SWIFT presentation for Bank Payemnt Obligation (BPO) for the ICTF Conference (Paris April 2012)

1. Bank Payment Obligation for supply
chain finance
Improve efficiency and mitigate payment delay
and default risk in a multi-bank environment
ICTF conference
Paris, 23 April 2012
supplychain@swift.com

2. Supply Chain Finance
Context and key challenges
SWIFT and your
payments business

3. Key objectives in the financial supply chain
Making trade receivables and liabilities visible
5
How to allocate capital efficiently to
support my production process?
Inventory
Physical Supply Chain
turnover
1 2 How to improve my purchase-to-
How to reduce my pay process, extend my payment
order-to-cash cycle, free 3 terms or get discounts for early
What is my credit risk? payment?
up cash and get credit
as early as needed?
Working
Accounts Accounts
Capital
Receivable Payable
Management
Supplier Buyer
4
Where is my cash and my liabilities?
How to improve my liquidity forecasts?
Treasury
management
Financial Supply Chain
3

4. Current financial supply chain challenges
Payment risk and mitigation tools
Cash in advance Documentary collection
Supply Chain Supply Chain
Supply Chain Supply Chain
Physical
Physical
Order Production Shipment Delivery Order Production Shipment Delivery
Delivery default or
Delivery default or delay risk
delay risk
Financial
Financial
Documentary
Payment Settlement Pay ment
collection
Settlement
Payment (default) or delay risk
Letter of credit Open account
Supply Chain Supply Chain
Supply Chain Supply Chain
Physical
Physical
Order Production Shipment Delivery Order Production Shipment Delivery
Delivery default or delay risk
Financial
Financial
Letter of Payment &
Payment Settlement Open account Settlement
credit
Payment (default) or delay risk Payment default or delay risk
4

5. Trade and Financial supply chain
Market trends and challenges
Increased cost of borrowing
Financing models New partners with various risk profiles
Need faster and efficient access to financing
Working capital Accuracy of liquidity forecasting and planning
optimisation Complex trade and cash reconciliation
Multitude of interfaces and systems
Technology
Little or no automation
evolution
Lack of business process integration
New emerging trade corridors
Trade globalisation
Growing multi-bank relationships
Strong need for efficiency and security at lower cost
5

6. Supply Chain Finance
Bank Payment Obligation
Open account

7. The Bank Payment Obligation (BPO)
A new alternative instrument for trade settlement
A BPO is an irrevocable
undertaking given by one
bank to another bank that
payment will be made on a
specified date after a
successful electronic
matching of data according to
an industry-wide set of rules.
New ICC Uniformed Rules for BPO
Target publication Q1 2013
7

8. Secure and optimise your trade transactions with
Bank Payment Obligation
A legally binding, valid and
irrevocable bank payment
SWIFT matching platform
obligation based on a minimum
implementing BPO using
set of matched transaction data
ISO20022 standards that
and being adopted by the ICC
implements the BPO in a multi-
bank environment
Bank Payment Obligation
Trade Service
Utility
Supplier (TSU)
Bank Bank Buyer
A commercial agreement An agreement between
between buyer and seller, with Business-to-business
buyer and its bank with
potential financing options practices
potential financing options
8

9. Minimum data subset
Order number,
Bank Payment Obligation flows Product name & quantity
Amount, currency, date
Buyer & seller (name, address)
BICs of the banks
Business
Supplier/Exporter Recipient bank Obligor bank Buyer/Importer
Role
BPO
Trade Services
Utility (TSU)
Tchin Wa manufacturer BBBBCNSH PPPPUS33 Big-Mart distributor
1. Contract and Paper documents
Trade
Processing 2. Electronic data matching
services  
Financing 3. Pre-/post shipment finance 4. Payables finance
services
a/c 5. Guaranteed payment a/c
Payment and cash + -
management USD 15,370
CNY 100,000
Fees
Risk commitment fee Risk commitment fee, payment
and service charge fee and service charge
9

10. BPO combines the best of both worlds
Contract Contract Contract
Documents Documents
Buyer Seller Buyer Seller Buyer Seller
Documents
Application
Documents
Letter of Bank Open
Advice
Data
Data
Credit Payment Account
Obligation
Documents
Data
Issuance
LC Issuing LC Advising Obligor Recipient Buyer’s Seller’s
Bank Bank Bank Bank Bank Bank
Payment Payment Payment
Bank services based on paper Bank services based on Bank services limited to
document processing electronic trade data exchange payment processing
Array of risk, financing and processing services to address
both cash management and trade finance needs
10

11. BPO positioning
Better than Letter of Credit Better than Open Account
Electronic presentation of data Better payment risk mitigation
instead of physical documents than Standby L/C
Improve quality and objectivity of Facilitate win-win trade
compliance verification relationships
Quicker process as it focuses Reduced on-boarding and
only on data relevant for financing operational costs
Can be added at any time, for any Enhanced trade transaction
amount value processing and reconciliation
Easier access to financing Can be used as collateral for
services financing
11

12. Supply Chain Finance
Business scenarios

13. Accelerate the settlement and financing
process through trade processing automation
Purchase Shipment Acceptance Settlement
Execute
Trade and Match Match transport Reconcile approved
payment and
payment Purchase (shipping) (e-)invoices with
reconcile
processing Orders information purchase orders
collections
Shorten finance
acceptance time
Authenticated Shipment & certificate Invoice
Due Date
purchase order documents acceptance
(D)
Pre-Shipment Post-Shipment Post-Shipment
Payment
finance finance finance
New opportunity windows to get access to supply chain finance
13

14. Case 1: Seller mitigates the risk of non-payment or payment delay
Buyer commits to pay the seller (no financing)
I need to offer payment
2 assurance to my supplier and
confirm the purchase order I want to be certain
1 that I will be paid
on time
BPO
TSU
Buyer Obligor Bank Recipient Bank Seller
I can offer the guarantee of
I will substitute for the payment to my customer
3 creditworthiness of my customer
and guarantee the payment to
4 based on the BPO issued
by the buyer’s bank
the seller’s bank (BPO) for a fee
Payment guarantee
14

15. Case 2: Buyer mitigates the supplier default risk
Buyer supports pre-shipment finance for the supplier
I want my business-
critical supplier to increase I want to access cost-
2 its financial resilience and
1
effective financing to
cover my working
will confirm the purchase
order capital expenditure
BPO
TSU
Buyer Obligor Bank Recipient Bank Seller
I will guarantee the I will offer pre-
payment (BPO) to the shipment finance to
3 seller’s bank upon the 4 my customer based
confirmed purchase order on the BPO
Payment guarantee
Financing services 15

16. Case 3: Supplier mitigates liquidity risk
Supplier gets post-shipment finance
I want my business-
critical supplier to
2 increase its financial
resilience and will
confirm the transport or I want to be paid as
early as possible
commercial data
1 after the shipment to
the buyer
BPO
TSU
Buyer Obligor Bank Recipient Bank Seller
I will guarantee the payment I will offer earlier payment to
(BPO) to the seller’s bank
3 based on the submission of 4 my customer based on the
BPO issued by the buyer’s
compliant transport or bank
commercial data
Payment guarantee
Financing services 16

17. Case 4: Buyer mitigates its liquidity risk
Buyer gets import finance with extended payment
terms
I accept the goods
I shipped the goods
delivered by my
2 seller but would 1
to the buyer and I
want to be paid on
like to pay at a
time,
later date
BPO
TSU
Buyer Obligor Bank Recipient Bank Seller
I can offer the guarantee of
I will guarantee the payment (BPO) to
payment to my customer
3 the seller’s bank and will offer the
extension of payment terms to my 4 based on the BPO issued by
the buyer’s bank
customer for a fee
Payment guarantee
Financing services 17

18. Supply Chain Finance
Key Benefits

19. BPO benefits
Payment
Assurance
Receivables Streamline
finance Processing
BPO
Payables Risk
finance mitigation
19

20. A multi-bank solution … BPO
Payment
… based on ICC rules &
Assurance
ISO messages …
Receivables Structured data
finance and
BPO e-matching
… and powered by Risk
Payables
SWIFT's Trade
finance mitigation
Services Utility (TSU) &
Correspondent Banking
network 20

21. Key benefits for the seller Receivables
Cash flow optimization
Get payment on time
Payment Optimisation of risk-reward
Assurance transactions
Improve liquidity forecasts
Improve discrepancy management
Easy integration with e-invoices
Receivables Structured data
Reduce processing effort
finance and
Syndicate payment risk
BPO e-matching
Supply Chain
Finance
(optional)
Payables Risk
finance mitigation
Pre-/post shipment finance
Alternative to credit insurance
21
Reduced interest costs

22. Key benefits for the buyer Procurement
Cash flow optimization
Payment Pay key suppliers on time
Assurance Reduce administrative costs
Reduce investigations & disputes
Outsource payables processing
Control payment time execution
Receivables Structured data
finance and
BPO e-matching
Supply Chain
Finance
(optional)
Payables Risk
finance mitigation
Extend payment terms
Negotiate commercial terms
22
Reduce supply default risk

23. BP Chemicals case
BPO to replace confirmed L/Cs
Company profile Key benefits
• 2010 Revenues of USD 14 billion • Get paid on time and avoid judicial proceedings
• Revenue created for approx. 50% in Asia • Reduce complexity – removal of paper trail
• Trade account receivables of EUR 1.4 billion • Limit to relevant trade information only
(consolidated receivables only) • Reduce cost by removing vetting activities and
• More than 600 clients worldwide presentation assistance
• Improve customer offer by allowing for flexible
Challenges options
• About 50% of exposure on secured terms • Improve speed of handling
• Competitive commodities market requires a • Reduce the risk of discrepancies
secure and cheaper alternative to L/Cs • Reduce need for confirmation cost by being able to
• High processing and confirming costs (0,8% tap larger pools. Free up banking lines.
of transaction value) • Easy to exercise tool for liquidity
• LCs process limits commercial possibilities • Easier access to banks to secure transactions
and weakens compliance under certain • Possibility to spread the risk with multiple obligors
conditions
Gains expected greater than $1m worldwide, but most
upside, but most of the upside lies in more marginal income
23

24. Multi-bank export to APAC and EMEA at BP Chemicals
Proof-of-concept (ongoing)
Chemical
fiber Co.
Kuala Lumpur
Buyers of BP Petrochemicals
Exporters
Textile &
Garnement HK
Co.
BPO
TSU London
Industrial
Zhuhai
fiber Co.
Polyester Belgium
fiber Co. BPO Obligor BPO Recipient Belgium
Bank branches Banks
24

25. Vale case
BPO based on confirmed invoice
Company profile Key benefits
• 2010 Revenues of USD 46.8 billion • Reduce the DSO by approx.10 days (including
• Main product Iron ore (69,9%) internal processes efficiency gains) with a financial
gain over USD 37 million / year.
• Approximately 100 clients worldwide
(Iron Ore) • Freeing up Working Capital – USD 600 million.
• Reduce costs for customers.
• Main market is China (32%)
• Reduce document delivery costs.
Challenges • Reduce the risk of discrepancies
• Improve access to Trade Financing products to our
• Competitive commodities market requires a customers.
secure and cheaper alternative to L/Cs
• Reduced environmental impact - reducing paper
• L/Cs at sight for USD 18 billion with China usage in extra copies of the shipping documents
clients for the banks
• DSO (Days Sales Outstanding) is between
25 and 30 days
Significant process efficiency gains and
working capital gains
Supply Chain Finance for Corporates – Webinar – 7 December 2011 25

26. Multi-bank export to China at Vale
Proof-of-concept (ongoing)
Steel
Manufacturer 1
Buyers of Vale
Exporter
Steel
Manufacturer 2
BPO
Steel BPO Recipient
Manufacturer 3 Banks
Steel BPO Obligor
Manufacturer 4 Bank branches
Supply Chain Finance for Corporates – Webinar – 7 December 2011 26

27. Supply Chain Finance
Detailed features

28. The baseline gathers the matching conditions
using data extracted from trade documents
Purchase order
Allows payment risk
syndication among different Mandatory
obligor banks
Baseline Optional
Matching
conditions
Commercial Transport Insurance Certificates
data set data set data set data set
Air Waybill (AWB), bill Insurance Certificate
Invoice of lading (BOL),… document document
28

29. BPO offers flexible payment terms and allows early
information gathering on settlement details
Case 1: Mitigate delivery default risk and offer extend payment terms to the buyer When ?
Open account
Supply Chain Supply Chain
Payment vs. delivery
Physical
Purchase Production Shipment Delivery
Order • On delivery date (D)
• At the end of the month of delivery (D+30)
BOL Invoice
PO • At the end of a period after delivery (D+P)
Financial
Data • At the end of a month after period of
BPO D+0, +30 or +P Payment
match or
delivery (D+P+30)
+P+30 days
Case 2: Mitigate payment default risk and offer post-shipment finance to the seller When?
Letter of credit
Supply Chain Supply Chain
Payment vs. invoice
Physical
Purchase Delivery
Production Shipment • On receipt of invoice (I)
Order
• At the end of the month of invoice (I+30)
PO BOL Invoice
• At the end of a period after invoice receipt (I+P)
Financial
Data match I+0, +30 or +P • At the end of a month after period of
BPO Payment
or received invoice (I+P+30)
+P+30 days
Case 3: Mitigate payment default risk and offer pre-shipment finance to the seller When?
Cash in advance
Supply Chain Supply Chain
Physical
Purchase Production Shipment Delivery
Order Payment vs. “presentation” (matching)
PO BOL Invoice • After match or mismatch acceptance (M)
M+0
Financial
BPO Data Payment
match
29

30. BPO includes details of charges as per international
standard trade terms - INCOTERMS
Allows partial shipment
Option 1: Specification of the shipment costs
Supply Chain Supply Chain
Shipment terms
Physical
Purchase Production Shipment Delivery
Order • Costs and freight
• Cost insurance and freight
BOL Invoice
PO • Carriage paid
Financial
BPO Data Payment • Carriage and insurance paid
D+0, +30 or +P
match or
+P+30 days
Option 1: Specification of the delivery costs
Physical Supply
Delivery terms
Chain
Purchase • Delivered at frontier
Production Shipment Delivery
Order
• Delivered duty paid
BOL Invoice • Delivered duty unpaid
PO
Supply Chain
• Delivered ex quasy
Financial
Data
BPO D+0, +30 or +P Payment • Delivered ex ship
match or
+P+30 days • Exworks
• Free alongside ship
• Free carrier
• Free on board
30

31. Supply Chain Finance
Risk mitigation
32

32. Current challenges on documentary credit
Long, costly and cumbersome process
Re-route ships … or risk …..or storage at
Longer inventory Delayed Delayed
in case of due to a port of
cycles or… production delivery
refusal waiver destination
Physical Supply
Chain
Purchase
Production Shipment Delivery
Order
PO BOL Invoice
Financial Supply
Chain
L/C issuance and
L/C issuance and Documents presentation and
Documents presentation and Payment
Payment
acceptance
acceptance compliance verification
compliance verification
Need to request Payment delay even when “at Customer cannot free
L/C earlier sight” or on delivery its credit limits
Trade Post-Trade Pre-settlement Settlement
T T+1 T+10 S > T+20
33

33. BPO addresses the challenges of documentary credits
Measuring process efficiency
Sales Cycle 8
1 Reduce opening time
2 Increase inventory turnover cycle (DIO)
Physical Supply
2 3 4
Chain
Purchase Production Shipment Delivery 3 Reduce the production lead time (DIO)
Order
4 Reduce shipment delivery delays
Pre-
BOL matching
PO Reduce the number of amendments not
&
Invoice 5 related to financial liability
BPO Data match Payment
Financial Supply
Chain
6 Reduce payment delays when at sight (DSO)
1 5 6
7 Reduce risk coverage needs
Shorten sales cycle – increased window
8
Risk coverage of opportunity to sell
7
34

34. BPO compared to other trade finance tools
Mitigate risk
Open SBLC/
Risk
Risk description L/C BPO Notes
Account Insurance
Weak credit rating of the importer Substitute by bank's credit worthiness
Financial
Temporary liquidity shortage of the exporter Finance production and shipment or forfaiting
Bank financial risk Change bank (L/C) or split the risk (BPO)
Payment default Shorter for BPO than others
Commercial
Unpredictable cash-in flows to payment delay Shorter for BPO; impact on discounting for L/Cs at sight
Refuse to honor payment Usually irrevocable for L/C, always irrevocable for BPO
False or falsified information (do not match Validate authenticity “on their face” (L/C) or
goods) electronically (BPO) - Link BPO to the carriers for fraud
Economic Transport
Early or late shipment Specify last shipment date
Loss, theft, deterioration Mitigate through additional insurances
Fluctuations in currency, interest, inflation
Can predict cash flows in FX risk hedging
rates
Insurrections, terrorism war Syndicate the risk to other countries
Political
Sanctions , force majeure Mitigate through additional insurances
35

35. Example
Securing your trade transactions
A representative decision making process
Credit, commercial and country risk Commitment to pay
assessment
Yes Select a confirming
bank to substitute its Confirmed letter Confirmed
credit worthiness for of credit or
BPO
Yes Is the buyer’s that of the buyer’s bank
bank
creditworthiness
Select the buyer’s bank
Is the buyer’s weak?
to substitute its credit Advised letter or
creditworthiness worthiness for that of of credit BPO
weak? No
the buyer
Is there a risk of Yes Standby letter
payment delay? Are the profit Select a bank or of credit or
margins at risk? company insurance insurance on or BPO
Open Account
No
Are the Documentary
Do not secure the
revenues at collection or or TSU Payment
No transaction
risk? Open Account
36

36. BPO addresses financial supply chain challenges
Payment risk mitigation
When to use BPO? When to use BPO?
• New or less established • Unsecure relationship or market
relationships • High exposure to risk (market
• Good credit worthiness of price volatility, solvency risk ,…)
buyer’s bank Letter of credit Open account • High costs of risk mitigation
• High probability of payment measures
delays due to discrepancies
Supply Chain Supply Chain
Supply Chain Supply Chain
Physical
Physical
Order Production Shipment Delivery Order Production Shipment Delivery
Delivery default or delay risk
T+0, +30 or +90 days
Financial
Financial
Letter of Payment &
T+0, +30 or +90 days Payment Settlement Open account Settlement
credit
Payment (default) or delay risk Payment default or delay risk
Long, costly and cumbersome discrepancies management Political, economic or commercial risks
Risk of delayed payment due to the L/C processing Risk default or delay in payment obligation after
(documentary credit ) shipment of goods
Optimise the processing time and costs while BP Secure the transaction while maintaining a
securing the transaction competitive offer
 Gain certainty of the timing of the cash flows and improve  With no need for export working capital financing (loan
liquidity forecasts or revolving credit lines) or credit insurance or standby
 Use BPO for pre-/post-shipment finance, as for L/Cs letters of credit
 Syndicate the risk for very large value transactions  Ability to offer extended payment terms as an
 Ability to offer commercial incentives reflecting the processing alternative to factoring and forfaiting
costs savings  Improved transaction tracking (ease integration of
 Ability to reduce supply default risk for importers payment and trade processing )
 Establish and maintain successful trade relationship 37

37. BPO offers the best cost vs. risk performance
Processing efficiency/cost
Low Processing efficiency/cost
Open Account
- Less paper work and training than L/C
Bank Payment or insurance on Open Account
Obligation - Need workflow management compared
(service fees)
to SBLC or demand guarantee
SBLC, demand
guarantee
Risk mitigation security
Insurance - Similar to L/C (liquidity nature of the
on Open Account underlying assets)
Letter of - Banks do not transmit the paper
Credit document (bill of lading)
- Better payment delay risk mitigation
than insurance on open account
High
Low High
Risk mitigation security
(payment delay and default risk)
38

38. Supply Chain Finance
Integration aspects
39

39. 21 structured
standards (tsmt)
Industry standards for supply chain finance
Electronic matching
BPO
standards
Industry
Trade transaction
21 messages matching scheme 21 messages
(tsmt) based on tsmt (tsmt)
messages
1 2 3
Commercial
Any channel / Buyer’s Any Open Seller’s Any channel / Seller
Buyer bank(s) bank(s)
solutions
any format / Transaction any format /
any solution Matching platform any solution
Trade Services
Utility (TSU)
Standard exchange and matching of
richer electronic structured data
40

40. Integration options based on volumes and bank
relationships
Purchase Order data Transport, invoice, … data
BPO
Buyer Buyer’s bank Seller's bank Seller
1. Bank-specific Trade Portals
Bank Trade a. Manual access to bank-owned
portal back-end
Trade portal over Internet – 1 portal
Internet per bank
Bank b. ERP integration with bank-owned
Trade portal for large volumes
ERP
2. Vendor Multi-bank Trade solutions
a. Manual access to vendor multi-bank
Multi-bank Bank Trade Trade solution (local application or
Portal front-end back-end
hosted portal)
b. ERP integration with vendor-owned
Vendor Bank multi-bank Trade portal (local or
hosted)
ERP
41
41

41. Supply Chain Finance
Next steps and conclusion
Are my banks
ready now?
What is my
business
case?

42. Key roles and responsibilities for BPO
• Buyers and Sellers
– Provide the merchandise details (description, quantities, unit price, ...)
– Agree on the amount of the payment obligation
– Define the payment terms: on receipt of the invoice, on delivery or extended
– Agree on the expiry date
– Agree on the financing terms and conditions
– Agree on who bears the financing charges
– Agree on the shipping terms and latest shipment date
• Obligor bank(s)
– Propose the bank to advise the obligation, with agreement of the seller
– Propose the bank to confirm the obligation (if any) with agreement of seller
– Verify apparent authenticity and deliver to recipient bank, upon successful matching
43

43. 33 banks adopting BPO (update as at 4 April 2012)
Including 12 from the top20 Trade banks
44

44. 33 banking groups adopting BPO
by primary regional location (update as at 27 April 2012)
AM EMEA AP
• Banco do Brasil • Barclays • ANZ
• Banco Itaú BBA • BNP Paribas • Bangkok Bank
• Bank of America • Byblos Bank • Bank of China
• BMO Capital Markets • Commercial Bank of Dubai • Bank of Communications
• BNY Mellon • Commerzbank • BTMU
• Citi • Deutsche Bank • China Citic Bank
• JP Morgan • First National Bank of S. Africa • China Minsheng Bank
• HSBC • Hua Nan Bank
• National Bank of Greece • Kasikornbank
• Qatar National Bank • Korea Exchange Bank
• Standard Bank of South Africa • Siam Commercial Bank
• The Royal Bank of Scotland • Standard Chartered Bank
• UBS • SMBC
45

45. Key considerations for your business case
Working capital optimisation (CCC) Quality and compliance
Get paid quicker (from 10 to 5 days), Improved business relationships
Extended payment terms Better credit rating and credit risk management
Better cash allocation to inventory and Lower rate of litigations
transportation
Reduction of loans and interests,
Better financing terms Adjacent
benefits
Financial Business
benefits case
Trade transaction processing
Operational
benefits
Lower on-boarding costs
Costs Improved cash management
Lower auditing, collection, accounting effort
Lower rate of investigation
46

46. Summarizing BPO value for Corporates
Process efficiency Payment timeliness Business growth
Standards & rulebook ICC adoption Multi-bank access
47

47. Q&A
?
48

48. Thank you
Generic e-mail: supplychain@swift.com
Join our LinkedIn group Supply Chain on SWIFT
49