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The future of trade finance

An efficient and effective trade finance market is vital to a country's prosperity and to the survival of thousands of individual companies in the supply chain, but it is an incredibly clunky, paper-based world.

The set of documents and processes has remained largely unchanged for decades, supporting traditional letters of credit and guarantees.  This all works well enough but it is slow and requires a lot of manual work, exchanging and checking physical pieces of paper. It is also highly prone to error and challenge, and to a large extent feels like it belongs in the last century.

There is, however, a new kid on the block courtesy of the International Chambers of Commerce and SWIFT - the Bank Payment Obligation.  This is an entirely electronic set of ISO20022 messages backed by an ICC approved protocol.

It is not for the faint hearted - you need to have a robust supply chain (ie buyers and sellers know and trust each other) but the benefits are huge.  There is no manual checking; payment is made once the messages are automatically matched via a central service, and this opens new financing options as well as the obvious benefit of earlier payment.  RBS's Anand Pande commented that dematerialisation of invoices drives processing costs down from $50 to "a few cents", but it remains to be seen if this will translate into an overall cost saving compared to letters of credit

Will it take off? There is a great deal of interest in Asia, particularly in the commodities and energy markets, but ultimately it will come down to economics.  If the price is right, BPOs look set to transform international trade.

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