Adoption of bank payment obligation (BPO) – the digitalized, bank-issued letters of credit (LCs) – has so far been slow, but Asia could pave the way for the wider use of the global payment instrument.
"Adoption of these techniques has so far been slow – both in Asia and worldwide – but Asia is well-placed to lead the way (in its use) in many respects,” Kok Keong Tay, head of GTB Asia at UniCredit tells The Asset.
“Corporates in other regions have already invested in optimizing their systems for open-account methods of transaction and they are worried about disrupting their established workflows. However, since open-account transactions are far less common among Asian corporates – and LCs dominate – the same problem does not apply,” Tay says.
He adds that corporates in the region will have the flexibiilty to maximize the use of BPOs as a payment instrument that has the potential to streamline trade and supply chain processes. Tay says the first-ever BPO involving an Asian company is Mitsui & Co, along with buyer, Rühr- und Verfahrenstechnik, in a deal that took place last year.
Developed by global payments system Swift, BPO is a new settlement and financial vehicle for international settlement. It is based on Swift’s trade services utility (TSU) system and issued as an irrevocable, conditional payment obligation by one bank to another after the digitalized matching of transaction data in line with the ISO 20022 standard, explains Lo Ping Wing, Marvin, assistant general manager, corporate banking and financial institutions, Bank of China (Hong Kong).
Efficiency and risk management
An increasing number of banks and corporates in Asia are opening up to BPO solutions as they see the benefits of improved operational efficiency, resulting in better working capital management, Daniel Lit, senior vice president, global transaction services, DBS Bank tells The Asset.
“[BPO] payments are settled based on electronic data matching instead of compilation/examination paper documents and cash cycle is reduced,” DBS’ Lit adds.
BPOs hold a significant speed advantage over traditional letters of credit – processing in a maximum of 7 days, compared to the latter method’s average time frame of 21 days, according to Tay.
Meanwhile, BPOs also benefit from strong risk management – making it a strong alternative to open-account methods that expose firms to risks of default.
“Unlike open account transactions, BPOs benefit from bank mediation, guaranteeing that firms will be paid the money they are due, regardless of whether the buyer defaults on its payment,” Tay continues.
The digitalized channel provides a faster and more stable trade settlement for international trade, that will help improve the speed of flow of cargo, information and cash, BOCHK’s Lo says.
“While the adoption rate of BPO is low at this stage, we are seeing encouraging signs in certain industries, particularly the commodity space,” DBS’ Lit says.
Banks are catching up to offer other innovative products in combination with BPO services. For instance, UniCredit offers the possibility of mitigating currency risks by settling BPO contracts directly in the currency of suppliers. BOCHK says they are studying relevant products and services and aim to provide to their corporate clients in near future.