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…?
Disclaimer
This communication is made by Standard Chartered Bank (SCB) a firm authorised and regulated by the United Kingdom’s
Financial Services Authority. It is not directed at Retail Clients, neither has it been prepared in accordance with legal
requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing
ahead of the dissemination of investment research. It is provided to assist interested parties in making a preliminary analysis of
the proposed transaction and does not purport to be all-inclusive or to contain all of the information that a prospective investor
may require to make a full analysis of the proposed transaction. It is for information and discussion purposes only and does not
constitute either an offer to sell or the solicitation of an offer to buy any security or any financial instrument or enter into any
transaction or recommendation to acquire or dispose of any investment. Any values shown herein are indicative, do not
represent any obligation or commitment by SCB to transact, are subject to change without notice and in particular, any such
value may not reflect factors such as hedging and transaction costs, credit considerations, market liquidity and bid-offer
spread, all of which could be relevant in establishing a firm price quotation.
Information (including market data and statistical information) appearing herein has been obtained from various public sources
believed to be reliable. We do not represent or warrant that this information is accurate or complete. Accordingly, it should not
be relied upon as such. While all reasonable care has been taken in preparing this communications, no responsibility or liability
is accepted for any errors of fact, omission or for any opinion expressed herein. The information contained herein does not
purport to identify or suggest all the risks (direct or indirect) that may be associated with the proposed transaction. Any
investment or ideas discussed may not be suitable for all investors. Past performance is not necessarily indicative of future
performance; the value, price or income from investments may fall as well as rise. SCB and/or its affiliates and subsidiaries
may have position(s) in any of the underlying(s), indices, instruments or currencies contained herein. SCB may not have the
necessary licenses to provide services or offer products in all countries or such provision of services or offering of products
may be subject to the regulatory requirements of each jurisdiction and you should check with your relationship manager or
usual contact. You are advised to exercise your own independent judgment (with the advice of your professional advisers as
necessary) with respect to the risks and consequences of any matter contained herein. We expressly disclaim any liability and
responsibility for any losses arising from any uses to which this communication is put and for any errors or omissions in this
communication.
© Copyright 2010 Standard Chartered Bank. All rights reserved. All copyrights subsisting and arising out of these materials
belong to Standard Chartered Bank and may not be reproduced, distributed, amended, modified, adapted, transmitted in any
form, or translated in any way without the prior written consent of Standard Chartered Bank.