BPO: The New Global Standard For International Trade Andre Casterman, Global Head, Corporate and Supply Chain Markets, SWIFT

Citi Transaction Banking Academy for Financial Institutions Professionals | April 8, 2015

Citi Treasury and Trade Solutions

Digitisation of Trade flows The Bank Payment Obligation, a new open account payment method

André Casterman SWIFT | Global Head of Corporate and Supply Chain Markets

ICC | Banking Commission | Member of Executive Committee

April 8th 2015

Agenda

SWIFT and ICC

Overview of BPO

BPO benefits

BPO market adoption

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SWIFT is the global provider of secure financial messaging services

212 countries

10k+ users

23 offices

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1,000+ Corporates

4 billion Messages per year

25 million

Peak day messages

11,000 IT changes

per year 99.999% Availability

Roles of ICC and SWIFT

To help banks provide innovative trade and supply chain services that enable their corporate customers to:

– reduce risk – enhance process efficiency – improve liquidity

management. More than 10,000 financial institutions in 212 countries.

The ICC Banking Commission is a leading global rule-making body for the banking industry, producing universally accepted rules and guidelines for international banking practice, notably letters of credit, demand guarantees and bank-to-bank reimbursement. Over 500 members in 85 countries.

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Industry standards for Trade Finance Developed by international standardisation bodies

Industry standards are industry-owned and technology-neutral. They coherently address legal and operational aspects.

• Trade Finance instruments (UCP600, URDG758, URC 522, URBPO, …)

• MT standards (for L/Cs, Demand Guarantees, Collections)

• ISO 20022 standards (for BPO) • ISO 9362 Business Identifier Code (BIC) • ISO Country codes, Currency codes, …

Agenda

SWIFT and ICC

Overview of BPO

BPO benefits

BPO market adoption

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The Bank Payment Obligation (BPO)

Buyer Seller UR BPO rules govern an irrevocable and conditional electronic inter-bank payment

obligation

Purchase Orders Transport docs Certificates Invoices

Provision of risk & financing services

Industry-wide BPO transaction matching Legally binding rulebook owned by the ICC TSU

A strong alternative instrument for trade settlement

BPO

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ICC Model International Sale Contract

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Click image to ICC website Source: ICC

Bank Payment Obligation (BPO)

What is BPO? The Bank Payment Obligation is a new payment method based on data matching which can be used for risk mitigation and financing

Irrevocable

Conditional What are the key

features of a BPO?

What is new? For the first time an open account payment obligation can be guaranteed by banks in order to get financed. The ICC supports the market launch with the release of unified rules (URBPO)

„A Bank Payment Obligation (BPO) is an irrevocable and independent undertaking of an Obligor Bank to pay or to incur a deferred payment obligation and pay at maturity a specified amount to a Recipient Bank in accordance with the conditions specified in an established baseline.“ (Extract from the URBPO)

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BPO flows for data, documents and goods

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Seller Buyer

BPO Obligor

Bank

BPO Recipient

Bank

Carriers Delivery of goods

1 Purchase order

Transport and invoice data

5 6 Transport and invoice data

(match report)

7 Inform that payment is due on agreed date 9 Transfer funds at maturity

TSU

2

Request BPO based on PO

3 Inform of BPO establishment

Use minimum set of fields

4 Shipment

Established baseline BPO is due TSU

Documents sent directly to

the client

Invoice and shipping documents 8

The baseline gathers the matching conditions using data extracted from trade documents

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Baseline

Commercial data set

Transport data set

Insurance data set

Certificates data set

Purchase order

Insurance document

Certificate document Invoice

Air Waybill (AWB), bill of lading (BOL),…

Matching conditions

Optional

Mandatory Allows payment risk

syndication by multiple obligor banks

The BPO builds upon electronic data matching

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Matching of

contract data

Transfer of funds

Matching of

data

Buyer Seller

1) Sign contract (PO)

2) PO data 3) SO data

4) Match PO/SO data & confirm

6) Match requested datasets & confirm

5) Datasets

8) Transfer funds

7) Debit buyer 9) Pay seller FIN

PO= Purchase Order; SO= Sales Order

TSU

Bank A Bank B

Buyer Seller

Bank A Bank B

TSU

Buyer Seller

Bank A Bank B

BPO is established

BPO is due

Trade is settled

5) Datasets

Agenda

SWIFT and ICC

Overview of BPO

BPO benefits

BPO market adoption

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The BPO enables risk and financing to start at PO level

Ordering Production Delivery Invoicing Payment & cash mgmt

Invoice Issuance

Purchase Order (PO)

Transport Documents

Invoice Approval Certificates Payment

Goods Acceptance

Risk Mitigation Pre-shipment Finance

Post-shipment Finance

Approved Payables Finance

Faster Payment

Transforming open account payments into SCF opportunities

High-risk zone Payment assurance & financing services

No/Low-risk zone (Early) Payment services

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Buyer’s Bank

Buyer’s Bank

• Sellers need to connect to various SCF portals operated by the buyers’ banks

• Buyers’ banks face high supplier on-boarding and KYC costs

• SCF services limited to approved payables finance

• Proprietary formats increase costs for all and limit end-to-end automation

• Proprietary formats and contractual schemes limit adoption

Buyer

Seller

“3-corner” closed model

Industry Standards

Buyer

• Sellers get SCF services from their own bank(s)

• Seller’s bank takes risk on buyer’s bank, not on buyer

• No supplier on-boarding needed as banks only deal with their respective clients

• SCF services extended to pre/post-shipment finance and payment assurance

• Industry multi-banking standards facilitate adoption and end-to-end automation by all

Buyer

Seller Seller’s Bank

“4-corner” interoperable model

Buyer’s Bank

Too many portals! Seller

works with own bank Industry

Standards Trade contract

Benefits of the 4-corner model

Trad

e co

ntra

ct

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BPO benefits

Payment Assurance

Increased operational efficiency

Risk mitigation

Payables finance

Receivables finance BPO

Payment assurance

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Importer

Offer payment assurance to my supplier and confirm

the purchase order -> negotiate better payment

terms

Control payment time execution (as BPO is

conditional)

Exporter

Certainty to be paid on time -> improve liquidity

forecasts

Early settlement (if “at sight”)

Benefits for:

Increased operational efficiency

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Importer

Easy procedure to issue BPO

Reduce operational burden of treating

complicated L/C and trade documents

“Just in time” orders to improve inventory management and

avoid storage costs

Both

Improve visibility and traceability

Smooth reconciliation of payment & A/P or

A/R

Electronic matching of structured data is

faster than manual examination

Exporter

Documents sent directly to importer and kept outside of the banking system

Reduce the risk of discrepancies, limit to

relevant trade information only

Reduce discrepancy workload

Benefits for:

Increased efficiency of BPO

Sight Letter of Credit

Same day 2 days 5 working days Dispute period

8 working days Extended period

Present doc Send out

doc Receive doc Payment (clean)

Payment (discrepancy)

Doc checking (by Advising Bank) Courier

Doc checking (by Issuing Bank)

Discrepancy dispute

Sight Bank Payment Obligation

Same day 2 days Acceptance period

3 working days Collection days eliminated

Submit data Send out doc

Receive doc / Payment (matched)

Payment (mismatch)

Data matching Courier Acceptance of

mismatch

Risk mitigation

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Importer

Possibility to get goods earlier

Increased flexibility vs L/C when changing deal

parameters

Improve relationship with exporter by diversifying

settlement method and add flexible options

Exporter

Delayed and non-payment risk mitigation

Safer than open account payment

Credit risk is transferred from importer to the obligor

bank or confirming bank

Benefits for:

Payables and Receivables Financing

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Importer

Optimize use of banking lines

Increase DPO

Extend payment terms

Shift funding role to banks

Both

On-demand financing

Exporter

Decrease DSO

Pre-/post shipment finance

Alternative to forfaiting

Benefits for:

Buyer commits to pay the seller (risk scenario)

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I need to offer payment assurance to my supplier and confirm the purchase

order via my bank

I will substitute for the creditworthiness of my customer

and guarantee the future payment to the seller’s bank

(BPO) for a fee

I want to be certain that I will be paid on

time

Based on the BPO issued by the buyer’s bank , I can

offer the guarantee of payment to my customer

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3 4

1

Seller Buyer

URBPO & ISO 20022

on TSU BPO Obligor

Bank BPO Recipient

Bank

Buyer gets pre-shipment finance and seller gets post-shipment finance

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I accept the goods delivered by my seller but would like to pay at a

later date

I will guarantee the payment (BPO) to the seller’s bank and will offer

the extended payment terms to my customer

Based on the BPO issued by the buyer’s bank, I can also

finance the receivables of my customer before buyer approved the invoice

I shipped the goods to the buyer and I want to be paid on

time, or optionally in advance

1 2

3 4

Financing services

URBPO & ISO 20022

on TSU Seller Buyer BPO Obligor

Bank BPO Recipient

Bank

Agenda

SWIFT and ICC

Overview of BPO

BPO benefits

BPO market adoption

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49 corporate relationships live on BPO

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“We were able to share shipping documents with BNPP electronically and in a matter of hours we received confirmation that they were fine.” “In terms of ease of working, it’s very positive, and we plan to conduct BPOs with full cargoes in the future.”

Michael Van Steenwinkel Global Credit Manager

BP Petrochemicals

Source: Global Trade Review

• Petrochemical Chemical

• Consumer goods • Textile Retail

• Mining: Iron ore Basic materials

• Electronics and computers • Machine building industry • Automotive industry

Technology

• Food processing Agriculture

BPO brings value in various industries

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18 banking groups live on BPO Including 6 of the top20 Trade banks (based on Cat 7 traffic)

BPO Case Studies

• Standard Chartered, BP Petrochemicals and Octal • ROI for BP Petrochemicals • Itō Yōkadō, Bank of Tokyo Mitsubishi UFJ and Bank of China • Bank of Tokyo-Mitsubishi UFJ (1) • Vale with Bank of Tokyo Mitsubishi UFJ • Isbank • Bank of Tokyo-Mitsubishi UFJ (2) • BNP Paribas Fortis - BP Aromatics (2015) • UniCredit (2015) • TEB, TEMSA, ZF and UniCredit (2015)

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Available BPO related articles reporting on those BPO implementations

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Date Link to article May 2014 BP agrees first European multi-bank BPO

June 2014 Trade industry progressing towards digitisation July 2014 CIMB Bank Completes Malaysia’s First Cross-border Bank Payment

Obligation July 2914 CIMB Completes first Malaysian bank BPO July 2014 Exclusive: COFCO Completes BPO transaction through ANZ Sep 2014 Asia leading BPO adoption Sep 2014 Cargill’s digital drive to save industry millions Oct 2014 BHP Billiton eyes BPO trials Oct 2014 BPO makes its debut - Commerzbank handles first live transactions

for a German SME and an international group of companies Mar 2015 First BPO in Italy to replace open account

White paper The Bank Payment Obligation: a new start for Supply Chain Finance

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Q&A

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Link to Corporate-to-Corporate space Electronic bills of lading

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Buyer Seller

Recipient Bank Obligor Bank

UR BPO

Provider of electronic

bill-of-lading and supporting

BPO

Thank you!

Web www.swift.com/corporates

Email swiftforcorporates@swift.com supplychain@swift.com

Twitter @swiftcorporates

LinkedIn Corporates and Supply Chains on SWIFT

Contacts Global team contact list

SWIFT for Corporates

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