Clearing the path to BPO adoption for international trade finance banks

Maria Malinowska is director of financial institutions at Bolero International

The release in 2013 of Universal Rules for Bank Payment Obligation by the International Chamber of Commerce effectively endorsed and formalised the structure for international trade finance processes. Despite this, the volume of completed BPO transactions remains low, writes Maria Malinowska

One potential reason is that a number of banks have become accustomed to working with shipping documents over many years and embedded them into their internal processes. As a result, they are often uncomfortable relinquishing all sight of the shipping documents associated with global trade transactions.

Banks are also challenged by the time and investment required to implement a Bank Payment Obligation solution, the success of which is dependent on all the counterparties in a BPO transaction working in advance to establish a baseline against which shipment data is presented. When a dataset is presented and a match is confirmed, this electronically triggers the necessary controls to make payment over the Swift network.

The primary purpose of BPO is to exchange trade document information between buyers, sellers, banks, carriers and other counterparties from purchase order to payment. Therefore, the time invested typically results in the process either being used for large one-off transactions or as a way to carry out repeat transactions between existing trade partners – rather than as a more widely-encompassing format for trade.

Adapting to electronic processes

A core business for many banks, trade and supply chain finance services are designed and intended to support clients in controlling operations, managing import and export transactions and improving the processes which support client growth and business development. Linked to this, for many banks, the attraction of BPO lies in the potential to streamline trade and supply chain processes with advanced technology, enhancing regulatory compliance and opening up the opportunity to finance the transaction.

The fact that BPO uses a globally-recognised secure bank-to-bank infrastructure platform is an advantage, especially in terms of volume trade and the potential for integration with solutions for payments, FX and cash management. As well as increasing integration of their own processes, this also gives banks a viable means of providing an end-to-end service for clients and in principle, is attractive in reducing the amount of time, resource and cost dedicated to each transaction.

Since the global financial crisis however, trust between the banks has been significantly eroded. This presents a further challenge of the technology in that, even when the rules and structured format required to carry out BPO are agreed in advance and the data matching takes place, some organisations are more confident when the documents come through. This is also linked to the fact that documents are still deeply ingrained within corporate and banking processes as active instruments in the process of trade.

In order to cope with electronic documents, banks’ existing infrastructure and internal processes need to be realigned and reassessed, which must be documented and approved by internal stakeholders such as the legal department, operations, accounting, tax, treasury, financial management etc.

This is necessary both to provide certainty in trade flows within the bank, as well as satisfying regulatory requirements. However, it is also the reason why many organisations are still piloting BPO only for select transactions and in some cases, is deterring them from pursuing the process in the first place.

Future potential

In future, closer collaboration between the banks and trade finance solutions providers could create a clearer process, speeding up what continue to be growing volumes of electronic transactions. This may include, for example, integrating electronic document presentation (ePresentation) into the process, including an electronic bill of lading solution.

Rather than being limited to bank-to-bank transactions, ePresentation supports corporate-to-bank connectivity and control of trade documents. By integrating BPO messaging flows via the bank-to-bank matching systems (such as Swift’s Trade Service Utility) as a component to the ePresentation  process, banks can create a single integrated processing flow of trade documents for all parties, with maximum and secure reuse of data. This would also ensure the release of documents to the buyer is still tied into the trade transaction.

In turn, the fact that the flow of documents can be followed gives confidence in the integrity of the trade documents and creates a single, integrated process from corporates to banks and vice versa.

In creating what is effectively a single electronic document managing and matching engine for banks, corporates and carriers, banks stand to gain from a compelling proposition that can significantly simplify integration into the bank’s trade management process.

By matching the content of the original document against each subsequent document presentation, they can guarantee and validate document originality and integrity at each stage of the process, enhancing system security and regulatory compliance considerations with a fully auditable trail.

As e-Presentation continues to gain momentum globally, adopting this capability enables banks to engage in existing transaction flows as the demand for automated BPO services evolves.