The Bank Payment Obligation (BPO) offers banks and corporates a secure, digital way to manage documents for trade finance but market adoption has come up against hurdles. This white paper from Commerzbank looks at how adoption of BPO could be boosted and the benefits for corporates, including, it says, significant opportunities to improve supply chain finance.
Trade finance done through BPO provides a legally binding promise to execute payment for goods or services, based on the successful matching of agreed electronic trade data. The BPO project has been in development for a long time but 2010 was the year it moved into a pilot phase. Standard Chartered first facilitated a transaction between BP and Octal through its internal branch network and later that year, the first cross-border transaction, between Bank of China and Bank of Montreal, took place. There are now about 40 BPO- active and BPO-ready banks, and they report that more corporates are routing their trade business through BPO. However, the white paper examines some of the hurdles to wider market adoption of BPO and summarises them as follows:
1. Trade is complex
Traditional trade finance instruments have been used for centuries, such as letters of credit (LCs), guarantees and documentary collection. But increasing regulatory complexity, market volumes and globalisation mean that adopting new technologies and innovative solutions is required.
2. More bank support required
The white paper says: “While some banks are BPO-ready and BPO-active, market adoption has been held back by those that have not embraced the instrument. Ultimately, further corporate demand for the BPO will not be met until more banking partners are able to transact with it.”
3. Communication with corporates
Do corporates understand how BPO can improve their trade finance and supply chain processes? Banks need to communicate this more to their corporate clients, otherwise “without sufficient demand from corporates, there is a risk that other banks will see little incentive to invest in the BPO.”
4. Updated rules
According to Commerzbank, the current set of Uniform Rules for Bank Payment Obligations (URBPO) are in need of an update as they don't address corporates directly. Again, this positions BPO as an instrument for banks rather than something perceived as being directly beneficial to corporates. The ICC is being called upon to address recommendations in the corporate-corporate space.
5. Getting local regulators on board
Further work needs to be with local regulators in some countries, who require traditional trade finance documentation. The white paper states: “These institutions need to be informed of the BPO, so that it can be included as a new trade finance instrument in local regulatory frameworks.”
Benefits for corporates
The benefits for corporates include:
- fast, automated and seamless transaction settlement processing;
- improvement to the efficiency of the working capital cycle;
- risk mitigation and financing for open account transactions; and
- reduction of complexity involved with paper-based processes.
Competition from blockchain?
But what of the trade finance platforms being developed on distributed ledger systems such as R3 Corda and Hyperledger? Will these pose a threat to BPO or is there room for both? Commerzbank's Angela Koll, said: "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.”
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