The Bank Payment Obligation (BPO) is often heralded as a predecessor to many common trade finance instruments, but is there still a chance to resurrect in by way of facilitating trade? Herbert Broens thinks so. We spoke to him about the role of BPO in trade finance today.
Credit Risk Management and Trade Finance
Today most trade finance experts know something about BPO but about the role of TSU is seldom something to hear. This is a pity for me as I have not seen all the years any document that there was a requirement from the market to bring such a bank instrument in trade finance. From the product, everybody was happy with the letter of credits. They have an experience of at least 500 years with millions of transactions. And they are in their handling and structure economically and legally well accepted all over the world.
The letter of credit does not need a central unit like SWIFT. And the even bigger advantage of the letter of credit is that it includes normally a legal transaction umbrella from the buyer to the seller or debtor. In contrast if a firm want to use the BPO it needed three legal contracts to reach the same effect (First contract between buyer and opening bank, second contract the BPO contract between both banks and third a contract between confirming and/ or advising bank and seller).
It does not help us today when we would discuss, what had 2010 to be different to bring the letter of credit into an electronic form. But it should be clear that the BPO in its actual form does not meet perfectly the market needs of the international acting production, selling and service firms. The market needs one electronic solution for trade finance from the seller to the buyer as the paper letter of credit is to slow and expensive. There are two ways how we can reach it – either by changing the BPO or adapting the paper letter of credit.
Adapting the letter of credit was in the past not easy or perhaps not possible. For example, the internet was never seen as a general save transport medium. Therefor for international transactions the legal side was so complex and often even unclear that a use in trade finance with it’s high money amounts was too risky. The situation might change if a new blockchain technology for the internet is accepted as safe as the manual transport of a paper document. If blockchain is in addition cheap, letters of credit can be used in a decentralized form electronically and the whole international finance community will use it gladly. But this is not hundred percent certain today. As a consequence, we should evaluate the BPO:
As the letter of credit is for the real world of production and service the legal BPO framework cannot be any more limited to banks. Insurer, potential lender and other parties must have a right to legally handle under the BPO rules. This has to be changed by the ICC. I am not sure, what is there position as the BPO is still very new, but without this adaptation the “BPO” has no future from my viewpoint. In this context it seems to be necessary not only for marketing reasons to change the word bank in BPO to a word, which enables other participants to step in. From my viewpoint we can use the word credit from letter of credit. Electronically we do not have letter. But the word payment obligation from BPO are right. This leads to “Credit payment obligation (CPO)”.
SWIFT should open the TSU matching tool to other firms as they have opened the payment information to corporates. Other providers should be allowed to offer legally a kind of TSU matching as well. The electronic payment industry shows actual that this will fast lead to various improvements in favor of the customer with all kinds of adds-on solutions. And this is necessary as the participant of the trade finance community have many different needs. The producers want many data of the logistic process included. Pharma firms different one than automotive companies. And so on. These data are of interest for the seller but as well for the money lender, as the bank can evaluate with better data the credit risk deeper. – I will not forget that SWIFT has a very good reputation that it will fulfill its obligation. If there are other providers as well, the users have a perhaps a bigger fulfillment-risk. Such a risk is common in the whole economy and therefore can be accepted. – If a participant wants to be safe, he can use SWIFT.
There are fintech firms since some years working to bring a true electronic letter of credit. Each has still one or more of the named disadvantages against the paper letter of credit. But the gaps are each year less. On the other hand, if SWIFT and ICC will soon adapt the BPO to a true electronic letter of credit in form of a CPO or something else, this instrument will have all the advantages I wrote 2010 about and more.