swift bpo for corporates ictf conference

Bank Payment Obligation for supply chain finance Improve efficiency and mitigate payment delay and default risk in a multi-bank environment

ICTF conference

Paris, 23 April 2012

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mailto:[email protected]�

SWIFT and your payments business

Context and key challenges

Supply Chain Finance

Key objectives in the financial supply chain Making trade receivables and liabilities visible

Physical Supply Chain

Financial Supply Chain

Working Capital

Management

Inventory turnover

Accounts Payable

Treasury management

Accounts Receivable

How to reduce my order-to-cash cycle, free up cash and get credit as early as needed?

1 How to improve my purchase-to-pay process, extend my payment terms or get discounts for early

payment?

2

Where is my cash and my liabilities? How to improve my liquidity forecasts?

4

How to allocate capital efficiently to support my production process?

5

What is my credit risk? 3

Supplier Buyer

3

Current financial supply chain challenges Payment risk and mitigation tools

4

Payment

Order Production Shipment Delivery

Settlement

Fina

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Cash in advance


Settlement

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in Letter of credit

Letter of credit Payment

Delivery default or delay risk

Payment (default) or delay risk


ment

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Documentary collection

Documentary collection

Settlement



Pay


Order Production Shipment Delivery Fi

nanc

ial

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ply

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Phy

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hain

Open account

Open account Payment & Settlement

Payment default or delay risk

Trade and Financial supply chain Market trends and challenges

Technology evolution

Multitude of interfaces and systems Little or no automation Lack of business process integration

Working capital optimisation

Accuracy of liquidity forecasting and planning Complex trade and cash reconciliation

Financing models Increased cost of borrowing New partners with various risk profiles Need faster and efficient access to financing

Trade globalisation New emerging trade corridors Growing multi-bank relationships

5

Strong need for efficiency and security at lower cost


Bank Payment Obligation

Open account

The Bank Payment Obligation (BPO) A new alternative instrument for trade settlement

7

A BPO is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after a successful electronic matching of data according to an industry-wide set of rules.

New ICC Uniformed Rules for BPO Target publication Q1 2013

Business-to-business practices

Supplier Buyer

A commercial agreement between buyer and seller, with

potential financing options

Secure and optimise your trade transactions with Bank Payment Obligation

8

A legally binding, valid and irrevocable bank payment

obligation based on a minimum set of matched transaction data

and being adopted by the ICC


Bank Bank

Trade Service Utility (TSU)

SWIFT matching platform implementing BPO using ISO20022 standards that

implements the BPO in a multi-bank environment

An agreement between buyer and its bank with

potential financing options

Bank Payment Obligation flows

9

Fees Risk commitment fee, payment fee and service charge

Risk commitment fee and service charge

5. Guaranteed payment + a/c

CNY 100,000 USD 15,370 -

a/c Payment and cash management

Financing services

3. Pre-/post shipment finance 4. Payables finance

BBBBCNSH PPPPUS33

Business Role

Tchin Wa manufacturer Big-Mart distributor

Supplier/Exporter Recipient bank Obligor bank Buyer/Importer

BPO

Trade Services Utility (TSU)

1. Contract and Paper documents

2. Electronic data matching

Trade Processing services

Minimum data subset Order number,

Product name & quantity Amount, currency, date

Buyer & seller (name, address) BICs of the banks

BPO combines the best of both worlds

10

Seller Buyer

LC Advising Bank

LC Issuing Bank

Docum

ents

Contract

Documents

Doc

umen

ts

Advi

ce

Application

Issuance

Payment

Letter of Credit

Bank services based on paper document processing

Seller Buyer

Seller’s Bank

Buyer’s Bank

Contract

Payment

Open Account

Documents

Bank services limited to payment processing

Array of risk, financing and processing services to address both cash management and trade finance needs

Seller Buyer

Recipient Bank

Obligor Bank

Contract

Documents

Payment

Bank Payment

Obligation

Bank services based on electronic trade data exchange

Data

Dat

a

Dat

a

BPO positioning

11

Better than Letter of Credit Electronic presentation of data

instead of physical documents

Quicker process as it focuses only on data relevant for financing

Improve quality and objectivity of compliance verification

Can be added at any time, for any amount value

Easier access to financing services

Better than Open Account

Facilitate win-win trade relationships

Can be used as collateral for financing

Better payment risk mitigation than Standby L/C

Reduced on-boarding and operational costs

Enhanced trade transaction processing and reconciliation

Business scenarios


Payment

Accelerate the settlement and financing process through trade processing automation

13

Trade and payment processing

Match Purchase

Orders

Match transport (shipping)

information

Reconcile approved (e-)invoices with purchase orders

Execute payment and

reconcile collections

Pre-Shipment finance

Purchase Shipment Acceptance Settlement

Post-Shipment finance

Due Date (D)

Invoice acceptance

Authenticated purchase order

Shorten finance acceptance time

Post-Shipment finance

Shipment & certificate documents

New opportunity windows to get access to supply chain finance

Payment guarantee

Buyer commits to pay the seller (no financing)

14

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

I will substitute for the creditworthiness of my customer

and guarantee the payment to the seller’s bank (BPO) for a fee

Case 1: Seller mitigates the risk of non-payment or payment delay

I want to be certain that I will be paid

on time

I can offer the guarantee of payment to my customer based on the BPO issued

by the buyer’s bank

2

3 4

1

Seller Buyer

BPO

TSU Obligor Bank Recipient Bank

Payment guarantee

Buyer supports pre-shipment finance for the supplier

15

I want my business- critical supplier to increase its financial resilience and will confirm the purchase

order

I want to access cost-effective financing to

cover my working capital expenditure

I will offer pre-shipment finance to my customer based

on the BPO

Case 2: Buyer mitigates the supplier default risk

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

confirmed purchase order 3 4

1 2

Financing services

Seller Buyer

BPO


Supplier gets post-shipment finance

Case 3: Supplier mitigates liquidity risk

I want my business- critical supplier to

increase its financial resilience and will

confirm the transport or commercial data

I want to be paid as early as possible

after the shipment to the buyer

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

based on the submission of compliant transport or

commercial data

I will offer earlier payment to my customer based on the BPO issued by the buyer’s

bank

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1

2

3 4

Financing services

Seller Buyer

BPO


Payment guarantee

Buyer gets import finance with extended payment terms

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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 extension of payment terms to my

customer for a fee

Case 4: Buyer mitigates its liquidity risk

I can offer the guarantee of payment to my customer

based on the BPO issued by the buyer’s bank

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

time, 1 2

3 4

Financing services

Seller Buyer

BPO


Payment guarantee


Key Benefits

BPO benefits

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Payment Assurance

Streamline Processing

Risk mitigation

Payables finance

Receivables finance BPO

Payment Assurance

Structured data and

e-matching

Risk mitigation

Payables finance


A multi-bank solution …

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… and powered by SWIFT's Trade

Services Utility (TSU) & Correspondent Banking

network

… based on ICC rules & ISO messages …

BPO

Payment Assurance

Structured data and

e-matching

Risk mitigation

Payables finance


Key benefits for the seller

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Receivables Cash flow optimization

Get payment on time

Optimisation of risk-reward transactions

Improve liquidity forecasts Improve discrepancy management

Easy integration with e-invoices Reduce processing effort Syndicate payment risk

Supply Chain

Finance (optional)

Pre-/post shipment finance

Alternative to credit insurance Reduced interest costs

Payment Assurance

Structured data and

e-matching

Risk mitigation

Payables finance


Key benefits for the buyer

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Procurement Cash flow optimization

Pay key suppliers on time

Reduce administrative costs Reduce investigations & disputes Outsource payables processing Control payment time execution

Supply Chain

Finance (optional)

Extend payment terms

Negotiate commercial terms Reduce supply default risk

BP Chemicals case BPO to replace confirmed L/Cs

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Challenges • About 50% of exposure on secured terms • Competitive commodities market requires a

secure and cheaper alternative to L/Cs • High processing and confirming costs (0,8%

of transaction value) • LCs process limits commercial possibilities

and weakens compliance under certain conditions

Company profile • 2010 Revenues of USD 14 billion • Revenue created for approx. 50% in Asia • Trade account receivables of EUR 1.4 billion

(consolidated receivables only) • More than 600 clients worldwide

Key benefits • Get paid on time and avoid judicial proceedings • Reduce complexity – removal of paper trail • Limit to relevant trade information only • Reduce cost by removing vetting activities and

presentation assistance • Improve customer offer by allowing for flexible

options • Improve speed of handling • Reduce the risk of discrepancies • Reduce need for confirmation cost by being able to

tap larger pools. Free up banking lines. • Easy to exercise tool for liquidity • Easier access to banks to secure transactions • Possibility to spread the risk with multiple obligors

Gains expected greater than $1m worldwide, but most upside, but most of the upside lies in more marginal income

Multi-bank export to APAC and EMEA at BP Chemicals Proof-of-concept (ongoing)

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Buy

ers

of B

P P

etro

chem

ical

s

Industrial fiber Co.

BPO TSU

Chemical fiber Co.

Textile & Garnement

Co.

Polyester fiber Co. BPO Obligor

Bank branches

Belgium

Exporters

BPO Recipient Banks

Kuala Lumpur

HK

Zhuhai

Belgium

London

Vale case BPO based on confirmed invoice

Supply Chain Finance for Corporates – Webinar – 7 December 2011 25

Challenges • Competitive commodities market requires a

secure and cheaper alternative to L/Cs • L/Cs at sight for USD 18 billion with China

clients • DSO (Days Sales Outstanding) is between

25 and 30 days

Company profile • 2010 Revenues of USD 46.8 billion • Main product Iron ore (69,9%) • Approximately 100 clients worldwide

(Iron Ore) • Main market is China (32%)

Key benefits • Reduce the DSO by approx.10 days (including

internal processes efficiency gains) with a financial gain over USD 37 million / year.

• Freeing up Working Capital – USD 600 million. • Reduce costs for customers. • Reduce document delivery costs. • Reduce the risk of discrepancies • Improve access to Trade Financing products to our

customers. • Reduced environmental impact - reducing paper

usage in extra copies of the shipping documents for the banks

Significant process efficiency gains and working capital gains

Multi-bank export to China at Vale Proof-of-concept (ongoing)

Supply Chain Finance for Corporates – Webinar – 7 December 2011 26

BPO

Exporter

BPO Recipient Banks

Buy

ers

of V

ale

Steel Manufacturer 3




BPO Obligor Bank branches

Detailed features


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 among different obligor banks

BPO offers flexible payment terms and allows early information gathering on settlement details

Purchase Order

BPO

Production Shipment Delivery

Payment

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Data match

BOL PO

I+0, +30 or +P or

+P+30 days

Payment vs. invoice

• On receipt of invoice (I)

• At the end of the month of invoice (I+30)

• At the end of a period after invoice receipt (I+P) • At the end of a month after period of received invoice (I+P+30)

Invoice

When? Letter of credit

Case 2: Mitigate payment default risk and offer post-shipment finance to the seller

Purchase Order

BPO


Payment

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Data match

PO M+0

Payment vs. “presentation” (matching)

• After match or mismatch acceptance (M)

Case 3: Mitigate payment default risk and offer pre-shipment finance to the seller

BOL

When? Cash in advance

Invoice

Purchase Order

BPO


Payment

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Data match

PO

D+0, +30 or +P or

+P+30 days

When ? Open account

Payment vs. delivery

• On delivery date (D)

• At the end of the month of delivery (D+30)

• At the end of a period after delivery (D+P) • At the end of a month after period of delivery (D+P+30)

Case 1: Mitigate delivery default risk and offer extend payment terms to the buyer

BOL Invoice

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BPO includes details of charges as per international standard trade terms - INCOTERMS

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Purchase Order

BPO


Payment

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Data match

PO

D+0, +30 or +P or

+P+30 days

Shipment terms

• Costs and freight

• Cost insurance and freight

• Carriage paid

• Carriage and insurance paid

Option 1: Specification of the shipment costs

BOL Invoice

Purchase Order

BPO


Payment

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Data match

PO

D+0, +30 or +P or

+P+30 days

Delivery terms • Delivered at frontier

• Delivered duty paid

• Delivered duty unpaid

• Delivered ex quasy

• Delivered ex ship

• Exworks

• Free alongside ship

• Free carrier

• Free on board

Option 1: Specification of the delivery costs

BOL Invoice

Allows partial shipment

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Risk mitigation


Current challenges on documentary credit Long, costly and cumbersome process

Purchase Order

L/C issuance and acceptance


Payment

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Documents presentation and compliance verification

PO BOL Invoice

Longer inventory cycles or…

…..or storage at port of

destination

Delayed delivery

Payment delay even when “at sight” or on delivery

Need to request L/C earlier

Customer cannot free its credit limits

Delayed production

… or risk due to a waiver

Re-route ships in case of

refusal

L/C issuance and acceptance



Payment

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Trade Post-Trade Pre-settlement Settlement T T+1 T+10 S > T+20

BPO addresses the challenges of documentary credits Measuring process efficiency

Purchase Order

BPO


Payment

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Data match

BOL & Invoice

PO

Reduce the production lead time (DIO) 3

3

Reduce shipment delivery delays

4

4

Risk coverage

Reduce the number of amendments not related to financial liability 5

5

Sales Cycle

Reduce payment delays when at sight (DSO)

6

6

2

2 Increase inventory turnover cycle (DIO)

1 Reduce opening time

1 7 Reduce risk coverage needs

7

Shorten sales cycle – increased window of opportunity to sell 8

8

Pre-matching

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BPO compared to other trade finance tools Mitigate risk

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Risk Risk description

Open Account

SBLC/ Insurance

L/C BPO Notes

Weak credit rating of the importer Substitute by bank's credit worthiness

Temporary liquidity shortage of the exporter Finance production and shipment or forfaiting

Bank financial risk Change bank (L/C) or split the risk (BPO)

Payment default Shorter for BPO than others

Unpredictable cash-in flows to payment delay Shorter for BPO; impact on discounting for L/Cs at sight

Refuse to honor payment Usually irrevocable for L/C, always irrevocable for BPO

False or falsified information (do not match goods)

Validate authenticity “on their face” (L/C) or electronically (BPO) - Link BPO to the carriers for fraud

Early or late shipment Specify last shipment date

Loss, theft, deterioration Mitigate through additional insurances

Econ

omic

Fluctuations in currency, interest, inflation rates

Can predict cash flows in FX risk hedging

Insurrections, terrorism war Syndicate the risk to other countries

Sanctions , force majeure Mitigate through additional insurances

Com

mer

cial

Tran

spor

tPo

litic

alFi

nanc

ial

Credit, commercial and country risk assessment

Securing your trade transactions A representative decision making process

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Yes

No

Is the buyer’s creditworthiness

weak?

Is there a risk of payment delay?

Is the buyer’s bank

creditworthiness weak?

Are the profit margins at risk?

Are the revenues at

risk?

Commitment to pay

Select a confirming bank to substitute its credit worthiness for

that of the buyer’s bank

Select the buyer’s bank to substitute its credit worthiness for that of

the buyer

Confirmed letter of credit

Advised letter of credit

Select a bank or company insurance

Standby letter of credit or

insurance on Open Account

Documentary collection or

Open Account

Yes

No

Do not secure the transaction

Yes

No

Confirmed BPO

BPO

BPO

or

or

or

TSU Payment or

Example

BPO addresses financial supply chain challenges Payment risk mitigation


Settlement

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Letter of credit

Letter of credit Payment




Fina

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cal

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in

Open account

Open account Payment & Settlement

Payment default or delay risk

Long, costly and cumbersome discrepancies management

Risk of delayed payment due to the L/C processing (documentary credit )

Gain certainty of the timing of the cash flows and improve liquidity forecasts

Use BPO for pre-/post-shipment finance, as for L/Cs Syndicate the risk for very large value transactions Ability to offer commercial incentives reflecting the processing

costs savings Ability to reduce supply default risk for importers

Optimise the processing time and costs while securing the transaction

Political, economic or commercial risks

Risk default or delay in payment obligation after shipment of goods

With no need for export working capital financing (loan or revolving credit lines) or credit insurance or standby letters of credit

Ability to offer extended payment terms as an alternative to factoring and forfaiting

Improved transaction tracking (ease integration of payment and trade processing )

Establish and maintain successful trade relationship

BP Secure the transaction while maintaining a competitive offer

When to use BPO? • Unsecure relationship or market • High exposure to risk (market

price volatility, solvency risk ,…) • High costs of risk mitigation

measures

When to use BPO? • New or less established

relationships • Good credit worthiness of

buyer’s bank • High probability of payment

delays due to discrepancies

T+0, +30 or +90 days

T+0, +30 or +90 days

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BPO offers the best cost vs. risk performance Pr

oces

sing

effi

cien

cy/c

ost

(ser

vice

fees

)

Risk mitigation security (payment delay and default risk)

Low

High Low High


Letter of Credit

Open Account

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Insurance on Open Account

SBLC, demand guarantee

Processing efficiency/cost - Less paper work and training than L/C

or insurance on Open Account - Need workflow management compared

to SBLC or demand guarantee

Risk mitigation security - Similar to L/C (liquidity nature of the

underlying assets) - Banks do not transmit the paper

document (bill of lading) - Better payment delay risk mitigation

than insurance on open account

39


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Integration aspects

Any channel / any format / any solution

Any Open Transaction

Matching platform

Any channel / any format / any solution

Com

mer

cial

so

lutio

ns

Trade Services

Utility (TSU)

Buyer’s bank(s)

Seller’s bank(s)

1 2 3

Seller Buyer

Indu

stry

st

anda

rds

BPO

21 messages (tsmt)

21 messages (tsmt)

Trade transaction matching scheme

based on tsmt messages

Industry standards for supply chain finance Electronic matching

21 structured standards (tsmt)

Standard exchange and matching of richer electronic structured data

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Vendor Bank

Bank

Integration options based on volumes and bank relationships

Trade back-end

Bank portal

Trade back-end

Seller

Bank front-end

Purchase Order data

Buyer

ERP

Internet

Buyer’s bank Seller's bank

Transport, invoice, … data

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BPO

1. Bank-specific Trade Portals a. Manual access to bank-owned

Trade portal over Internet – 1 portal per bank

b. ERP integration with bank-owned Trade portal for large volumes

2. Vendor Multi-bank Trade solutions a. Manual access to vendor multi-bank

Trade solution (local application or hosted portal)

b. ERP integration with vendor-owned multi-bank Trade portal (local or hosted)

ERP

Multi-bank Portal

41

Next steps and conclusion


What is my business

case?

Are my banks ready now?

Key roles and responsibilities for BPO

• Buyers and Sellers – Provide the merchandise details (description, quantities, unit price, ...) – Agree on the amount of the payment obligation – Define the payment terms: on receipt of the invoice, on delivery or extended – Agree on the expiry date – Agree on the financing terms and conditions – Agree on who bears the financing charges – Agree on the shipping terms and latest shipment date

• Obligor bank(s) – Propose the bank to advise the obligation, with agreement of the seller – Propose the bank to confirm the obligation (if any) with agreement of seller – Verify apparent authenticity and deliver to recipient bank, upon successful matching

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33 banks adopting BPO (update as at 4 April 2012) Including 12 from the top20 Trade banks

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http://www.ubs.com/�

33 banking groups adopting BPO by primary regional location (update as at 27 April 2012)

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AM

• Banco do Brasil • Banco Itaú BBA • Bank of America • BMO Capital Markets • BNY Mellon • Citi • JP Morgan

EMEA

• Barclays • BNP Paribas • Byblos Bank • Commercial Bank of Dubai • Commerzbank • Deutsche Bank • First National Bank of S. Africa • HSBC • National Bank of Greece • Qatar National Bank • Standard Bank of South Africa • The Royal Bank of Scotland • UBS

AP

• ANZ • Bangkok Bank • Bank of China • Bank of Communications • BTMU • China Citic Bank • China Minsheng Bank • Hua Nan Bank • Kasikornbank • Korea Exchange Bank • Siam Commercial Bank • Standard Chartered Bank • SMBC

Key considerations for your business case

46

Costs

Working capital optimisation (CCC) Get paid quicker (from 10 to 5 days),

Extended payment terms Better cash allocation to inventory and

transportation Reduction of loans and interests,

Better financing terms

Financial benefits

Business case

Quality and compliance Improved business relationships

Better credit rating and credit risk management Lower rate of litigations

Adjacent benefits

Operational benefits

Trade transaction processing Lower on-boarding costs

Improved cash management Lower auditing, collection, accounting effort

Lower rate of investigation

Summarizing BPO value for Corporates

47

ICC adoption

Business growth Process efficiency Payment timeliness

Standards & rulebook Multi-bank access

Q&A

? 48

Thank you

Generic e-mail: [email protected]

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49

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