Industry SectorsFinancial ServicesMaking Headway Towards Digitisation

Making Headway Towards Digitisation

While the age-old treasury “golden triangle” remains the same – striking the optimum balance between securing liquidity, optimising profitability and minimising risks – the demands of treasurers are evolving with a focus on technology-driven solutions as they move away from the use of paper.

Indeed, international trade is finally beginning to move into the digital era and companies are set to enjoy huge benefits, including quicker processing times, greater flexibility and cost savings as processes become more efficient.

In this respect, a new instrument in trade finance is providing new opportunities in trade finance. With the Bank Payment Obligation (BPO), payment is made from a buyer’s bank to a seller’s bank following trhe successful electronic matching of trade data, instead of the traditional method of manually checking documents.

According to the latest SWIFT figures, 20 banking groups and more than 50 corporates globally have now “gone live” with BPOs – more than twice as many as last year – and the number is steadily growing. With the first BPO transactions in Europe taking place in the second half of 2014, adoption will almost certainly continue to grow.

To understand the progress the industry is currently making, we only have to look at the example of essDOCS – one of the major platforms for electronic trade document transmission – which saw its first use in support of a BPO earlier this year. This first live BPO transaction connected with the issuance of an electronic bill of lading was announced by SWIFT in April and has set a milestone for increased market adoption of the BPO, demonstrating the true potential for electronic trade processes.

Advantages of Digital Trade Finance

Certainly, there are promising opportunities associated with the BPO – particularly given that demand for trade finance is growing as corporates extend their global reach. While demand for traditional tools, such as Letters of Credit (LCs), remains stable, growth in open account trade -where goods or services are delivered before payment is due – is particularly exciting for the BPO’s prospects.

As a result of the ongoing development of global supply chains, an increasing number of companies are today implementing open account trade terms in order to increase sales and gain a competitive edge.

However, while an open account transaction benefits the buyer there are clear risks involved for the supplier. Not only must exporters be aware of the export destination country risks, they must also be sure that their counterparty will accept delivery of the goods and pay at the agreed time.

Therefore, for some companies, the BPO can provide an additional trade payment mechanism to the traditional tools already in use. Not only does a BPO ensure the viability of settlement by open invoice, it also allows optimisation of working capital and provision of liquidity – all while providing assurance of payment.

Indeed, the BPO can also act as an enabler of supply chain finance. In this respect, BPOs present an opportunity to provide post-shipment financing to suppliers, allowing them to access finance at earlier stages in their supply chain cycles. This is thanks to automatic data matching processes that are quick and reliable, thereby guaranteeing payment for the exporter’s bank and facilitating post-export financing. Significantly, the BPO will also provide opportunities in pre-shipment finance to support loan agreements between the banks involved or upon establishment of the BPO baseline (the agreement between banks for any given transaction).

Unlocking the Benefits of Automated Trade Finance

While the possibilities offered by the BPO are exciting, many banks and corporates continue to sit on the fence, uncertain about whether trade is just too complicated to be fully automated – slowing individual transactions, and broad adoption.

However, Commerzbank’s two BPO transactions last year – which were among the first to be successfully completed in Europe – showed that unlocking the benefits associated with the BPO can be achieved.

The first BPO was for Frankfurt-based SME client, Polytrade GmbH, a global merchant specialising in polymers, additives and polymer chemicals. It used the BPO to receive payment from its supplier in Thailand, PTT Polymer Marketing Company Ltd., whose bank partner was Bangkok Bank.

Polytrade and PTT have a longstanding trade relationship. Prior to using the BPO, their business was handled using Import LCs with deferred payment terms of 60 days after bill of lading date – a highly secure, but complex trade instrument. Therefore, the BPO was ideally suited to Polytrade for the optimisation of internal payment handling processes. In addition, the BPO provided the company with a number of efficiency benefits through reduced document handling, shorter processing times and cost savings.

Commerzbank BPO fig1
BP Aromatics Limited NV, a Belgium-based group, was behind the second BPO. The company agreed to process payment from its Turkish business partner, Köksan Pet Ve Plastik Ambalaj San. Tic. A.S. using a BPO.

In this case, the key driver for undertaking a BPO was the flexibility and speed offered by the automated tool for making changes to shipping or trade terms. For example, when shipping goods from Port A, but wanting to amend the shipping terms for shipment from Port B, the BPO allows BP Aromatics to make transaction adjustments immediately, whereas using traditional methods such as the LC would take days to complete.

Also important for BP Aromatics was the faster processing time that comes with the electronic handling of data in a BPO transaction. This is thanks to the fast establishment of the “BPO baseline”. The BPO works by electronic matching of data through the SWIFT trade services utility (TSU) platform by establishing a “baseline”, containing the purchase order data and after shipment, provision of shipping document data, taken from invoices, transport documents and other documents.

The data is provided by buyer and supplier, forwarded by banks to the platform and matched electronically. Upon successful matching of shipping data against the baseline, the BPO becomes due and payment at maturity date is then processed outside the SWIFT TSU platform.

Commerzbank BPO fig2
The Future is Digital

Despite the clear advantages of the automated tool, paper-based trade finance solutions have traditionally been seen as the safest way of confirming payments for goods and services. It will take time and effort to change from paper-based trade to digital handling. Still, the BPO is a first step in that direction.

In order for the BPO to enter the market and allow development and experience to be gained in digital handling, more successful BPO transactions will need to take place to demonstrate that trade can be automated. As the number increases, this digital trade finance solution will undoubtedly start to gain prominence among today’s technophile corporate treasurers.

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