Which way now for digital trade?

Digital trade is at a crossroads, as SWIFT hands over the mantle for the Bank Payment Obligation (BPO) - the electronic trade finance instrument it has championed since 2013 - to trade solutions company essDOCS.

As of July this year, all SWIFT-handled BPOs are expected to go through essDOCS’ own new platform Cmatch, in a move welcomed by established trade bank users of the instrument.

Raphael Barisaac, global co-head of cash management, trade and working capital solutions at UniCredit, explained that his bank has been a leading adopter of the BPO ever since its inception and remain convinced of the instrument's value – not least because it underpins many of today's digital trade innovations.

“Trade cannot become fully paperless without industry-wide adoption of common tools and standards, so we encourage as many financial institutions as possible to engage with digital solutions such as Cmatch.”

However, the BPO’s future with essDOCs still remains unclear in the face of competition from blockchain trade finance initiatives.

At TradeIX, which is leading one of two blockchain trade consortia, chief marketing officer Oliver Belin said he sees “very little future for the BPO” instead believing that banks and corporates starting out in digital trade will go straight to distributed ledger technology.

“The BPO probably has its strongest - and possibly only - following with existing customers,” commented Belin. “This is similar to the situation we saw in Africa, where there were few landline connections and most consumers moved straight to the mobile phone when it emerged.”

He added that the BPO had never seen the transaction volumes needed to achieve economies of scale and bring down costs.

Marc Delbaere, global head of corporates and trade at SWIFT, admitted that “low take-up levels” were behind SWIFT’s decision to discontinue its Trade Services Utility (TSU) and the BPO transactions it accommodated.

“The TSU has been a very niche success and important for banks and corporates using it,” he stated, noting: “Its adoption has been limited, and as a co-operative we have to focus on solutions with wider adoption and application.”

Meanwhile, at we.trade, the other main blockchain trade consortium, general manager Ciaran McGowan said there could be a future for the BPO, but described it as “only one digital tool in the wider trade finance toolbox”.

The consortium offers a range of open account trade finance solutions over its digital platform, as well as a ‘lite replacement’ for letters of credit, similar to the BPO.

“I think SWIFT was ahead of its time with the BPO – they knew what they wanted to achieve, but did not have the right vision,” McGowan commented. “The BPO is now just one trade finance product among many.”

However, essDOCS remains confident of a positive future for the BPO. Co-chief executive Alexander Goulandris stated that transactions are on the up, albeit from a very low base.

“We have to wait and see what goes through our platform,” he said, explaining that there are currently about 13,000 BPO transactions per annum (in 2018 and 2019).

“The banks that have used the BPO in the past have always been happy with it. Will it fall to Blockchain? That is a possibility, but if you are using something that works, there is no real incentive to transfer.”

Goulandris dismissed suggestions that only existing users of the BPO will continue as its supporters with essDOCS, adding that some banks are keeping their options open by backing it and the new blockchain initiatives.

There are currently 12 active bank users of the BPO, now testing transactions over Cmatch, but essDOCS mentioned it is signing up two new customers, including an African bank and a Middle Eastern bank, with talks underway with two North American banks that have never used the BPO before.

“Digital trade is always going to be difficult, as you need to move lots of banks to one trade instrument,” Goulandris argued. “Achieving critical mass takes time.”

The two main blockchain-based trade finance groups are, nevertheless, now gathering pace.

European bank-led we.trade has 16 banks on its platform and is already seeing “hundreds of live transactions,” according to McGowan, who added it has seen 35 to 38 per cent growth in transactions over the last year.

The consortium is now working on fully commercialising onboarded banks and plans to take its platform global in the second half of this year. “We are doing a round of funding and expect to get American and Chinese banks investing in our initiative,” McGowan said, adding that we.trade wants to attract insurance and shipping companies too.

Meanwhile, the Marco Polo initiative, led by TradeIX, which will also offer a range of trade finance solutions - including receivables finance, payables and payment commitments - has now been piloted by 30 banks. It anticipates live transactions within the next few months.

“The receivables discounting solution went live in October and the technology is ready for use,” said Belin. “In a few weeks’ time, we will be launching a payments commitments solution which is a direct replacement for the BPO.”

He believes that other factors will drive the take-up of blockchain, including the opportunity to bring together a broader remit of players involved in the trade ecosystem.

“Blockchain is aimed at a much wider market, not just those in the trade finance transaction, as it provides visibility into the physical supply chain – for example, it provides information on the shipping containers and enables the tracking of goods.

“A BPO transaction by contrast is between two banks – no other information is provided.”

However, essDOCS contends it has the technological and legal expertise to improve the BPO, with Goulandris asserting: “We want to change the pricing structure and also make it easier to use, while expanding legal agreements to do four-corner model transactions.”

There are plans to extend the BPO this year to provide a four-corner Bank Payment Undertaking (BPU) solution, so that the buyer, buyer’s bank, seller and seller’s bank have visibility into transactions.

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