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Slow Adoption of SWIFT’s Bank Payment Obligation for Digital Trade Finance

By Megan Doyle

SWIFT introduced its bank payment obligation (BPO) system in 2013 as a digital trade finance solution meant to securely streamline international trade payments. Despite a range of potential benefits, BPO adoption has been slow – just like other emerging digital trade finance alternatives. Experts note that, so far, the promise of speed and security from digital alternatives like BPO have yet to outweigh the obstacles preventing importers, exporters, and banks from adopting the technologies.

What is SWIFT Bank Payment Obligation (BPO)?

 

According to SWIFT, BPO is a globally recognized inter-bank digital trade finance system intended to secure payments by successfully matching electronic data between parties.1 BPO is similar to letters of credit, but it digitally automates legally binding rules and uses electronic messaging and matching to automate processing and settlement of international trade payments.2,3

 

Essentially, SWIFT BPO provides an irrevocable agreement between the importer’s bank (obligor bank) and the exporter’s bank (the recipient bank) to ensure payment is executed on time, in accordance with the buyer and seller’s purchase order agreement.4 It uses the ISO 20022 messaging standard to enable interoperability between banks.5

 

According to David Hennah, a key figure in the creation of BPO, the digital trade payment assurance service is intended “to be used as a form of collateral for the increasing number of counterparties opting to trade on open account.”6 By allowing a way to irrevocably exchange trade document information between buyers, sellers, banks, carriers, and other counterparties – from initial purchase order through final payment – banks can securely provide digital trade financing from the moment a trade is agreed.7

 

How the SWIFT BPO Process Works

 

Importers and exporters using BPO begin by negotiating their trade deal, agree on a payment amount, define payment and shipping terms, an expiry date, and other stipulations. The buyer then sends a purchase order with that data to the seller and the obligor bank. If the submitted data matches for both buyer and seller, the parties can proceed.8

 

The seller then ships the goods to the destination, providing relevant invoice data to its bank, and the buyer receives a report ensuring the agreed-upon stipulations have been met. If all checks out, the seller can now send relevant paper documents to the buyer, which can then receive the goods.9

 

On the agreed-upon due date, the obligor bank debits the buyer’s account and remits the agreed-to amount to the recipient bank, which credits the seller’s account.10

 

Benefits of Using BPO for Digital Trade Finance

 

According to SWIFT, BPO offers a number of digital trade finance benefits, including mitigating risk and enhancing security, promoting speed and efficiency of trade settlements, and improving cash flow and liquidity for businesses.11

 

BPO’s irrevocable automated system improves transaction visibility and traceability, thereby potentially reducing transaction risks.12,13 Similarly, its automated technology can help enhance regulatory compliance, according to some analysts.14

 

BPO’s use of digital automation can help streamline trade and supply chain processes by improving communication speed when transacting.15 Thus, BPO can reduce time, cost, and resources needed for each trade finance transaction.16

 

Finally, SWIFT BPO’s quick processing capabilities can optimize liquidity and working capital for businesses. For example, importers can access goods faster, and exporters may experience greater working capital liquidity due to faster settlements.17 In addition, since organizations can collect funds sooner, BPO could help businesses mitigate FX risk.18

 

Obstacles Squelch BPO’s Adoption Rates

 

Despite the wide range of benefits, few corporate finance executives have begun to leverage digital trade finance technology solutions: only 23 percent of survey respondents are currently using BPO, according to Euromoney’s 2018 Trade Finance Survey.19

 

Lagging adoption rates are in part due to the difficulty of breaking old habits and restructuring processes embedded within the international trade finance community. For example, banks have years worth of experience using shipping documents, meaning a shift towards digitization and e-documents can be a challenging investment that takes time to implement.20

 

Moreover, international trade transactions often include many parties with different levels of technological capabilities, and BPO cannot be successfully leveraged unless all parties use the technology.21 Some businesses do not accept e-signatures as valid and instead require paper documents, further restricting widespread adoption.22

 

Inclusive Systems More Likely to Encourage Efficiency

 

Some banks are beginning to use their own digital trade finance platforms. But experts say that greater benefits will stem from working with external, globally recognized services like SWIFT’s BPO because they facilitate interoperability among different banks and create clearer, quicker processes – especially as volumes of electronic transactions increase.23,24

 

The

Takeaway:

SWIFT’s Bank Payment Obligation technology may be an efficient digital trade finance payment solution with a wide range of benefits, but organizations have been slow to adopt it, or to digitize their trade finance processes in general. Although BPO is globally recognized and standardized, some businesses still prefer to use paper documentation. But experts say BPO’s full range of benefits can only be realized if all parties utilize the technology.

Megan Doyle - The Author

The Author

Megan Doyle

Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.

Sources

1. “The Bank Payment Obligation – Looking Ahead,” Institute of International Banking Law & Practice; http://iiblp.org/the-bank-payment-obligation/
2. “The Bank Payment Obligation,” SWIFT; https://www.swift.com/our-solutions/corporates/drive-trade-digitisation/bank-payment-obligation
3. “Bank Payment Obligation: The New Global Standard for International Trade from SWIFT & ICC,” Oracle Financial Services Blog; https://blogs.oracle.com/financialservices/bank-payment-obligation:-the-new-global-standard-for-international-trade-from-swift-icc
4. “Commerzbank processes first BPO live transactions in Austria,” Banking Tech; https://www.bankingtech.com/2017/08/commerzbank-processes-first-bpo-live-transactions-in-austria/
5. “Bank Payment Obligation,” SWIFT; https://www.swift.com/our-solutions/corporates/drive-trade-digitisation/bank-payment-obligation
6. “The Bank Payment Obligation – Looking Ahead,” Institute of International Banking Law & Practice; http://iiblp.org/the-bank-payment-obligation/
7. “Clearing the path to BPO adoption for international trade finance banks,” Banking Tech; https://www.bankingtech.com/2015/07/clearing-the-path-to-bpo-adoption-for-international-trade-finance-banks/
8. Bank Payment Obligation: A new payment method, SWIFT; https://www.swift.com/node/35051
9. Ibid.
10. Ibid.
11. Ibid.
12. Ibid.
13. Ibid.
14. “Clearing the path to BPO adoption for international trade finance banks,” Banking Tech; https://www.bankingtech.com/2015/07/clearing-the-path-to-bpo-adoption-for-international-trade-finance-banks/
15. Ibid.
16. Ibid.
17. “Bank Payment Obligation: The New Global Standard for International Trade from SWIFT & ICC,” Oracle Financial Services Blog; https://blogs.oracle.com/financialservices/bank-payment-obligation:-the-new-global-standard-for-international-trade-from-swift-icc
18. Bank Payment Obligation: A new payment method, SWIFT; https://www.swift.com/node/35051
19. “Trade Finance Survey 2018,” Euromoney; https://www.euromoney.com/article/b16bp3d2cf3ccs/trade-finance-survey-2018-results-index
20. “Clearing the path to BPO adoption for international trade finance banks,” Banking Tech; https://www.bankingtech.com/2015/07/clearing-the-path-to-bpo-adoption-for-international-trade-finance-banks/
21. Ibid.
22. “Trade finance: Clients prove slow to embrace digital,” Euromoney; https://www.euromoney.com/article/b161cl0s78gm98/trade-finance-clients-prove-slow-to-embrace-digital
23. Ibid.
24. “Clearing the path to BPO adoption for international trade finance banks,” Banking Tech; https://www.bankingtech.com/2015/07/clearing-the-path-to-bpo-adoption-for-international-trade-finance-banks/

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