Swift Corporates Presentations Bankpaymentobligation

Bank Payment Obligation
A new payment method
SWIFT’s Corporate and Supply Chain

Market Management team
supplychain@swift.com
July 2016
̶ Digitisation of trade with BPO - a new payment
method in your sales contract supported by ICC
rules and electronic data matching
̶ Benefits for buyers and sellers
̶ A 3-corner model vs. a 4-corner model
Example: Approved Payables Finance (APF)
̶ BPO market adoption and case studies
supplychain@swift.com 2
SWIFT operates
the global bank-owned
secure financial
messaging platform
25.8 million
FIN messages peak day (2014)
5.6+billion 11%
FIN messages per year (2014) Increase in FIN traffic (2014)
10,800+
SWIFT users
200+
Countries and territories
SWIFT is a member-owned cooperative through which the financial world

conducts its business operations with speed, certainty and confidence.
« SWIFT for Corporates » portfolio
Secure financial Automation and Identity and Certainty and

connectivity compliance mandate efficiency in the
management supply chain
SWIFT’s Training, Consulting and Business Intelligence Services
Download our brochure 4
The Bank Payment Obligation (BPO)
A strong alternative instrument for trade settlement Buyer and Seller agree to use
BPO as payment method in
 Purchase Orders their sales contract
 Transport docs
 Certificates
 Invoices BPO
URBPO: rules that govern Seller

Buyer an irrevocable and conditional
electronic inter-bank payment obligation
Provision of risk BPO / TSU

& financing
services
URBPO
 Industry-wide BPO transaction matching

 Legally binding rulebook owned by the ICC
The Bank Payment Obligation
A new payment method between L/C and open account
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 BPO BPO
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
The Bank Payment Obligation (BPO)
The Bank Payment Obligation is a new payment method based on data

What is BPO?
matching which can be used for risk mitigation and financing!
For the first time an open account payment obligation can be confirmed by
What is new? banks in order to get financed. The ICC supports the market launch with the
release of unified rules (URBPO).
„A Bank Payment Obligation (BPO) is an irrevocable and

independent undertaking of an Obligor Bank to pay or to
What are the general irrevocable incur a deferred payment obligation and pay at maturity
a specified amount to a Recipient Bank in accordance
criterias of a BPO? concret & conditional with the conditions specified in an established baseline.“
(Extract from the ICC URBPO)
BPO the answer to the growing demand for a straight through processing,
risk mitigating and liquidity provisioning instrument
Win-win benefits for buyers and sellers alike
Buyer BPO Seller
Transaction risk mitigation Payment assurance through preferred bank
Early payment to support financially critical

Earlier funds collection and FX risk mitigation
suppliers
Optimize working capital thanks to earlier
Negotiate better trade terms
settlement
Streamline operations and reduce costs Improve transaction visibility and traceability
Improve order-to-cash process Improve A/R reconciliation
Flexible order of goods Increase competitiveness
Key roles and responsibilities for BPO
Buyers and Sellers
• Negotiate the merchandise details (description, quantities, unit price, ...)

• Agree on the amount of the payment obligation and settlement/charges
conditions
• Define the payment terms: on receipt of the invoice, on delivery or deferred
• Agree on the expiry date, the shipping terms and latest shipment date
Obligor bank(s)
• Analyse the risk and manage internal compliance (KYC of the buyer)
• Price the BPO to the Buyer
• Propose the BPO in favour of the Recipient Bank (Seller’s Bank)
• Settle the BPO on the due date, subject to matching conditions having been met
• Provide optional financing services to the Buyer, as required
Recipient Bank
• Analyse the risk and manage internal compliance ( KYC on the Seller)
• Validate the Seller’s data set submissions
• Price the BPO-based services to the Seller
• Advise/confirm the BPO to the Seller
• Provide optional financing services to the Seller, as required
BPO flows for data, documents and goods
Carriers
Delivery of goods
4 Shipment
Use minimum Documents sent

fields directly to the client
1 Purchase order
8 Shipping documents and invoice

Buyer Seller
2 Request BPO
based on PO
Inform of BPO
3 establishment
6
Transport and
BPO
TSU BPO 5 Transport and
invoice data Obligor Recipient invoice data
Bank Bank
7 Inform that payment is
9 Transfer funds at maturity due on agreed date
BPO in 3 steps
•Buyer sends a purchase order (PO) to the seller

•Buyer provides the minimum data from the PO + the BPO conditions to the Obligor bank
•Seller confirms the data from the PO + the BPO conditions to the Recipient bank
Baseline •If the submitted data matches on the TSU, the “baseline” is established. Buyer and Seller receive
the matching report from their banks
establishment
BPO is irrevocable but conditional (subject to the electronic matching of agreed datasets)
•Seller ships the goods to the destination

•Seller provides the shipment and invoice data to its bank, which submits it to TSU for matching
•Buyer receives a match report from the Obligor bank (and is invited to accept mismatches, if any)
Data set •Seller’s bank informs the Seller about the successful dataset match
matching
BPO becomes operative and due according to the agreed payment terms
•Seller sends the paper documents directly to the Buyer enabling the Buyer to receive the goods
•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
Settlement
The baseline gathers the matching conditions using data extracted from
trade documents
The BPO builds upon electronic data matching
1) Sign contract (PO)

Buyer Seller
Matching of 2) PO data 3) SO data
TSU
contract data Bank A Bank B
4) Match PO/SO data & confirm
BPO is established
Buyer Seller
Matching of 5) Datasets 5) Datasets
TSU
data Bank A Bank B
6) Match requested datasets & confirm
BPO is due
Buyer Seller
Transfer
of funds 7) Debit buyer FIN 9) Pay seller
Bank A Bank B
8) Transfer funds
Trade is settled
PO= Purchase Order; SO= Sales Order
Components for electronic matching of commercial trade data
Communication standard ISO 20022 TSMT

(Trade Service Management)
Between Banks:
TSU
(Trade Services Utility)
Communication Channel
Between customer and banks:
Bilaterally to be agreed
(Portal/SWIFT Score/ Papier…)
Payment risk mitigation instrument BPO

(Bank Payment Obligation)
Benefits of the BPO
Supply chain risks
When dealing on open account trade terms, both buyers and sellers are faced with a
series of risks and financing needs that banks are best placed to deal with
Good Payment
Ordering Production Delivery Invoicing
Acceptance Initiation
Purchase Transport Invoice Invoice

Certificates Payment
Order (PO) documents issuance approval
Payment risk mitigation Post-shipment Receivables Payment

Pre-shipment finance finance finance processing
Higher risk zone No/Low risk zone

Payment assurance & financing services (Early) Payment services
By getting involved in open account trade

relationships as early as possible, banks can
efficiently secure and finance those transactions
BPO benefits
Payment
Assurance
Increased
Receivables
operational
finance BPO efficiency
Payables Risk
finance mitigation
Risk mitigation
Benefits for:
Importer Exporter
Possibility to get goods Delayed and non-payment

earlier risk mitigation
Increased flexibility vs L/C

Safer than open account
when changing deal
payment
parameters
Improve relationship with

Credit risk is transferred
exporter by diversifying
from importer to the obligor
settlement method and add
bank or confirming bank
flexible options
Payment assurance
Benefits for:
Importer Exporter
Offer payment assurance to
my supplier and confirm the
purchase order -> negotiate Certainty to be paid on time
better payment terms -> improve liquidity
forecasts
Control payment time

execution
Early settlement
(if “at sight”)
Avoid advance payments
Improved operational efficiency
Benefits for:
Importer Both Exporter
Documents sent
Easy procedure to Improve visibility and directly to importer
issue BPO traceability and kept outside of
the banking system
Reduce operational Reduce the risk of

Smooth reconciliation
burden of treating discrepancies, limit to
of payment & A/P or
complicated L/C and relevant trade
A/R
trade documents information only
“Just in time” orders to Electronic matching of

improve inventory structured data is Reduce discrepancy
management and faster than manual workload
avoid storage costs
examination 21
Time savings and efficiencies thanks to BPO
Present Send out Receive Payment Payment
doc doc doc (clean) (discrepancy)
Doc checking Doc checking Discrepancy

Courier
Sight (by Advising Bank) (by Issuing Bank) dispute
Letter of
Same day 2 days 5 working days Dispute period
Credit
8 working days Extended period
Submit Send out Receive doc / Payment

data doc Payment (matched) (mismatch)
Bank Acceptance of
Data matching Courier
Payment mismatch
Obligation Same day 2 days Acceptance period
3 working days Collection days eliminated

Source: Dubai Trade
On-demand financing
Benefits for:
Importer Both Exporter
Optimize use of
banking lines Decrease DSO
Increase DPO
On-demand Pre-/post
Extend payment financing shipment finance
terms
Shift funding role Alternative to
to banks forfaiting
A 3-corner model vs. a 4-corner model
Example: Approved Payables Finance (APF)
What is Approved Payables Finance (APF)?
From the Global Supply Chain Finance Forum (2015)
Payables Finance provides a supplier with the option of receiving the discounted
value
• of an invoice prior to its actual due date or
• of an account payable due to be paid by a buyer to the supplier at a future date.
Synonyms:
Supplier Finance, Approved Payables Finance (APF), Confirming, Confirmed
Payables, Reverse Factoring, Supplier Payments, and Buyer-Led Supply Chain
Finance or just Supply Chain Finance (SCF)
Current APF programmes have been designed in a buyer-centric way (3-corner)
Buyer-centric schemes
operated by bank-specific Challenges
platforms
Too many • Sellers need to connect to various SCF
bank Buyer portals operated by the buyers’ banks
portals • Buyers’ banks face new supplier on-
Buyer’s
boarding and KYC challenges leading to
Bank much higher costs than ever before
Seller • SCF services are often limited to approved
payables finance where suppliers often
Trade Buyer’s need purchase order finance
contract
Bank • Bank- or vendor-specific formats increase
costs for all and limit opportunity for
Buyer automation
Buyer-led finance
Issues and challenges for buyers and suppliers

Pre-shipment
finance is difficult
Carriers to get
Delivery of goods
2 Shipment
Buyer locked in one
bank’s programme
1 Purchase order
3 Shipping documents and invoice

Buyer Seller
Scope limited to large
4 Approved Need to join multiple
suppliers
payables SCF platforms
6 Supply Chain Finance

Service provider
Collect funds at
(Buyer’s Bank or 3rd party) 5 Advanced payment
payment maturity at a discount
Bank faces
high onboarding costs as
supplychain@swift.com some suppliers need to 27
be onboarded
Challenges of current APF set-ups
Challenges for buyer Buyer’s key requirements What if (supplier view)

Seller needs to join How can I quick start the What if my key buyers all
multiple SCF platforms Approved Payables Finance? use a different bank – do I
need to join as many
platforms?
Buyer’s bank faces high How long does it take to on- What if the bank of my buyer
onboarding costs (KYC) board my new suppliers? stops providing such service
or leave my own geography?
SCF services limited to How can I scale my financing What if I need to finance my
approved payables support towards key suppliers? production based on PO
finance finance?
Buyer locked in one What if my bank does not cover Should I repeat the whole
bank’s programme or is leaving the geography of onboarding process with the
some of my suppliers? new bank chosen by my
buyer?
BPO enables two-bank interoperable model
Two-bank interoperable model Benefits

• Sellers get APF services from their own
Seller’s (local) bank(s)
Seller
Bank • Seller’s bank takes risk on buyer’s bank,
not on buyer – no need for KYC between
Seller
buyer and seller’s bank
Trade contract
works with
own bank • Buyer’s bank commits to pay seller’s bank
BPO/TSU
on due date – no need for KYC between
buyer’s bank and seller
• No supplier on-boarding needed as banks
Buyer’s only deal with their respective clients
Buyer • SCF services scalable to pre/post-
Bank
shipment finance and payment assurance
• ISO 20022 industry standards facilitate
adoption and end-to-end automation by all
BPO market adoption and case studies
Insert here slides from latest BPO Market Adoption deck
2014
Case study: “The first open account BPO”
Japanese importer German exporter

Delivery contract (Gearbox and Coupling)
and agreement on
“BPO at 7 days after TSU data match”
Energy infrastructure New importer – exporter relationship Machine building

industry Implemented BPO instead of Advance Payment industry
Obligor bank Processing the first open account BPO Recipient bank
- World-wide
- Between Europe and Japan
- Between a German company and a bank
2015
Case study: “Coming from open account”
Turkish importer German exporter

Delivery contract (spare parts)
and agreement on BPO
(sight for exporter; Deferred-Payment for importer)
automotive industry Before they used open account technology industry
Obligor bank Recipient bank
Processing BPO and

financing Deferred-Payment for importer
due master loan agreement between the banks;

TEB charged importer financing costs
2014
Case Study - “Optimisation of internal payment handling processes”
Importer in Frankfurt Exporter in Bangkok
Trade contract and

shipping documents
German SME
PTT Polymer Marketing
Global merchant, specialising
Company Ltd.
in polymers, additives
Data for Shipping

baseline data sets
Matching of trade data
Frankfurt
Recipient Bank
Obligor Bank Import BPO
2015
April 2015 – First ever BPO with eB/L
1 Delivery contract (Iron Ore)

and agreement on BPO as payment method
Commodity / Previously through documentary credit Mining
Agriculture industry industry
2
Data for Shipping
5 Release of eB/L eB/L held in escrow 3
baseline data sets
TSU
URBPO
Obligor
Obligor Exchanging and matching trade Recipient
Bank
Bank
4 data to create payment obligation Bank 35
2015
First end-to-end electronic transaction in the Middle East automotive sector
for Al-Sayer
Importer in Kuwait Exporter

Al-Sayer had previously relied on traditional
Letters of Credit for trade settlement and
was seeking more efficient methods to Automotive
reduce the reliance on paper documentation Industry: vehicles
Automotive dealer as well as optimise their transaction
processing
Obligor bank Recipient bank

With automated data matching, BPO
removes the risk of subjectivity in the
physical examination of documents, thus
significantly reducing discrepancy disputes
and delays.
Al-Sayer will benefit from increased
efficiency in trade processing and the
assurance of payment to trading partners
Link to full article
from J.P.Morgan
(July 2015)
Questions? Comments?
BPO is…
a few fields
in a message
The TSU-Interface - To support your initial BPO transactions
Start Small Scale Later
• Define project team (product, legal, • Approach additional customers

accounting, IT, B/O, sales) • Forecast volumes
• Register to TSU (3 weeks) • Contact your trade vendor
• Follow BPO training (2 days) • Plan back-office integration based on volume
• Get used to TSU-Interface (2 days) forecasts
• Perform initial tests (2-3 days) • Upgrade front-end portal
• Identify BPO prospects (O/A or LC)
• Develop BPO-based offering (paid on time,
financing…)
• Adapt C2B contracts (15 days)
• Operate initial transactions with client(s) and
correspondent bank(s) (POC)
• Go live using the TSU-Interface
Readiness dashboard for banks adopting the BPO
Commercial Operational Technical

readiness readiness readiness
• Business case • “Proof of • Register to TSU
• Market research concept” • Set up test
• Data mining • Training environment
• New product • Test plan incl. TSU
definition • Operational Interface
• Legal procedures • Define impact
• Automation on front / middle
• Accounting
/ back office
• Collateral
• Develop
• Sales training integration
• Promote project
Business Operations Infrastructure

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Bank Payment Obligation

A new payment method

SWIFT’s Corporate and Supply Chain

SWIFT is a member-owned cooperative through which the financial world

Secure financial Automation and Identity and Certainty and

SWIFT’s Training, Consulting and Business Intelligence Services

URBPO: rules that govern Seller

Provision of risk BPO / TSU

 Industry-wide BPO transaction matching

Contract Contract Contract

Letter of Bank Open

Payment Payment Payment

Array of risk, financing and processing services to address

The Bank Payment Obligation is a new payment method based on data

„A Bank Payment Obligation (BPO) is an irrevocable and

Buyer BPO Seller

Transaction risk mitigation Payment assurance through preferred bank

Early payment to support financially critical

Improve order-to-cash process Improve A/R reconciliation

Flexible order of goods Increase competitiveness

Buyers and Sellers

• Negotiate the merchandise details (description, quantities, unit price, ...)

Use minimum Documents sent

8 Shipping documents and invoice

•Buyer sends a purchase order (PO) to the seller

•Seller ships the goods to the destination

1) Sign contract (PO)

Communication standard ISO 20022 TSMT

Payment risk mitigation instrument BPO

Purchase Transport Invoice Invoice

Payment risk mitigation Post-shipment Receivables Payment

Higher risk zone No/Low risk zone

By getting involved in open account trade

Possibility to get goods Delayed and non-payment

Increased flexibility vs L/C

Improve relationship with

Control payment time

Importer Both Exporter

Reduce operational Reduce the risk of

“Just in time” orders to Electronic matching of

Doc checking Doc checking Discrepancy

Submit Send out Receive doc / Payment

Obligation Same day 2 days Acceptance period

3 working days Collection days eliminated

Importer Both Exporter

From the Global Supply Chain Finance Forum (2015)

Issues and challenges for buyers and suppliers

3 Shipping documents and invoice

6 Supply Chain Finance

Challenges for buyer Buyer’s key requirements What if (supplier view)

Two-bank interoperable model Benefits

Japanese importer German exporter

Energy infrastructure New importer – exporter relationship Machine building

Turkish importer German exporter

automotive industry Before they used open account technology industry

Obligor bank Recipient bank

Processing BPO and

due master loan agreement between the banks;

Importer in Frankfurt Exporter in Bangkok

Trade contract and

Data for Shipping

Matching of trade data

1 Delivery contract (Iron Ore)