BANK PAYMENT OBLIGATION: FINANCIAL INSTRUMENTS TO MANAGE RISK IN THE OPEN ACCOUNT TRADE

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1 BANK PAYMENT OBLIGATION: FINANCIAL INSTRUMENTS TO MANAGE RISK IN THE OPEN ACCOUNT TRADE J.P. Morgan Michael Quinn, Managing Director, Global Trade Product Management Executive Qatar National Bank Imre Gorzsas, Assistant General Manager, Transaction Banking Moderator: IFC Bilge Ozisik, Global Head, Trade Operations

2 Trade business evolution Cross-border trade has more than tripled since the 1980 s Trade is expected to grow by on average 8.7% a year until 2020 Revenue pools are expected to grow by 80% New trade partners: intra-region and South-to- South corridors (Asia to Latam, Africa) Source: BCG workshop with SWIFT, June 2012 Year on year increase in payment volumes (albeit global macro economic conditions) Trade volumes have remained low or flat over the years +80% trade are on Open Account transactions How can banks take advantage of the trade growth opportunity?

3 Bank Payment Obligation (BPO) Alternative instrument for trade settlement A BPO is an irrevocable undertaking given by a bank to another bank that payment will be made on a specified date after successful electronic matching of data according to an industry-wide set of rules. Therefore, a BPO offers:» An assurance of payment» Risk mitigation for all parties» Possible use as collateral for finance An alternative instrument for trade settlement

4 BPO flows for data, documents and goods Use minimum fields Delivery of goods Carriers 1 Purchase order 4 Shipment Documents sent directly to the client 8 Invoice and shipping documents Buyer 2 Request BPO based on PO Trade Matching Application (TMA) 3 Confirm BPO Seller Transport and invoice data (match report) 6 BPO Obligor Bank Established BPO is due TSU baseline engine BPO Recipient Bank 5 Transport and invoice data 9 Transfer funds at maturity 7 Confirm payment is due on agreed date 4

5 Bank Payment Obligation (BPO) - SWOT Analysis STRENGTHS Electronic presentation of data efficiency, paperless office; Objective immediate matching reduced discrepancy, consistency; Can be added to the supply chain process at any time and any amount; Focuses only on data relevant to support value proposition; Better payment risk mitigation Irrevocable and unconditional after the TSU data matching process performance risk excluded, set-off risk excluded; Enhances trade transaction processing and reconciliation; Creates transaction status visibility; Standardized BPO rulebook, ISO messages; New ICC publication is expected from early 2013; Legal obligation;

6 Bank Payment Obligation (BPO) - SWOT Analysis WEAKNESSES New solution on the market, material marketing effort is needed to increase transaction volume and BPO acceptance; Limited transaction history track record; ICC publication is expected only in 2013; Requires new infrastructure in the banks (TSU + front end); Only few trade platforms handle TSU transactions for the time being (e.g. Misys Trade Portal); No title documents in hand; Full STP requires integration and process change on the customer side as well; Transactional approach, does not deal with portfolio

7 Bank Payment Obligation (BPO) - SWOT Analysis THREATS Some existing bank revenues might be cannibalised (e.g. doc. negotiation revenues and courier charges); Document oriented business culture both on the customer and on the bank side; Potential legal concerns in certain countries electronic data only, no documents; Various alternative solutions for commercial risk mitigation in the open account space e.g. ECA and private credit insurance with portfolio approach, CDS

8 Bank Payment Obligation (BPO) - SWOT Analysis OPPORTUNITIES Creates new business opportunities for banks by converting open account trade to BPO; Increase efficiency on both the customer and on the bank sides; Potential settlement tool for B2B and B2C web portals; It can automate escrow account services; Can be adopted by MDBs and ECAs; ISO standard (same standard as proposed PSD in the EU and SWIFT); Scope to simplify the Trade Risk participation via electronic participation certificates, disclosure; Reduces Cash Conversion Cycle - WC optimisation, faster trade settlement processing (CCC= DSO+DIO-DPO );

9 Case Study for BPO Improve processing efficiency with BPO Company profile 2010 Revenues of USD 14 billion Revenue created for approx. 50% in Asia Trade account receivables of EUR 1.4 billion (consolidated receivables only) More than 600 clients worldwide Challenges About 50% of exposure on secured terms Competitive commodities market requires a secure and cheaper alternative to L/Cs High processing and confirming costs (0,8% of transaction value) LCs process limits commercial possibilities and weakens compliance under certain conditions Key benefits Get paid on time and avoid judicial proceedings Reduce complexity removal of paper trail Limit to relevant trade information only Reduce cost by removing vetting activities and presentation assistance Improve customer offer by allowing for flexible options Improve speed of handling discrepancies Reduce the risk of discrepancies Reduce need for confirmation cost by being able to tap larger pools. Free up banking lines. Easy to exercise tool for liquidity Easier access to banks to secure transactions Possibility to spread the risk with multiple obligors Avoid unnecessary paper flows Gains expected greater than $1m worldwide per year but most of the upside lies in more marginal income

10 Current status of the BPO Bank Payment Obligation is available today within the SWIFT Trade services Utility (TSU) and its Rule Book The ICC has created a Drafting Group to create Uniform Rules for Bank Payment Obligation (URBPO) Provide globally recognized rules similar to UCP 600 Make the BPO technology independently available through any provider/servicer who provides a Transaction Matching Application First draft published June 1; targeting approval Q2 13

11 40 banks adopting BPO

12 Why shall banks consider BPO? To benefit from new sources of revenue in a declining business To stay in the game and respond to market demand and trends To be more competitive and innovative

13

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