellers wish
penultimate stage of trade transactions integrate in their internal applications
to work in a win-win spirit as large buyers
when the invoices are approved (e.g., ERPs) whereas all players want
aim to support their suppliers working
whereas the corporates needs for to benefit from end-to-end automation
capital needs. Typically buyers facilitate
financing and mitigating risk start to limit processing costs
early payments to their suppliers via one
much earlier, i.e., when the Purchase
of their banking partners. Buyers therefore Lack of standardised product
Order is raised. The real opportunity
approve invoices as early as possible definitions. The naming and
for banks is to get involved as early as
in the process in order to maximise the definitions of the various SCF services
possible in the transaction cycle
financing opportunity for suppliers in vary from one bank to the other which
need of working capital. Such services Limited to large buyers. Todays makes it difficult for clients to compare
have also validated the fact that banks SCF offerings are rolled out as buyer- offerings and consider switching
are ready to extend financing to their specific programmes and mainly from one provider to another. The
clients using electronic and automated address the large buyers whereas the industry has, however, started to
transaction flows as they do in payments real SCF opportunity extends to large address this issue and delivered global
and cash management services since sellers too, in particular in terms of SCF definitions via the BAFT-IFTA
more than 20 years. payment assurance organisation.
Supplier on-boarding raises costs. Despite the above shortcomings, the SCF
Current offerings require in most market has grown, but it did so without
cases the buyers counterparties - relying on strong foundations. The market
the suppliers - to be enlisted on the is beginning to face some difficulties
buyers bank portal. The multitude of due to the absence of interoperability
SCF platforms generates operational standards. This is why banks have
issues for suppliers wishing to benefit decided to develop specific ICC and
from various SCF offerings via their SWIFT standards for this market.
buyers banks.
Industry standards will help 3-corner closed model 4-corner interoperable model
banks grow the size of the SCF
market
Buyer
Sellers
Seller
Bank
Given the limitations of the current SCF
set-ups, banks have developed new Buyers
legal and operational standards that will Bank

Trade contract
help bring the market to new levels both

Multi-bank
standards
Seller Seller works with own
in market size and in product scope. By
bank
introducing such standards, banks aim Industry
to move the market from the 3-corner (or Buyers
Bank standards
single-bank closed model) to the 4-corner
model (or two-bank interoperable model). Buyers
Buyer
Banks also intend to extend their offerings Buyer Bank
beyond the current early payment
services. Here is how: Too many portals
Involving the suppliers bank. Trade contract
Moving from the typical 3-corner to
the 4-corner model will allow large
banks to extend their SCF services Figure 2 - This figure illustrates the current problems faced by suppliers who need to join various
by involving local banks. The 4-corner banks platforms, as well as the more positive situation where their own (local) banks are involved.
model will enable correspondent
banks to reach out to a larger number
of suppliers, usually the SMEs. This
needs to be done by relying on local
banks which can best assess SMEs
performance risks. It will also eliminate
the need for the buyers banks to on- Issues with the 3-corner Benefits with the 4-corner
board suppliers, as well as the related closed model interoperable model
KYC costs as the two-bank model
relies on the relationship between the SCF services limited to approved SCF extended to pre/post-shipment
supplier and its own bank payables finance and target large finance and payment assurance, and
Early start. By providing SCF buyers should target large sellers too should
offerings at the very beginning of the
transaction, banks will be able to Seller needs to connect to various Buyer and seller work with their
address requirements such as the SCF portals operated by its buyers preferred banks; no unnecessary on-
provision of pre-shipment finance banks boarding of seller by buyers bank
which is required as soon as the
Buyers bank faces additional Sellers bank takes risk on buyers
Purchase Order is agreed. They
supplier on-boarding and KYC bank, not on buyer
will also be in a position to provide
payment assurance, which is critical costs
for any seller at the very early stage
of the transaction. Extending the Proprietary formats increase Multi-bank industry standards facilitate
payables financing services will also be costs for all and limit end-to-end technology independence between all
possible, well before the approval of automation parties and end-to-end automation
the invoice.
Lack of common legal and Standards accelerate adoption as initial
operational foundations limit investment is re-usable with many
adoption banks

Figure 3 - This figure compares the main issues of the 3-corner model to the benefits of the 4-corner
model.
Corporates need more than Ordering Production Delivery Invoicing
Goods Payment
Approved Payables Financing Acceptance Initiation

Purchase Transport Invoice Invoice

Certificates Payment
Order (PO) Documents Issuance Approval
In Q2 2013, the International Chamber
of Commerce (ICC) and SWIFT roll out Payment risk mitigation Post-shipment Receivables Payment
new industry-owned legal rules and Pre-shipment finance finance Financing Processing
technology standards for supply chain
finance. These standards enable banks to Transforming open account
interoperate through their correspondent payments into SCF opportunities
banking agreements in order to provide
risk mitigation and pre/post-shipment
financing in the 4-corner model. The
combination of legally binding rules with Figure 4 - This figure shows that the Bank Payment Obligation and the underlying ISO
electronic messaging and matching 20022 standards enable banks to extend their SCF offerings to higher value services.
provides unique efficiency benefits not yet
witnessed in the trade industry to date.
Known as the Bank Payment Obligation
(BPO), the new trade settlement
instrument offers buyers and suppliers BPO is a new payment term in the
(irrespective of size, geography and ICC Intl Sale Model Contract
industry) a new payment method
to secure and finance their trade Business-
transactions. The BPO is easy to use by to-business
practices Purchase Orders
corporate clients as it is offered as a new
Transport docs
payment term next to existing ones (e.g., Certificates Invoices
letter of credit, advanced payment, open
account payment) as documented in the LC BPO OA
ICC Model International Sale Contract.
Buyer Seller

Banks will extend their

correspondent banking
relationships to URBPO New C2B contracts
facilitating the
provision of risk &
In order to offer BPO-based services, financing services
banks need to implement the inter-bank
Uniform Rules for BPO (URBPO) as well
New URBPO govern an irrevocable
as the underlying messaging standards. and conditional inter-bank payment
This is facilitated by SWIFTs ISO obligation based on structured data
20022-compliant inter-bank messaging Buyers and central matching Sellers
and transaction matching cloud Bank Bank
application called Trade Services Utility.
For banks, the BPO is also convenient to
use as it integrates into the correspondent
SWIFT & ICC
banking agreements that banks have in
place for international payment and trade
transactions.
An industry-wide transaction A legally binding rulebook owned
matching platform that implements by the ICC and based on ISO
the BPO using ISO 20022 20022 messaging standards

Figure 5 - This figure shows how the BPO fits into the two-bank model and re-uses the
correspondent banking practices so that corporates can benefit from the BPO with their chosen banks.
Development Banks have an
opportunity to extend their
roles too

Given the intended global use of the Business-

to-business
BPO and the high demand for pre-
practices
shipment finance from SMEs in emerging
markets, the involvement of multi-lateral
development banks (MDBs) in BPO
transactions will be critical in some BPO
geographies. As the BPO shares features
similar to those of the letter of credit (i.e., Buyer Seller
both commercial banks have full visibility
on transaction details and BPOs are
self-liquidating transactions), MDBs have
the opportunity to extend their role on
BPO transactions. Typically, BPOs issued
by buyers banks can be secured by
MDBs using techniques similar to those
established for letters of credit, i.e., by
issuing guarantees on BPO transactions
issued by the BPO obligor bank, which is
usually the buyers bank.
Buyers Sellers
Multi-lateral development banks aim to Bank Bank
support local banks as well as the SME
market, explains Steven Beck, Head of
Trade Finance at Asian Development Bank BPO
(ADB) and Member of the ICC Banking transactions
Advisory Board and of the WTO Working
Groups for Trade Finance. He adds:

MDBs can issue Guarantees on BPOs

The new BPO trade when the Buyers Bank(s) / Obligor
Banks need to be backed up
settlement instrument is Multilateral
Development Banks
an efficient way to extend
export financing to SMEs in
Asia and we trust this new
mechanism will contribute
to increasing support to
this vital segment of the
economy.
Figure 6 - This figure depicts how MDBs can get involved in BPO transactions.
Conclusion: moving open David Vermylen, Global Credit Manager Next step: getting ready on
account payments to the trade for BP Chemicals - the first large the new ICC and SWIFT
finance space exporter to use the BPO - illustrated the SCF standards
benefits of the BPO in a recent interview
published in The Corporate Treasurer: The time has now come for the banking
For decades, trade bankers community as a whole to prepare for
have demonstrated that working this innovation. Banks now have the
collaboratively and leveraging the Before the BPO, BP could opportunity to extend their supply chain
appropriate standardisation bodies physically move 150,000 finance services from invoice-based
(such as ICC and SWIFT), can effectively processing services (e.g. factoring and
address their clients requirements
cubic meters of LNG
early payment services) to purchase
and help them develop their business. [liquefied natural gas] faster order-based services, such as payment
Trade banks have developed the BPO than it could process 500 assurance, pre-shipment and post-
instrument and the related ISO 20022 grams of paper. Things shipment finance. By promoting
standards in order to efficiently support the BPO payment term to trading
the further development of international needed to change. counterparties, banks will accelerate
trade in a modern way. By defining legal the financial supply chain and become
and technology standards, banks aim better financial partners.
Yumiko Hoshino, Executive Officer,
to better respond to their corporate
Overseas Department at Ito-Yokado, the Dan Taylor, Vice-Chair of the ICC
clients desire to accelerate financial
Seven & I Holdings Group superstore Banking Commission and Managing
processes and optimise their working
operator which is the first importer to Director at J.P.Morgan confirms the
capital as well that of their most critical
use the BPO, explained how the new rationale for ICC and SWIFT to work
counterparties.
instrument would be an integral part of together: Combining the ICC rules
The industry has attempted to doing business in Asia: and arbitration role with SWIFTs
dematerialise trade several times since correspondent banking network
the 90s and many initiatives have not and matching technologies offers
delivered as expected (initial Bolero Exporters want faster the required legal and technology
vision, e-UCP rules and initial e-Bill foundations for banks to secure and
of lading initiatives). The first BPO payment and less paper, so finance open account trade transactions
implementations completed by the 5 our suppliers who are using in a standardised multi-bank
live BPO banks over the last 18 months this love it. environment.
suggest that this innovation will help the
As Kah Chye Tan, Chair of the ICC
trade industry address the supply chain
Banking Commission and Global Head
challenge. Bank of Tokyo Mitsubishi Ito-Yokado has benefited from the BPO of Trade and Working Capital at Barclays
UFJ, Bank of China, Standard Chartered for over a year thanks to leadership said at Sibos during the now traditional
Bank, Korean Exchange Bank and Siam of Bank of Tokyo Mitsubishi UFJ. Monday morning ICC Supply Chain
Commercial Bank are actively attracting Shigeki Kawabata, General Manager, Finance briefing:
corporates to benefit from the BPO. Transaction Banking Division, Bank of
At Sibos in Osaka, Karen Fawcett, Tokyo-Mitsubishi UFJ, who has been an
Group Head of Transaction Banking at advocate of the BPO from the outset
agreed:
This is a golden age for
Standard Chartered Bank put it very
clearly in an interview with Trade Finance trade finance. All banks wish
magazine: to better engage in open
Leadership will be a account transactions and the
significant success factor BPO will make it happen.
As we get the BPO online, to drive change and we
we are going to pick up are happy to be first on
what was just a payment, an the Asian market with the A total of 50 banking groups have
unfinanced and uninsured BPO. understood the opportunity that
instrument, and move it comes with the BPO and confirmed
into the trade finance space, their decision to extend this innovation
It seems that getting ready on the BPO to their corporate customers. As
thereby growing the trade sooner than later is a wise choice for corporates discover the benefits of the
finance business remit. trade bankers. BPO, they will expect their banking
partners to react quickly.
 Andr Casterman

Global Head of Corporate and Supply Chain Markets, SWIFT

Member of the Banking Executive Committee, ICC
Co-chair Bank Payment Obligation project, ICC
[email protected]

Recent publications
1. Collaborative supply chain finance: A few more steps to go,
Andr Casterman, September 2010, www.swift.com
2. Accelerating Global Trade Finance,
Andr Casterman, January 2012, www.swift.com
3. Observations on the Evolution of Trade Finance
and Introduction to the Bank Payment Obligation,
March 2013, www.swift.com
56238 - APR 2013

SWIFT 2013