SWIFT, formerly known as the Society for Worldwide Interbank Financial Telecommunications, and a global provider of secure financial messaging services, turned 40 on May 3 of this year, and that’s noteworthy on it’s own as this tells us that we’ve only been thinking about electronic financial transactions on a global scale for 40 years, but that’s not the most important piece of news to come out of SWIFT, which processes 90% of traditional global trade transactions, this year.
The most significant piece of news to come out of SWIFT this year, and this decade, is the fact two weeks later on May 17, two months ago, the electronic Bank Payment Obligation (BPO) for an open account transaction became an official financial instrument under the International Chamber of Commerce’s (ICC) Uniform Rules for Bank payment Obligation (URBPO). The URBPO, which is an element in the electronic matching of open account trade data, and which utilizes the ISO 20022 messaging standards, provides an irrevocable payment guarantee in an automated environment and enables banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers.
As defined by the U.S. Department of Commerce’s International Trade Administration in their Trade Finance Guide, an open account transaction, which is the preferred transaction type by most North American and European multi-nationals, is a sale where the goods are shipped and delivered before payment is due. This option, which is often the most advantageous to the importing buyer, is often the most disadvantageous to the exporting supplier, as they will have difficulty getting financing from their bank to finance the production and shipment of the goods until they are paid by the buyer without proof that they will be paid. That’s why many suppliers will insist on a Letter of Creditworthiness from the buyer’s bank, which will often need to be provided direct to the supplier’s bank. This paperwork takes time, especially since it has to flow through banks, slows down trade, and aggravates buyers who need to move fast to keep up with constantly changing customer demand. That’s why they insist on open accounts, even though the supplier’s bank may not accept them because the buyer, or the buyer’s bank, isn’t known (well enough) to the supplier’s bank, which is fair.
This is a situation that, theoretically, could be easily corrected with an electronic replacement for a letter of credit, that could move at the speed of light down a fiber cable, as the buyer’s bank, which can see the buyer’s ability to pay, can immediately send the supplier’s bank an electronic Bank Payment Obligation that the bank will pay when the goods are shipped and adequate proof has been provided. The supplier’s bank could then advance the supplier as it has a trustworthy bank obligation, and not just a copy of a purchase order (PO), from the buyer’s bank that it can rely on. And now that we have the ICC URBPO, this is finally a reality. And if you’re a multi-national, it’s a reality that’s at your fingertips!
All that is required to create a BPO is a purchase order and an acceptance by the supplier. All that is required to complete the BPO is a commercial invoice and acceptance by the buyer. No other documents are required.
The process is as follows, provided the buyer has an open account with a bank on the SWIFT network that is, or soon will be, URBPO enabled:
- the buyer sends their PO to their bank and requests a BPO be sent to the supplier’s bank
- the buyer’s bank delivers the BPO through the TSU (Trade Services Utility) operated by SWIFT to the supplier’s bank
- the supplier’s bank delivers the PO to the supplier
- the supplier accepts the PO and sends confirmation to their bank
- the supplier’s bank delivers the confirmation to the buyer’s bank
and, voila, a valid BPO, which is irrevocable once all conditions are met, has been created. Once the terms of the PO have been completed in full,
- the supplier informs their bank and provides the commercial invoice
- the supplier’s bank informs the buyer’s bank that the terms have been completed
- the buyer’s bank asks for confirmation from the buyer
- the buyer confirms completion
and the supplier is paid! It’s that easy.
Since only banks have access to the TSU, it’s likely that you’ll probably still have to use e-paper to communicate with your bank if you’re a small or mid-size operation, but if you’re a large multi-national, you can work with an approved vendor (of which there are at least 6 and more in the process of being certified) to integrate your finance system into the bank’s SWIFT system and if you have an open account with the right permissions, automatically create BPOs within your transaction limit (and seamlessly submit requests for approval and conveyance with the click of a mouse), just as easy as you can do ACH payments and wires today with advanced business banking solutions from the major banks.
Of course, it goes without saying that you have to be a client of either the 6 banks that are currently live, the 10 banks that have implemented the capability and that are in the process of implementing their big clients, or the 50 banks that are adding the capability, but if you’re not, and you’re a major player in international trade, maybe you should be! e-Invoicing was e-Procurement 1.0. e-Payment was e-Procurement 2.0. But e-BPO/TSU is e-Procurement 3.0, and if you want to get to the next level, you have to get there.