Trade finance products: Composition of Trade Finance Project and its importance for the integrations of SMEs in the trade value chains

Urs Kern

28th March 2014

Geneve

Today many companies are globaly linked via integrated supply chains

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Production Centre Consumer

Institutions

Suppliers

G-NEXID workshop, 28th March 2014, Geneve

Implementation of production networks and supply chains cross countries (particularly between industrialised and developing countries)

737 Classic at start of production

787 Dreamliner at start of production

Value chains increasingly fragmented, as companies outsource more globallyExample Boeing

Parts built by Boeing in-house

Boeing has transformed itself into a systems integrator and has outsourced an increasing proportion of its aircraft production

10% outsourced

747 series at start of production20% outsourced 80% outsourced

SOURCE: International Association of Machinists and Aerospace Workers; Boeing; Reuters; McKinsey Global Institute

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SMEs plays a significant role in the global supply chain

• More flexible• Faster• More innovative• Cheaper

Software is a key enabler of process improvement and has led to closer cooperation between firms (e.g. via ERP, GTM, TM, CRM, etc)

However, SME’s tend to be under capitalised. Buyers have a strategic interest to integrate suppliers into the Financial Supply Chain

G-NEXID workshop, 28th March 2014, Geneve

General Supply Chain Finance Umbrella

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Bu

yer

Sel

ler

Pre-Shipment Financing(purchase order finance,

advanced payment)

Post-Shipment Financing(Approved payables finance

Receivables purchase)

Purchase order with payment obligation

Import FinancingExtension of payment due date

Supply Chain FinancePre-Shipment Post-Shipment

Source: Adapted from“BAFT-IFSA Product Definitions for Open Account Trade Processing and Open Account Trade Finance”, vom 13 Dezember 2010

Matching of purchase order dataTransport data matching

Trig

ger

poin

t

Invoice data matching

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General structure of supply chain finance instruments

Business relationship & liability

Buyer/Importer

Seller/Exporter

Service Provider

Risk & processing services

Financingservices Routing and

Settlement

Production(Market)

Distribution(Client)

+a/c

Processing platform

Contract

+a/c

• Limited buyer-seller relationships • Target “wealthy” and risk-free corporates • Based on proprietary formats and channels• Business relationship with Trade Service Provider

Innovation in SCF – The BPO

Bank Payment Obligation (BPO)

What is BPO? The Bank Payment Obligation is a new payment term based on data

matching which can be used for risk mitigation and financing!

irrevocable

concret & conditional

What are the general criterias

of a BPO?

„A Bank Payment Obligation (BPO) is an irrevocable and independent undertaking of an Obligor Bank to pay or to incur a deferred payment obligation and pay at maturity a specified amount to a Recipient Bank in accordance with the conditions specified in an established baseline.“

(Extract from the URBPO)

What ist new?For the first time an open account payment obligation can be confirmed by

banks in order to get financed. The ICC supports the market launch with the

release of unified rules (URBPO).

Innovation in SCF – The BPO

Payment risk mitigation instrument

Communication Channel

Communication standard

Three components for electronic matching of commercial trade data

ISO 20022 TSMT(Trade Service Management)

Between Banks:

TMA (Trade Matching Application)

BPO

(Bank Payment Obligation)

Between customer and banks:

Bilaterally to be agreed(Portal/SWIFT Score/ Papier…)

Innovation in SCF – The BPO

The BPO based on electronic data matching

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Matching of contract data

Transfer of funds

Matching of data

Buyer Seller

1) Sign contract (PO)

2) PO data 3) SO data

4) Match PO/SO data & confirm

6) Match requested datasets & confirm

5) Datasets

8) Transfer funds

7) Debit buyer 9) Pay sellerFIN

TMA=Transaction Matching Application, PO= Purchase Order; SO= Sales Order

TMA

Bank A Bank B

Buyer Seller

Bank A Bank B

TMA

Buyer Seller

Bank A Bank B

BPO is established

BPO is due

Trade is settled

5) Datasets

G-NEXID workshop, 28th March 2014, Geneve

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Approved Payables Financing with BPO

Buyer

Buyer’s Bank

Seller’s Bank

Seller

1. Send all paper invoices

1. Send only invoices for financing

2. Send only approved invoices

3. Initiate baseline with BPO

4. Check invoice is approved and resubmit baseline

5. Dataset

6. Approved payablesfinancing

TMA

BPO

G-NEXID workshop, 28th March 2014, Geneve

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• Limited buyer-seller relationships • Target “wealthy” and risk-free corporates • Based on proprietary formats and channels• Business relationship with Trade Service Provider

Summary: Supply Chain Finance for corporatesOpen 4-corner vs. closed 3-corner business model

• Large and growing trade players worldwide • Any corporate irrespective of their risk profile • Requires open and interoperable standards • Business relationship stays with the banks

BPO

Buyer/Importer

Seller/Exporter

Exporter’s bank

Importer’s bank

Risk, financing & processing services

Risk, financing & processingservices

Routing and Settlement

Routing and Settlement

Production(Market)

Distribution(Client)

Business relationship & liability

+a/c

+a/c

Processing platform

Contract TMA

Processing platform

Business relationship & liability

Buyer/Importer

Seller/Exporter

Service Provider

Risk & processing services

Financingservices Routing and

Settlement

Production(Market)

Distribution(Client)

+a/c

Processing platform

Contract

+a/c

Urs KernSenior Sales Manager, Corporate Business Europe, Middle East & Africa

SWIFTCity-Haus 1, Platz der Republik 6D-60325 Frankfurt am MainGermany

+49 69 7541 2233+49 69 7541 2290+49 172 763 5894urs.kern swift.comswift.com

@

D

F

ME

W

Thank you very much

To contact the SWIFT's Trade and Supply Chain team, send us an e-mail at supplychain@swift.com

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12G-NEXID workshop, 28th March 2014, Geneve