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Agenda
2
• Urs Kern, SWIFT: An update on the Bank Payment Obligation
• David Hennah, Misys: Technology Innovations in Trade and Supply Chain Finance
• Ravichander Varadarajan, ING Vysya Bank: A Perspective on India and Cross Border Supply Chain Finance
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Evolution of international trade – risk mitigation and financing
First UCP
LCs loosing share in world trade
Trade finance instruments based on open account payment are increasing. First supplier finance products
Bank Payment Obligation
1933
Since about1960
Since about1990
2013
90 years
Innovation in SCF – The BPO; 13th March 2014, Istanbul
Bank Payment Obligation (BPO)
What is BPO? The Bank Payment Obligation is a new payment term based on data
matching which can be used for risk mitigation and financing!
Irrevocable
concrete & conditional
What are the general criteria
of a BPO?
„A Bank Payment Obligation (BPO) is an irrevocable and independent undertaking of an Obligor Bank to pay or to incur a deferred payment obligation and pay at maturity a specified amount to a Recipient Bank in accordance with the conditions specified in an established baseline.“
(Extract from the URBPO)
What is new?For the first time an open account payment obligation can be confirmed by
banks in order to get financed. The ICC supports the market launch with the
release of unified rules (URBPO).
Innovation in SCF – The BPO; 13th March 2014, Istanbul
Payment risk mitigation instrument
Communication Channel
Communication standard
Three components for electronic matching of commercial trade data
ISO 20022 TSMT(Trade Service Management)
Between Banks:
TMA (Trade Matching Application)
BPO
(Bank Payment Obligation)
Between customer and banks:
Bilaterally to be agreed(Portal/SWIFT Score/Paper)
Innovation in SCF – The BPO; 13th March 2014, Istanbul
The BPO based on electronic data matching
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Matching of contract data
Transfer of funds
Matching of data
Buyer Seller
1) Sign contract (PO)
2) PO data 3) SO data
4) Match PO/SO data & confirm
6) Match requested datasets & confirm
5) Datasets
8) Transfer funds
7) Debit buyer 9) Pay sellerFIN
TMA=Transaction Matching Application, PO= Purchase Order; SO= Sales Order
TMA
Bank A Bank B
Buyer Seller
Bank A Bank B
TMA
Buyer Seller
Bank A Bank B
BPO is established
BPO is due
Trade is settled
5) Datasets
Innovation in SCF – The BPO; 13th March 2014, Istanbul
BPO as compared to Letters of Credit and Open Account
BPO enhances the LC process while addressing Open Account challenges
• Electronic presentation of data instead of physical documents - Improve quality and objectivity of compliance verification
• Quicker process as it focuses only on data relevant for financing
• Can be added at any time, for any amount value
• Sellers gain certainty of the timing of cash flow and can improve liquidity forecasts
• Sellers may use BPO to get pre-/post-shipment finance through their own bank
• Sellers can offer commercial incentives
• Buyers are able to reduce supply default risk
Compared to Letters of Credit… ….Compared to Open Account• Sellers get pre-/post-shipment financing to
support working capital needs – no need for loans or revolving credit lines
• Sellers can negotiate earlier payment terms as Buyers have better access to financing using BPO
• Buyers can extend payment terms from their own banks
• Improve transaction tracking and payment reconciliation
• Establish and maintain successful win-win trade relationships
• Reduce on-boarding and operational costs
Innovation in SCF – The BPO; 13th March 2014, Istanbul
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• Limited buyer-seller relationships • Target “wealthy” and risk-free corporates • Based on proprietary formats and channels• Business relationship with Trade Service Provider
Summary: Supply Chain Finance for corporatesOpen 4-corner vs. closed 3-corner business model
• Large and growing trade players worldwide • Any corporate irrespective of their risk profile • Requires open and interoperable standards • Business relationship stays with the banks
BPO
Buyer/Importer
Seller/Exporter
Exporter’s bank
Importer’s bank
Risk, financing & processing services
Risk, financing & processingservices
Routing and Settlement
Routing and Settlement
Production(Market)
Distribution(Client)
Business relationship & liability
+a/c
+a/c
Processing platform
Contract TMA
Processing platform
Business relationship & liability
Buyer/Importer
Seller/Exporter
Service Provider
Risk & processing services
Financingservices Routing and
Settlement
Production(Market)
Distribution(Client)
+a/c
Processing platform
Contract
+a/c
9
BPO adoption grows steadily
Counter Count
Banking groups adopting BPO 55
Banking groups live on BPO 7
Corporates live on BPO 22
Banking groups ready for live use of BPO 17
Banking groups reachable on TSU 83
BIC8s reachable on TSU 146
BIC8s and BIC11s reachable on TSU 225
Countries reachable on TSU 45
BPO certified applications 5 for Banks4 for Corporates
BPO certified consultants 2
Innovation in SCF – The BPO; 13th March 2014, Istanbul
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Live BPO banksBanks with live transactions + 1 corporate case study
Live Banks Region Intra / Inter-bank transations
Locations of live corporate supply chains
Corporate case study
Bank of China APAC Intra in ChinaInter
CN Ito Yokado’s Chinese suppliers
Bank of Tokyo Mitsubishi UFJ
APAC IntraInter
CN, HK, JP, SG, TH, TW
Ito YokadoMitsubishi-Shindoh Co.,Ltd.MSM (Thailand)Vale
Korea Exchange Bank APAC Inter KR OMRON Automotive Electronics Korea Co.Ltd.
Standard Chartered Bank
APACEMEA
Intra BE, OM, TH, AE
BP ChemicalsOctalPTT Polymer Marketing Co in Thailand Polymer Marketing DMCC in Dubai
Siam Commercial Bank APAC Inter TH PTT Polymer Marketing Co
Hua Nan Bank APAC Inter TW Importer in TW
Bangkok Bank APAC Inter TH Exporter in TH
13
Emerging Trade Flows & Trade Corridors
Re-shaping the strategic approach of corporates and banks.
14
Growth in International Trade
Year World Trade(WTO data)
Total Volume of LCs on SWIFT
Estimated Value of LCs
% world trade on LC (by value)
1970 USD 2 trillion USD 1.0 trillion 50.0
2000 USD 6 trillion 4.5 million USD 1.5 trillion 25.0
2010 USD 15 trillion 4.6 million USD 2.5 trillion 18.0
2020 (est) USD 33 trillion 4.7 million USD 3.5 trillion 11.0
Conclusion: if industry forecasts for growth prove correct, by 2020 we could have an additional USD 17 trillion worth of open account trade in respect of which banks will compete through innovative financial supply chain solutions.
Supply Chain Finance: the long view.....
Supply Chain FinanceTraditional trade Open Account
• Letters of Credit• Collections
• Standby letters of credit• Guarantees
• PO Commitment to Pay• Pre-shipment finance• Warehouse finance
• Post-shipment finance• Approved payables finance
• Receivables purchase• Etc
• Structured Trade Finance• Commodity Trade Finance
• Islamic Trade Finance• Bills discounted
• Factoring• Forfaiting
• Credit insurance• Etc
ANY Financial Solution that can be appliedto help a corporate
(a) optimise its working capital and (b) minimise its operational costs/risks associated with supply chain processes
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The challenge and the opportunity in Supply Chain Finance
New messaging standards / new rules /
new operating procedures
Continued growth in volume and value of
world trade (USD trillion by 2020)
Continued migration to open account (80/90% of
the market)
In the face of evolving market conditions and competition how can your bank retain and grow its trade business?
Regulatory requirements / capital
constraints
Demand for innovative solutions taking
advantage of trigger points in supply chain
Technology / automation a critical enabler of SCF
schemes
Supplier on-boarding, KYC, AML etc
Approved payables is a buyer-led proposition by which the bank provides financing to a clients’ suppliers by purchasing their Open Account receivables at a discount
Buyer centric solutionsExample and benefits for supplier finance solution
Buyer Supplier
Financial institution
2 Receivable purchase offer
1 Payable / Payment instruction
Buyer Supplier
Financial institution
3 Purchase acceptance / Sells receivable
4 Remits funds
Buyer Supplier
Financial institution
5 Disbursement of payment; settlement of invoice
Day 2 Day 3 Day 60
• The supplier can immediately discount the receivable
• Automatic discount is possible• The bank remits the funds to the
supplier (same day or next day payment
• The buyer funds a disbursement account via account payable process at maturity
• The Bank debits the buyer’s disbursement account for the full amount of the payment on due date (e.g. Day 60)
• The Buyer approves supplier’s invoice and electronically instructs the bank to pay the supplier on a future date
• The supplier is notified of a payment from the buyer scheduled for a future date (e.g. Day 60)
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Seller centric solutions -invoice discounting process flow
• 1 The supplier ships goods to the buyer and produces an invoice
• 2 The supplier sends a request for financing to the financial institution
• 2 The supplier sells it’s receivable of one or more buyer to the financial institution
• 3 The financial institution remits funds to the supplier (receivable minus a discount)
Buyer Supplier
Financial institution
2 Receivable purchase offer / Sells account receivable
Buyer Supplier
Financial institution
3 Remits funds (80%)
Day 3 Day 180
• 3 buyer pays the client (supplier) at maturity
• 4 supplier forwards payment to the financial institution at maturity
• Or the financial institution gets payment from the buyer(s)
3 Payment at maturity
Receivables finance is a supplier-led proposition by which the bank provides financing to the client (supplier/exporter) by purchasing their Open Account receivables at a discount
1 goods
Payment at maturity
18
SUPPLY CHAIN FINANCE MARKETClosed 3-corner business model likely to evolve into open 4-corner
model BPO has a role to play here
Business relationship & liability
Buyer/Importer
Seller/Exporter
Service Provider
Risk & processing services
Financingservices Routing and
Settlement
Production(Market)
Distribution(Client)
+a/c
Processing platform
Contract
+a/c
• Focused on limited set of buyer-seller relationships • Demand driven by cash rich importers • Use of proprietary standards and channels• Relationships managed by central Service Provider • Significant supplier on-boarding issues
BPO
Buyer/Importer
Seller/Exporter
Exporter’s bank
Importer’s bank
Risk, financing & processing
services
Risk, financing & processingservices
Routing and Settlement
Routing and Settlement
Production(Market)
Distribution(Client)
Business relationship & liability
+a/c
+a/c
Processing platform
Contract
• Supports partnership banking globally • Applicable across the risk spectrum • Open, interoperable rules and standards • Relationships maintained by local banks • Supplier on-boarding not an obstacle
Processing platform
BPO Factoring Forfaiting
Automated versus manual
Fully automated Manual Manual
Financing % of transaction
up to 100% < 100% 100%
Availability across transaction lifecycle
Pre-shipment & post-shipment
Post-shipment Post-shipment
Risk (1) Bank risk (impact on capital reqts/cost)
Corporate risk Bank risk (impact on capital reqts/ cost)
Risk (2) Transaction Portfolio Transaction
Recourse Without With/without Without
Track record Developing Established Established
Standardised international rules
URBPO GRIF URF 800
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