BPOs, launched by Swift and the International Chamber of Commerce this summer, enable automated payment once the data provided by the buyer and the seller have been matched.
In theory, this increases efficiency and reduces cost, though in practice its introduction is experiencing teething problems.
“For the seller, there is every incentive to use BPOs, as they help to reduce days sales outstanding [a receivables calculation used by a given company to estimate average collection period after a sale],” says Manoj Menon, global head of trade service, innovation and customer proposition at RBS.
However, enticing buyers might be more difficult at first, he says, adding: “For buyers, they would like to understand the risks and benefits associated with accelerating their payments, which may make it less appealing to many corporates.”
Given that BPOs operate in the bank-to-bank space and are based on the matching of trade data, buyers also want to have sight of the underlying shipping documents, says Menon, since it is important from a buyer’s perspective to see the electronic presentation of shipping documents when using BPOs as a settlement of trade.
It is down to banks to manage that transition and, if appropriate, delay the payment being made by the seller. “The link between the corporate and its bank, and the decision about when to initiate payment, is still in the hands of the bank,” says André Casterman, head of corporate and supply chain markets at Swift.
Corporates can even continue to delay payment until the last moment to increase their working capital, although it would require post-trade financing from the bank, says Casterman. However, he warned that corporates thinking this way risk missing the benefits of efficiency.
Buyers that pay late make less-desirable trading partners and will likely be penalized in some other way, such as on price, says Casterman. Conversely, prompt and efficient payments will strengthen trading relationships and ultimately increase business.
The impact of any reticence on the part of buyers is amplified because the nature of BPOs is that both parties need to agree. It is no good finding one corporate that is enthusiastic about using the contracts if its trading partner is not interested.
And one corporate might be reluctant to pressure its trading partners to enter new BPO arrangements for fear it might trigger a broader revision of the terms of their relationship, such as the payment window or price.
Nevertheless, interest is growing. “Swift has stepped up awareness and, with the launch of the uniform rules for BPOs, corporates are quite eager to understand what this product is, how it works, how it is relevant to their business and how it can help them,” says Menon.
Banks have been working hard to educate corporates on the advantages of using BPOs, although they face arguably even greater challenges in getting ready for their widespread use.
“It’s not easy for the banks that adopt BPO,” says Casterman. “There is a lot of work to do internally to make it work, with product departments, compliance, procurement and others.”
Given the limited demand from corporates at present, banks in general are taking a more wait-and-see approach to invest in the technology to make BPOs fully automated and deliver straight-through processing (STP). Yet the catch-22 is that until banks do make this investment, they will have to feed the data into their machines manually, eroding the advantages of using BPOs.
The manual inputting of data from corporates on to bank systems increases the likelihood of errors and adds cost to the process. And until banks have invested in the technology to maximize the STP benefits of BPOs, the service will also be difficult to price.
“Although demand has been limited so far, feedback from corporates that have used BPOs has been positive,” says Bertrand de Comminges, head of the global trade advisory team in EMEA at HSBC.
Among these early adopters, one might find leading commodity players, he says, mainly due to the size of the transactions they operate, their frequency and the leverage they hold against their commercial counterparts.
Similarly, Asia has been a front-runner in the take-up of BPOs, principally because the Bank of Tokyo-Mitsubishi UFJ and Bank of China have championed their use, says Casterman. Growth in BPOs has often been at the expense of traditional letters of credit. Bank of Tokyo-Mitsubishi UFJ remains the biggest user of BPOs by volume, according to Swift.
De Comminges is confident BPOs will continue to grow under the right conditions, but the pace of adoption is unclear. “The dematerialization of trade documentation could result in accelerated BPO adoption, provided both parties to the transaction agree to use BPOs as a trade settlement instrument,” says Menon.
Swift says it has 40 to 50 clients signed up to use BPOs, and targets 100 by the middle of next year.
“Swift has a history of launching initiatives that look great on paper but, for one reason or another, don’t get anywhere, but this one could prove to be compelling,” concludes one US-based banker.