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SWIFT-ICC Collaborate on “Electronic Letter of Credit”

Two global service providers recently joined forces to create a new way to facilitate trade finance.

SWIFT, a financial messaging provider for institutions in 210 countries, and the banking commission of the International Chamber of Commerce (ICC) collaborated on the Bank Payment Obligation (BPO), a new payment tool that can be used between banks and looks poised to enhance, or possibly replace, commercial and confirmed letters of credit.

The BPO essentially moves all of the manual tasks associated with using a commercial letter of credit and automates them, creating fewer chances for errors throughout the process. It represents an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after a specific event has taken place, according to SWIFT-ICC. “This ‘specified event’ is evidenced by a ‘match’ report that has been generated by SWIFT’s Trade Services Utility (TSU), or any equivalent transaction matching application,” they added.

Interoperability between participating banks is made possible by the BPO’s reliance on a standard set of messages, each of which reflects events that have taken place in the physical supply chain, and “create trigger points for the provision of financial supply chain services.” For example, the bank’s systems could generate a message that proposes offering pre-shipment financing based on a trigger point that indicates the confirmed receipt of a purchase order, or a proposition of post-shipment financing based on the receipt of an approved invoice. In either case, the BPO would be used as collateral for the financing.

The reliance of all participating banks on the single messaging standard, called ISO 20022, takes the guesswork out of the documentary credit process. “Open account often fails to provide banks with access to underlying transaction data—impeding their ability to follow relevant events in the physical supply chain,” said SWIFT-ICC. “The BPO and related ISO 20022 messaging standards provide access to relevant data, records and reporting—giving banks the ability to provide risk mitigation, finance and payment services while introducing additional automation and efficiency into the supply chain management process.”

In other words, by matching data according to the messaging standard, banks get a front row seat for the entire supply chain process and can react immediately to the occurrence of certain events. Furthermore, matching the data automatically ultimately removes the subjectivity associated with the manual checking of documents. Instead of having to look at the actual documents and make a judgment call on whether or not they’re correct or in compliance, banks will know instantly if there’s an issue or if the documents are good to go. “There is no subjectivity attached to data matching,” said SWIFT-ICC. “It either matches, or it doesn’t.”

So far SWIFT and ICC have only signed an agreement confirming the framework for the future publication and maintenance of a set of contractual rules that will establish uniformity of practice in the market adoption of the BPO.

Jacob Barron, CICP, NACM staff writer