The landscape of world trade has changed dramatically during the past decade. Notions of geography and of a defined marketplace are becoming increasingly outdated as international trade continues to transform. The widespread liberalisation of emerging markets, combined with the pressures of globalisation and the internet have accelerated consolidation, specialisation and innovation in trade related services.

Statistics show that the volume and value of international trade has grown and that there has been a significant shift away from the use of traditional trade instruments, such as letters of credit, in favour of trading on an open account basis. An open account transaction means that goods are shipped and delivered before payment is due. It is now estimated that over 80% of global trade is conducted on an open account basis. The market is therefore demanding new solutions to help deal with increasing cost pressures and changing risk dynamics, the main risk being the risk of default or delayed payment by the buyer. Under a regime of open account trade, the entire risk in the transaction is borne by the seller, since the payment is made by the buyer only after the latter has taken possession of the goods. 

This situation has led to the development of the Bank Payment Obligation (BPO), operated jointly by Swift and the ICC Banking Commission. By working together, the two organisations are leveraging their respective positions across the trade finance community. Swift has started rolling out its platform and generated increasing adoption by Banks. It has also signed a very important agreement with the ICC Banking Commission, whereby both parties have jointly undertaken to produce a set of contractual rules on BPOs. The two organisations are aiming to establish this payment method as a market-wide standard, with uniform rules and messaging protocols. They have now formed a working group in conjunction with 11 banks and two corporates – BP and Brazil’s Vale – that has been tasked with developing the rules that underpin the BPO. This set of contractual rules will establish uniformity of practice in the market adoption of the BPO, very similar to those of the UCP 600, which have proven to be the most successful of the rules drafted by the ICC.

Justifying the need for the creation of BPOs, Andre Casterman, Swift’s Head and Banking, Trade and Supply Chain stated that, “Conditional payments like L/Cs are an important payment method as they offer the seller certainty of payment. However, inefficiencies in using L/Cs – whereby goods are commonly received before the relevant paperwork – as well as the risks of using open account, means corporates require a more efficient alternative for securing international trade transactions.” Forty-five banking groups have adopted BPO while four of these, Standard Chartered Bank, Bank of China, Bank of Tokyo Mitsubishi and Korea Exchange Bank have already gone live. During Sibos 2012, Casterman also provided an update on the matter, confirming that, “The market is getting what we promised, which is a coherent set of ICC rules supported by ISO 20022 standards.” The BPO rules are expected to be approved during a media conference that will take place in Lisbon during the third week of April 2013.

The Bank Payment Obligation rules and the related ISO 20022 messaging standards will mean a strong foundation for banks to provide modern risk and financing services, aligned with today’s technology evolution, while addressing cost pressures in the face of increased automation and changes in the regulatory environment. BPOs will also enable banks to mitigate the risks associated with international trade to the benefit of both buyers and sellers. BPOs also enable flexible financing propositions across the supply chain, from pre-shipment to post-shipment, where the BPO may be used as collateral in each case.

Trade finance is a critical banking service supporting the world economy and it is vital that the financial industry is aligned by means of improved rules and tools in support of trading counter-parties. The BPO is an opportunity for a positive evolution of trade finance in an increasingly online industry. The market now eagerly awaits the ICC BPO Rulebook, which is due to be approved and released in the Spring of 2013.

Jason Zammit is Head of Public & Media Relations, FIMBank plc.

FIMBank  plc is an international trade finance bank providing a comprehensive range of trade finance solutions and banking services. For further information please visit www.fimbank.com