For SWIFT, the member-owned cooperative of banks that electronically links more than 9,000 financial institutions in 209 countries, October marked something of a milestone. On the 28th of that month, the Bank of China announced that its Jiangsu branch had completed the first ever Bank Payment Obligation (BPO) financing, using SWIFT’s Trade Services Utility (TSU) platform. The client was Nanjing Textile Import and Export Co.
Trade Finance: Bridging the Last Mile in Asia
It was the latest step in the evolution of the BPO, which SWIFT introduced earlier this year. “Financing is one of the key trade services, whether it’s pre-shipment or post shipment,” says Connie Leung, Director, Payments and Trade Markets, Asia Pacific, at SWIFT. “So the BPO is really used as a tool to facilitate the banks in Asia into offering financing on the back of open account transactions.”
Leung spoke to CFO Innovation’s Cesar Bacani on international trade’s inexorable move towards open account at the expense of the traditional letter of credit, the future of the TSU and BPO, and other trade finance trends.
Why has international trade moved away from letters of credit to open account?
The letter of credit (LC) was very popular because there’s a risk between the buyer and seller, depending on how good they know each other, on how much trust they have in each other. If you don’t have a lot of trust, you go to the LC. When the buyer and the seller have built up trust, the issue of opening LCs goes away and they move to what we call open account, which is now more or less like 80% of world trade.
As soon as the buyer and the seller move into the open account, they can deal directly [with each other], and sometimes the bank only gets involved in the payment. Banks don’t get involved to see any paperwork in-between.
Some of the large buyers actually build an IT infrastructure where they can electronically ask the supplier to input all the relevant data. Other than documents required by customs and local regulators, they don’t need any paper. The open account helps streamline the process, but only if you put in an IT infrastructure like this. If you don’t, then you’re still flowing paper.
How do SWIFT’s Trade Services Utility (TSU) and now the new Bank Payment Obligation (BPO) figure in all this?
There is no risk instrument in the open account space; it’s basically the level of trust between the buyer and the seller. If the buyer goes bankrupt, the seller will [just have to tell itself], tough luck. There is a need for a financial instrument in the open account world that people can use to mitigate the risk. That’s why we [at SWIFT] came together [with the banks] and built the TSU.
We have now added a financial instrument to the TSU, which is the bank payment obligation (BPO). The BPO is basically a bank-to-bank payment obligation. It’s underlying the matching of data from the TSU.
TRADE SERVICES UTILITY (TSU)
As SWIFT explains it, TSU is a data matching and workflow engine that allows banks to establish a common view of supply chain transaction data and to monitor events from inception to completion. Isn’t this what the proprietary systems of individual banks do anyway for their clients as buyers and suppliers?
Each bank may have their own portal to connect to their customers, but then there is no standardisation [among those different portals]. Where the TSU is placed is more in the multibank arena, particularly when you look at Asia, where it’s so fragmented. We still have a lot of the local regional banks in Asia that are representing the exporter. It won’t be like a bank working with another bank; a proprietary network would not work.
The TSU is really like the LC, which is a generic framework. Any bank can open an LC to another bank. BPO would be the same; it’s multibank in nature, where the suppliers can be all over Asia or the client can be in US, Europe or even Asia, and both can have different banks.
But as I understand it, a buyer and supplier can only use TSU if both their banks are part of the TSU community?
At the moment, yes. The bank who’s going to offer the TSU services will be the one that is on the TSU today.
We have a hundred banks today on the TSU community – 41 in Europe, 36 in Asia and the rest is in the U.S. Within Asia, 11 are in China, 10 in Taiwan . . . We’re talking about bank entities, and they have many branches in different locations.
We have encountered a situation where one buyer was with a TSU bank, but some of its suppliers were actually not with a TSU bank. What we will be doing will be to get the [non-TSU] bank to join TSU so they can support the supplier. We have banks that joined us because of customer demand. It’s a growing community.
There would be customers who would be content with the proprietary service of their non-TSU bank because it has branches around the world and agreements with other banks in areas where it does not have a presence.
Let’s put it this way: Open account has been there for the last ten years; TSU only came by three years ago. As I said, some open account transactions are just between buyer and seller because they have already put in place an infrastructure where they can exchange information. But there will be a lot of the mid-cap or even the larger buyers that have very diversified supply chains where they cannot use a single bank model. We’ve seen some of them moving over to TSU.
Is it possible for a buyer to combine the two models, where it will use a bank proprietary platform, and then whatever bank is not on that network, it will use TSU?
Some of the banks have done seamless integration, where the front end system actually captures TSU data, but they don’t call it the TSU service. They brand it as their service. So, you really cannot tell whether its backbone is TSU or not, until you go to the other side where the [other] bank represents the exporter and then you will be able to tell that is a TSU service.
I imagine the proprietary systems of banks are consistent with TSU standards anyway?
Yes, I think the banks have done that integration so they will be ready, depending on the customers’ requirements.
BANK PAYMENT OBLIGATION (BPO)
Tell me more about BPO. A TSU bank that issues a BPO provides an irrevocable undertaking that it will pay another bank an agreed amount so long as a number of conditions are met as evidenced by the electronic matching of data within the TSU. It sounds like an LC to me, except that instead of paper documents, the banks rely on electronic matching of data.
BPO should [bring] cost savings, if you compare that with LCs because of the automation that we provide and the standardisation of data.
Financing is one of the key trade services, whether it’s pre-shipment or post shipment. So the BPO is really used as a tool to facilitate the banks in Asia into offering financing on the back of open account transactions. The adoption of BPO will not only be just by banks, but also traders, buyers and sellers.
LCs follow well-established and accredited guidelines, with dispute resolution procedures around the Uniform Customs and Practice (UCP) published by the International Chamber of Commerce or ICC. Is the BPO regulated by ICC rules as well?
Right now, the BPO is governed by the SWIFT rulebook, which is a TSU rulebook. We want to transfer that to the ICC, so that the ICC can make the best practice and then make it an industry-wide adoption. We just started the process. In September we presented a BPO with the Bank of China as a live case, and now the ICC is evaluating the BPO and how they can adopt it into the ICC rules.
Is it only BPO that is going to the ICC? Are there other financial instruments for open account in addition to BPO?
I’m not sure how many other parties would have approached ICC for the same [open account trading] cases. Open account is such a big arena. There might be other areas that ICC could be considering, but BPO is already under consideration by the ICC today.
Whether you’re a big buyer or a small buyer, you will [encounter] a lot of buyers and they will not be using the same bank [you are using].
Can a company that’s perhaps not comfortable with BPO or open account choose to open an LC, but still use TSU?
Trade is trade. You start with the purchase order, you have to produce an invoice, and then you have to ship or you have to deliver. It’s all the same. It’s just at the end of it, the payment [method] chosen [may be different], whether you have chosen LC as a payment or TT [telegraphic transfer] as payment or BPO as payment. You can use TSU for domestic LC, for open account without a payment obligation – you can still use the matching service. At the end of the day, it’s just the settlement terms. So LC is just the settlement term; the underlying trade is still the same.
So the 20% of world trade that still uses LC can use TSU as well?
They can, yes.
Are they doing so?
Some, I would say, not all. Not many traders will change to a new service; it has to be a financial decision. If you have to wait two to three weeks to receive your shipment, it doesn’t make a lot of difference whether you have to deal with paper documents or not.
Some LCs, if it’s intra-Asia trade, there will be an advantage [to utilise TSU] because of the [short] distance . . . There are some people who actually still issue LC, but use TSU matching to reduce the document processing time. You can use TSU without BPO; you can just facilitate the matching so the data can come in electronically.
You can convert some data into electronic [form] so that they can have the visibility, and thus better manage and plan, but the paper still flows [physically].
You still need the actual physical paper?
You still need the physical paper because some countries like India need the paper. But if you already have the information before the paper arrives, you can better plan and you can arrange a facility to take the goods out. You can do much more than just waiting for the paper. You don’t have to convert the LC, but you can use the TSU as a data matching engine.
LOGISTICS AND CUSTOMS
Is there anything that SWIFT can do to help companies with processing these required paper documents as well?
In Taiwan we collaborate with a company called Trade-Van, which provides Customs [automated clearance] as main service. They also have a logistics section, where the buyer will be able to book the freight forwarder and be able to file the Customs [declaration forms for] the import/export of goods. We basically combine services, so that when the buyer submits the BPO, it’s automatically converted to TSU [data] as well as converted to the Customs’ data. So there’s only a single point of entry for the customer.
Don’t the banks provide these services anyway?
No, because banks are mostly involved in the financial part. Trade-Van is more with the paperwork, like the trade declaration that you have to do, import/export duties and the logistics you have to deal with, or the shipment document and also the certificate of origin. The banks do not produce these, but they use them as information to provide the financing.
These are the people [Trade-Van] who will be involved with the buyer or the seller, because in a trade transaction, we have to have a lot of information to be filed with different departments. Actually it’s a three-way collaboration. It’s a collaboration between Trade-Van, the bank and SWIFT. It’s a combined one-stop service, which covers open accounts, with BPO underlying.
Is the one-stop service available in other markets?
We have a collaboration in Korea with a company called KITA [Korea International Trade Association]; in Hong Kong we have TradeLink; in China as well [with CIECC]. All of them are actually part of the PAA network, which is the Pan Asian e-commerce Alliance. They are owned by [the member companies] and they partner and collaborate on the Customs side.
What we do is we bring them to the financial sector, because they’re normally in the trade sector, so the bank can leverage on the service they [offer] and access and integrate the data they capture that are seamlessly integrated with TSU, so the bank/customer doesn’t have to re-enter the [Customs and trade] data.
And as a member of the PAA network, Trade-Van, say, will be able to send the electronic certificate origin to Korea, for example, so you [as a customer of Trade-Van] don’t have to produce that paper. There are a lot of advantages in the collaboration in trade.
What we’re saying is we will not really reduce all the paper, but at least the data can be sent across to make [processing] more efficient. In a country that is ready to take electronic data [such as Korea], we can capitalise on that.
How about shipments to the US and Europe?
Unfortunately they don’t have a network like [PAA], which is unique in Asia. PAA is implementing a single [trade] window in each country, which they have been doing since 2000, when they were established.
A shipment from Asia to the U.S. might take three weeks [for the goods to physically arrive], so [the unified banking, logistics and Customs-clearance service] really doesn’t matter. But with intra-Asia, where the goods can arrive in a day or two, the processing of the trade [documents] hasn’t really caught up with [the shipping] time. That’s why the trader will have a lot of stock, a lot of money and cash trapped, because the goods are just sitting [in the warehouse] awaiting clearance by Customs.
For that, the bank can help a little bit but not a very big deal. It is the PAA network that can really help them take out the goods much faster through the visibility of when the shipments will arrive, has it boarded, which port has arrived, what data is not yet fulfilled. So it’s combining the physical world and the financial world.