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TradeWiz Opinion on BPO
Amsterdam 2012
The hidden opportunity of the Bank Payment Obligation
In their role as a trusted partner in the area of Trade Finance, TradeWiz consultants often
find themselves in a unique position due to their work with Financial Institutions, Corporates
and (system) solution providers. TradeWiz has been following the discussions and
developments around BPO with great interest.
Senior Advisor Jacco de Jong states:
I mainly work with Financial Institutions,
which are in the process of restructuring
their trade finance organization and
infrastructure. Drivers for those
developments varies from having to
upgrade a system which has reached the
end of its life cycle, up to wanting to be the
market leader in Trade Finance. The
scope of the desired development
determines the impact on budget
requirements and the angle of the
business case. In all cases we notice that
Banks want to optimize their services and
product range towards their customers,
whilst also finding ways to increase
efficiencies and attract more business.
Many of our clients are now looking into the concept of BPO, whereby they often struggle to
get a grip on how BPO could work out for their organization and their clients. Positioning of
BPO can be a challenge for them.
Associated Consultant Katarina Lodin
states: I mainly work with Corporates that
are looking to optimize their working
capital whilst effectively managing the
risks and Trade Finance business. Drivers
for these developments are the ongoing
challenges in the international business
environment forcing corporates to review
and adjust their approach on finance and
risk. Corporates can choose from a wide
array of products and solutions offered by
Financial Institutions, but many have their
limitations or specific characteristics and
complexity. Today many companies’ risk
policy requires that they secure open
account transactions by means of credit
insurance.
However, most of these policies only cover buyer’s insolvency and have a substantial grace
period. If there is a possibility to secure open account transactions in an effective way I am
sure this could be of great interest to many companies that are involved in international
business. Therefore, I can see that BPO could be an interesting opportunity for these types
of transactions, although I notice that many corporates are unaware of this possibility.
So why could BPO be a viable alternative and sometimes maybe even a preferred solution
for corporates over the traditional Credit Insurance solutions? Let’s compare 10 main
characteristics of both solutions without using the formal definitions or fancy marketing lingo:
Credit Insurance (security):
1. Credit Insurance usually only covers the fact that a buyer cannot pay, even though
the seller has performed as agreed
2. It focuses on Risk Mitigation in open account business environment (buyers risk)
3. It is has a portfolio nature, meaning that Credit Insurers often want to insure a range
of buyers (good and not so good) to spread the risk
4. The Credit Insurers insure parties that usually are not their own customers.
5. The Credit Insurers look at criteria such as Steel business, not at transaction level
6. Documentation is involved at initiation, ongoing, at notification and once claimed
7. Once claimed there is usually a waiting period which can take months
8. Benefits for the buyer are limited
9. Credit Insurance is often not part of the regular Trade or Cash Management portals
10. Pricing is done at portfolio level. Being between 0.1% to 0.8% on insurable turnover,
depending on the buyer quality, loss history, indemnity,first loss and credit terms
Bank Payment Obligation (secured payment instrument):
1. Bank Payment Obligation covers the fact that a buyer cannot or does not want to pay,
even though the seller has performed as agreed
2. It focuses on Risk Mitigation in Open account business environment (buyers risk and,
if needed buyers Bank risk)
3. It has a transactional nature, meaning the BPO can be used for single transactions
whereby the BPO Issuing Bank will only have to look at sole customer risk
4. Banks guarantee payments of their own customers (or correspondents in case of
confirmation) whom they can assess easily
5. BPO guarantees payments at transactional level, regardless of the industry sector
6. Documentation is involved at initiation and at claim level
7. The payment conditions can range from sight to an agreed deferred payment period
8. The buyer is certain that payment will only be effected once agreed criteria are met
9. BPO is intended to be part of the regular Trade and/or Cash Management portals
10. Pricing is done at transaction level. Although the solvency requirements are still
uncertain, we expect risk pricing to be between 1% - 3% per annum, based on the
credit rating of the buyer, calculated over the actual number of days that the BPO is
valid). This excludes handling fees and confirmation pricing if needed.
Glancing at the comparison above, one can clearly see that BPO can be an alternative to
credit Insurance for corporates depending on the situation, the transaction, and their specific
needs. However BPO is not there yet, there is also skepticism and historic behavior out
there.
First let us address this history and skepticism topic from a corporate angle. Throughout
history corporates have had to cope with risks. This is a given fact when doing (cross
border) business. Therefore, most of these companies have implemented risk policies that
drive the behavior of business and more specifically, the sales force. During the recent crisis
the International business environment has changed rapidly and risk policies needed to be
adjusted. In some occasions the Credit Insurers suddenly pulled out (e.g. the steel business)
and alternatives had to be found quickly (e.g. the traditional Documentary Trade Products).
Changing risk policies is challenging and is often done reactively; new solutions are often
not adopted quickly. A corporate Risk Policy should be solid and stable, which can conflict
with wanting to adopt a promising new development such as BPO at an early stage.
Then there is the Financial Institution angle where Supply Chain Financing is the buzzword
for some time now. Banks have been investing heavily over the years in IT driven solutions
both for internal use (e.g. operational infrastructure) and external use (e.g. portals) in this
area. The all-important return on investment hasn’t always provided black figures. Heavily
marketed solutions like Bolero and TSU showed modest usage. This makes the Banks think
twice before jumping on the next development that comes around. Business cases in the
area of supply chain financing are therefore scrutinized, and we notice a shift from Banks
wanting to be early adapters to more of a wait and see approach. This behavior could mean
that Banks, and their customers, miss out on a positive development due to skepticism.
Hence the positioning towards Banks and Corporates of a product like BPO is so important.
TradeWiz feels that the BPO solution can be of interest for both Banks and Corporates.
For Financial Institutions it could be a perfect addition to their Supply Chain Financing
product suite. Banks who currently can’t offer Credit Insurance themselves could benefit
from adding this interesting revenue generating solution to their customer portfolio. Banks
could now also start to generate Trade related revenues on open account business by
adding a BPO/confirmation.
For corporates it could be an alternative way to increase business without taking on more
risks, having more control over the payment triggers and payment date. Combined with
having clear international ICC rules of the “game” for all those involved in the BPO. Next to
this the BPO concept is flexible enough to still be able to handle paper-based transactions to
cater to the needs of many SME’s that may not have the need for a high tech solution.
As a conclusion we would also like to state that BPO is often compared to Letters of Credit
and Collections, however we feel there is also a hidden opportunity in BPO for both
Corporates and Financial Institutions as a possibility to guarantee open account payment
transactions and as an alternative to the traditional Credit Insurance as described herein.
We are certain that BPO will be a valuable addition to the Supply Chain product suite, once
BPO matures beyond the current inception phase, and the positioning and its scope become
more clear to the Financial Institutions and their clients.
For more information visit us at www.tradewiz.net or contact us at [email protected]