F rom its launch in 2007, uptake of the BPO was initiallyslow. Over the past year or so, adoption has increaseddramatically, with several ‘first’ transactions in Europe

and Asia, many of which were driven by UniCredit. The BPOoffers many advantages, but as yet, there remains a lack ofeducation of the instrument and its value. Voted the most

important recent innovation in trade by respondents to a surveyat SIBOS 2014, it is a tool with the potential to bringunprecedented levels of risk mitigation and automation in tradetransactions, whilst opening the door to a range of financingoptions and improving balance-sheet fundamentals such as dayspayable outstanding (DPO) and days sales outstanding (DSO).

by Thomas Dusch, Head of Trade Finance International Sales Germany, UniCredit

Making theCase for BPOs

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insight

Importance of the BankPayment Obligation

The Bank Payment Obligation (BPO) is anirrevocable undertaking given by a bankto another bank that payment will bemade on a specified date after successfulelectronic matching of data according toan industry-wide set of InternationalChamber of Commerce (ICC) rules. Thedigital method uses a TransactionMatching Application (TMA), such asSWIFT’s Trade Services Utility (TSU), tosend order details electronically, using thestandardised ISO 20022 format.The BPO represents a major innovation

in the settlement of trade transactions.Currently, the two most popularsettlement methods are letters of credit(LCs) and open account transactions.While these both have their benefits anduses, they are not ideal for all potentialsettlement scenarios. Letters of credit usebanks to mediate between tradecounterparties, making them an essentialtool for financing and managing risk. Yetthe documentation involved iscumbersome, taking on average 21 days tocomplete, and longer if there are errors oromissions in the documentation.Settling via open account is far quicker,

as transactions are conducted directlybetween counterparties without the needfor an onerous documentation process.However, it also leaves creditors vulnerableto counterparty default, an uncomfortablecompromise given this method currentlyaccounts for more than 80% of theworld’s foreign trade.The BPO is designed to incorporate the

strengths of these two methods whilsteliminating the drawbacks, thereforecombining fast, automated digitalprocesses with the risk protection offeredby bank mediation. Corporations have theopportunity to structure transactions inorder to improve DPO and DSO, whilebringing risks under control – all at aspeed more suited to today’s fast-paceddigital economy.

Market evolution

Uptake of the BPO has been slow so far,but we have recently seen a number ofpromising developments as companiesrecognise that they can achieve fastertransactions without losing the riskmanagement benefits of LCs. October

2014 saw a landmark deal, when Rühr-und Verfahrenstechnik (RVT), a Germanexporter, and its Japanese partner, Mitsui& Co. Plant Systems, moved away fromopen account settlement in favour of theBPO – a landmark deal for the Japanesemarket.Meanwhile, one of UniCredit’s clients,

ZF Friedrichshafen (ZF), chose to move tothe BPO in part because it was requestedby a counterparty. This is an illustration ofhow BPO is becoming a critical element ingaining traction in the emerging marketswhere demand for efficient settlementmethods with strong risk mitigation ishigh. ZF’s case also demonstrates thefinancing benefits of the BPO and howthis can affect client relationships. Thecompany was having some difficulty withits counterparty over payment terms, withthe client requiring extra time to cover itssix-month production cycle. By using theBPO, however, UniCredit was able torefinance the client for this period,enabling both parties to satisfy theirpayment requirements. Such was thesuccess of this solution that ZF has sincereceived greater volumes of business fromthe client.This year also saw the first BPO to take

place in Italy, between the Arona-basedproducer of industrial cooling systems,SPIG S.p.A. and a German supplier.

Barriers to adoption

While these companies are all earlyadopters, and there is still a way to gobefore BPOs become mainstream, demandis growing as market awareness increases.Indeed, the key barrier to BPO uptake atthe moment is a lack of awareness andunderstanding. Many treasurers have yetto fully explore the BPO as a settlementoption, so they are unaware of how theBPO can be implemented and whatbenefits it will bring. What’s more, lack ofawareness can easily lead to perceivedproblems that may not exist in reality. Forexample, a frequent concern expressed bytreasurers is that implementing BPOprocesses will require significanttechnological upheaval that could disruptexisting workflows. ZF, for example, has ahighly standardised workflow, andtherefore was particularly keen tominimise any disruption. Rather thancreating workflow obstacles, BPO helpedthe company to streamline and accelerate

its processes, and its example stands astestament to the ease with which BPOscan be implemented. UniCredit was closelyinvolved with ZF, with close co-ordinationacross financing, sales and procurementdepartments, to ensure that anychallenges associated with the BPOimplementation were kept to a minimum.

Future potential

The BPO is one of the most innovative andvalue-added solutions for financing andfacilitating trade that has emerged formany years, and the more informationthat treasurers have about the instrument,its implementation and benefits, the morequickly that adoption will grow. Thiseduction process needs to extend not onlyto treasury, but also into otherdepartments that have a role in trade andtrade finance, such as procurement andsales, which often involves teams at botha central and subsidiary level. Banks havea major role to play in this educationprocess: in particular, they must work withclients to show how BPOs could beintegrated into their workflow withminimal disruption, and leverage theknowledge they have of clients’ businessto demonstrate the value. With proactiveefforts amongst banks such as UniCredit,we expect significant growth over thenext few years, marking a significant shiftin the way that the risk and settlementassociated with trade transactions aremanaged. �

The BPO is

one of the

most

innovative

and value-

added

solutions for

financing

and

facilitating

trade that has

emerged for

many years.

Thomas DuschHead of Trade FinanceInternational SalesGermany, UniCredit

Thomas Dusch was appointedHead of Trade FinanceInternational Sales Germanyin July 2014 to build thenewly created InternationalTrade Finance Sales teamcovering the CIB Multinational Corporates clients inGermany. His responsibilities include the management anddevelopment of TFIS business. From 2010-2014 he wasHead of US Corporates at UniCredit in New York, USA.

Thomas earned a degree in Business Administrationand Management from Ludwig-Maximilians-Universitätin Munich.

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