Bank Payment Obligation (BPO) Case study - Getting paid on time and increase competitiveness using the BPO and SWIFT’s TSU BP Petrochemicals in numbers • In 2011, BP Petrochemicals’ revenues were ~$14bn • Apart from Olefins & derivatives (36%), Aromatics (PX/PTA) and Acetyls are the main products (combined 64%) • PX and PTA are Naphta-derived products used for the production for polyester and PET bottles (~54%) • Acetic Acid is an intermediate chemical that has many uses with amongst them: paints, adhesives, paper, PTA, film (~10%) • Main markets for Aromatics are − US (~20%) − W-E (~30%), with M-E typically on secured terms − Asia (~50%), all of which predominantly on secured terms (Figures vary depending on consolidation principles) 2 Where do we operate? 3 Key challenges for BP Petrochemicals • Trade account receivables of EUR 1.4 billion (consolidated receivables only) • Competitive commodities market requires a secure and cheaper alternative to L/Cs • About 50% of exposure on secured terms – typically interacting with around 50 banks • High processing and confirming costs (0,8% of transaction value in average) • LCs administration weakens compliance under certain conditions • Reduced need for specialized LC training and specialized LC vetting personnel LCs process limits commercial possibilities and reduces the competitiveness of the offering 4 Key Challenges for Octal • Procurement – delays in receiving the documents under L/Cs – • Sales - pressure from customers to move to Open Account terms – • • Unable to clear customs, freight charges, inventory outages Restricted ability to offer credit (little transparency on financial information) - limited opportunities in some jurisdictions Risk management – Need for higher working capital limits (limited financing options) – Tight relationships with major business suppliers (constraint by the product quality requirements and stock availability) High Operational costs – High administrative burdens of LCs Key challenges are not cost only, but much more strategically, in closer relationship between the buyer and the seller to secure the product supply cycle Long, costly and cumbersome documentary credit process Impact on the physical supply chain Purchase Order Financial Supply Chain Physical Supply Chain Re-route ships in case of refusal of documents Delayed delivery Production PO Shipment BOL L/C L/C issuance issuance and and acceptance acceptance … or risk due to a waiver Delivery Invoice Documents presentation and compliance verification Documentation standards require buyer to send L/C much earlier than the anticipated shipment date Trade T Payment Buyer cannot free its credit limits Post-Trade T+1 …..or storage at port of destination Pre-settlement T+10 Settlement S > T+20 6 Long, costly and cumbersome documentary credit process Impact on the internal processes efficiency Treasury Difficult to track the exposure due to little visibility on the trade transaction • Selection of the bank • Complete request Business units (Sales) High risk of discrepancy due to complexity Regional Trade Finance • Request to issue an L/C • Scan documents Verification criteria are not homogeneous across banks Cumbersome and complex reporting Additional risks due to waivers Credit Manager • Qualify the request • Approve if under limits Long and complex verification (5-10 days) • Approve exceptional deviations Courier transportation Seller’s Bank Trade Finance front-office • Collect the documents • Register the request Trade Finance back office • Compliance verification • Check data • Amend Trade Finance Manager • Authorise the request Credit Manager • Authorise the issuance 7 New Financial Instrument O B OBLIGATION BANK Uniform Rules for Bank Payment Obligation A legally binding, valid and irrevocable undertaking given by one bank to another bank that a payment will be made on a specified date after a successful electronic matching of data according to an industrywide set of rules. P PAYMENT An agreement between buyer and its bank with potential financing options SWIFT Trade Service Utility (TSU) matching platform implementing BPO rulebook and using ISO20022 standards in a multi-bank environment 8 BPO combines elements of both worlds BPO is expected to capture new flows of business and not to replace documentary trade finance or open account BPO – Changing Landscape Compared to Documentary Trade Compared to Open Account Shift from physical to electronic presentation Assurance of Payment Quick turnaround time on processing Reduced complexity and increased reliability Easy access to financing services Acts as collateral for financing Improve quality and objectivity of compliance verification Opens door to new business opportunity Remove subjectivity of physical document checking Reduced on-boarding time and operational cost 10 Benefits of BPO to a corporate 11 Mitigate the risk of payment default or payment delay 2 Buyer agrees to offer payment assurance to its supplier based on agreed payment terms 1 BPO Seller wants to be certain that it will be paid on time TSU Buyer BPO Recipient Bank BPO Obligor Bank 3 Buyer's bank provides payment assurance to the seller’s bank by issuing a BPO 4 Seller Seller's bank offers assurance of payment to the seller based on the BPO that is issued by the buyer’s bank Payment assurance 12 Chemical fiber Co. Kuala Lumpur Textile & Garnement Co. HK BPO TSU London BP Petrochemicals Buyers of BP Petrochemicals A multi-bank and cross-region solution for buyers and sellers Zhuhai Polyester fiber Co. BPO Obligor Bank branches BPO Recipient Banks Belgium 13 Proof of concept BPO process flow PO TSU Matching Data set 5 OMAN (Buyer) SCB OMAN SCB SG BP AROMATICS BELGIUM (Seller) Corporates access the BPO services through the Straight2Bank web platform of Standard Chartered Bank 14 BPO based on transport & invoice information Carriers Delivery of goods Use minimum fields 4 Shipment Documents sent directly to the client 1 Purchase order 8 Shipping documents (BOL) immediately 9 Invoice and certificates (authenticated and legalized) Buyer Seller 2 Transport and invoice data (match report) Request BPO based on PO 6 BPO Obligor Bank 3 Trade BPO is Established Services baseline Utility due (TSU) 10 Transfer funds at maturity Inform of BPO establishment BPO Recipient Bank 5 Transport and invoice data Advise payment is 7 due on agreed date 15 Baseline establishment BPO establishment and obligation 1 Buyer and seller agree on the BPO terms and the Buyer sends a purchase order to the seller 2 Buyer provides the minimum data from the PO and the BPO conditions to the Obligor bank 3 Seller confirms the data from the PO and the BPO conditions to the Recipient bank If the submitted data matches on the TSU, the “baseline” is established. Buyer and Seller receive the matching report from their banks Matching BPO is irrevocable but conditional (subject to the electronic matching of agreed datasets) 4 Seller ships the goods to the port of destination 5 Seller provides the shipment and invoice data to its bank, which submits it to TSU for matching 6 Buyer receives a match report from its bank and is invited to accept mismatches, if any 7 Seller’s bank informs of the successful dataset match to the Seller Settlement BPO becomes operative and due according to the agreed payment terms 8 Seller sends the bill of lading immediately by courier to the Buyer (eventually with a copy to the Buyer) 9 Seller sends the invoice and required certificates (authenticated and legalized as required) to the buyer so that he can receive the goods 10 On the due date, the Obligor bank debits the proceeds from Buyer’s account and remits the funds to the Recipient bank. The Recipient bank credits the seller’s account 16 BPO addresses some challenges of documentary credits Measuring process efficiency 5 Physical Supply Chain Sales Cycle 2 Purchase Order Production BOL & Invoice Financial Supply Chain PO BPO Shipment Data match 3 1 1 Reduce opening time 2 Reduce shipment delivery delays 3 Reduce the number of amendments not related to financial liability 4 Reduce risk coverage needs 5 Shorten sales cycle – increased window of opportunity to sell Delivery Payment Pre-matching Risk coverage 4 17 Comparison between LC and BPO - Settlement process Mon Documents presentation to Exporter’s bank Tue Wed Verification Thu Fri Sat Sun Mon Courier Cover Letter and Documents to Importer’s Bank Tue Wed Thu Documents verification Fri Sat Sun Mon Payment to Exporter’s Bank Tue Payment to Exporter Documents received and payment to Bank LC Flow Data set info input Data set transmission BPO Flow Update Importer on dataset status -10days Payment to Exporter’s Bank Payment to Exporter -7 days Documents received and payment to Bank Exporter Exporter’s Bank Importer’s Bank Importer 18 Realizing efficiencies from the working capital chain Sellers * • Accelerated cash flow through faster collections – reduces DSO by 50% - 65% • Lower operational costs on account of electronic nature of transactions – from 10% to 30% less FTEs involved in documents preparation • Releases liquidity from the financial supply chain to boost working capital • Reduced banking fees by up to 50% and eliminate the handling fees Buyers* • 3 x faster turnaround of the banking lines • Lower issuance banking fees by up to 60% (depending on the maturity of the BPO issuance facility) • Reduce or eliminate the discrepancy fees • Enhanced borrowing potential and an opportunity to make use of supplier discounts * All quantified benefits are subject to individual negotiations and use of Standard Chartered BPO Automated Framework 19 Key benefits for BP Petrochemicals Risk mitigation Operational efficiency Enhance competitiveness • • • • • Get paid on time and avoid judicial proceedings Easy to exercise tool for liquidity Easier access to banks to secure transactions Possibility to spread the risk with multiple obligors Free up banking lines • Streamline the process and improve speed of handling • Reduce the risk of discrepancies, limit to relevant trade information only • Remove costs due to confirmation, vetting and presentation • Reduce complexity – removal of paper trail • Reduce cost for customers due to vetting and presentation • Improve customer offer by allowing for flexible options 20 Key benefits for Octal Improve procurement process • Ensure supply continuity - improve inventory management • Cost reduction - avoid storage charges • Documentation is on the critical path - ensure the rapid movement through reliable courier partners Increase sales opportunities • Closer relationship between buyer and seller • Increase opportunities • For jurisdictions where buyer’s financial information is not available • Where parties want to eliminate the administrative burdens of LCs Treasury and risk Management • Closer relationship between buyer and seller • Clearer visibility over process at banks and agreement of liabilities • Process efficiencies and cost reduction 21 Standard Chartered BPO - high level project plan Live Feb 2012 Project definition March 2012 Implementation April 2012 Operational Readiness Tests (ORT) on TSU May2012 Operational readiness test plan • Counterparts identification (seller and buyer) • Scope and plan • Internal stakeholders identification • Project team nominations Project plan • Contractual agreements • Data mapping, forms and test cases • Internal building and testing of straight through capabilities • BIC set up • Processes flows, KPIs • Internal and external training • Seller-to-bank documentation • Buyer-to-bank documentation • BPO facility set up • Go LIVE Rollout plan 22 Project overview Technical Readiness Validate BIC and ensure all set up are done on time New BIC set up Familiarity with the system and functions Actions Test deal to validate end to end flow Enhance internal system to integrate with TSU functionalities Develop straight-through capabilities for a fully automated process Client-Bank-TSU Operational Readiness Nominate project manager and dedicated resources from the required business lines Stakeholders identification and training to ensure timely completion New product developing Perform analysis and leverage on existing open account and documentary credit solutions in terms of exposure booking, legal documentation, RWA treatment Commercial Readiness Define the value added for the client Actions Workflows mapping Identify customer needs Actions Create internal and external awareness and build up the market Client trainings and workshops Legal readiness – develop full set of specific documentation 23 Path Ahead on BPO The key tools 24 BPO solutions adapted to specific client needs 25 Wide geographic coverage Standard Chartered Bank widening geographic coverage, with 19 BICs registered on SWIFT TSU in 2012 What do BPO customers say…? 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