A Reference Guide to Trade Finance Techniquesin early 2013. There is significant overlap
with both SEPA and the PSD, so it will be
interesting to see whether the European
Commission decides to try to incorporate
some of these proposals as part of the wider
PSD review process.
Next steps
The European Commission’s stated objective
underpinning SEPA, the PSD and the most
recent consultation is for the EU to become
the most competitive market for payments.
These three parallel initiatives offer a great
opportunity to develop a single unified vision
for the future payments environment in
the EU, maximising the potential gains for
corporate treasurers as well as consumers.
There is enough certainty on the future
direction of SEPA for corporate treasurers
to be making and implementing concrete
plans with their banks and other partners
now. On the other two initiatives, much is still
under review. There is plenty of opportunity
for corporate treasurers to have input, either
directly or via trade and professional bodies,
including the ACT.Bank Payment Obligation:
a new direction for trade?
The Bank Payment Obligation (BPO) was
developed by SWIFT as a partial extension
to the Trade Services Utility (TSU) matching
service it launched in 2007. The BPO
was launched in 2009 (it was first used
in 2010) and was designed to meet two
key objectives: to minimise the continued
counterparty risk associated with open
account trading, while avoiding the expensive
processing associated with letters of credit.
SWIFT had launched its TSU service
as a way of enabling banks to match
payment and sales orders on behalf of
their clients and link them to the associated
electronic funds transfer. From the banks’
perspective, this offered the opportunity to
develop additional services around the TSU,
including financing solutions. Because banks
linked to the TSU separately, the additional
services were developed in a proprietary
way, offering limited standardisation benefits
for corporate treasurers.
The BPO is a bank guarantee of
payment made by the buyer’s bank for
a specific amount to a specific bank (the
seller’s bank) on a specific date. The trigger
for payment is specified electronically
matched data in the TSU. There are five key
stages in a BPO transaction:
Sale agreement.
The buyer and seller will agree a contract,
including payment terms. The seller
requires some form of payment guarantee.
Buyer requests its bank to arrange a BPO.
The buyer will specify to the bank the
information the seller must provide to
trigger payment. This will be data which
can be captured and matched by the
TSU, such as information from transport
documents, for example.
Buyer’s bank issues BPO.
As long as the buyer’s bank agrees to the
buyer’s request, it will issue a BPO to the
seller’s bank.
Seller’s bank advises seller.
Seller provides data required under BPO.
Once goods have been shipped, the
seller will provide data required under
the BPO to its bank. This data is then
matched with the requirements of the
BPO in the TSU. As long as the two
match, the seller will be guaranteed
payment (subject to the creditworthiness
of the participating banks).
This process differs from a letter of credit,
crucially, in that the core trade documents
are transferred between buyer and seller.
There is no need for either bank to physically
check and transmit documents, as occurs
under a letter of credit. The critical details
(which are agreed between buyer and seller
as part of the payment terms) are transferred
electronically between banks and matched
in the TSU. As a result, the process is much
quicker and more cost-effective.