Going digital : Bank Payment Obligation stands to boost African trade

Trade and technology have fundamentally changed Africa’s economic fortunes and its profile as an investment destination for global businesses.

In recent years, the continent’s commercial relationships with the rest of the world have evolved away from a reliance on traditional partners in Europe and North America, towards a more balanced arrangement, where emerging economies in Asia and the Middle East feature more prominently. While total trade has grown by an average of 13% each year over the last decade, China-Africa trade has increased at 25% per annum, Africa-India trade by 32% and Africa-Indonesia trade by 29%.

Advances in technology have also allowed Africa to leap-frog interim development steps in and break new grounds in critical growth sectors such as mobile banking, where African innovators are leading the world.

A similar, game-changing experience is now possible in Africa’s trade finance sector, with the emergence of a digital trade settlement system, called Bank Payment Obligation or “BPO”.

BPO is an undertaking between banks that a payment will be made on a specified date after electronic matching of data on SWIFT’s Trade Services Utility (TSU) or any other acceptable transaction matching application. In providing an end-to-end, automated trade finance solution for corporates, BPO increases the speed, reliability and convenience of international trade while mitigating risks and reducing costs for the buyer and seller. The technology offers the best of both worlds for corporates: the security of paper-based letter of credit transactions with the flexibility of open account trade.

Currently, a large proportion of export trade is conducted on ‘open account’ basis, meaning that goods are shipped and delivered before payment is due: an attractive option for importers, but less so for exporters, who carry a lot of the risk in the transaction. Letters of credit – bank documents guaranteeing payments to exporters on delivery – reduce the risk, but can be inefficient, costly and inflexible, entailing at least five separate documents which need to be manually evaluated and reviewed for compliance.

This can be worse for commodity exporters, who are an important component of Africa’s trade. The technical and payment procedures for a single cargo by sea may demand the use of about 36 original documents, 240 copies and as many as 27 parties, placing an enormous burden on commodity companies to seek out more cost-effective ways of trade.

BPO could transform this process by removing the inefficiency of manually checking documents, improving the quality of verification and reducing the time taken from days to minutes.

The BPO concept is still relatively new internationally. To transact on BPO terms, both trading parties would require their respective banks to be signed up with SWIFT’s TSU. Standard Chartered was the first bank to go live with a fully automated BPO deal involving our clients BP Aromatics in Singapore and Octal in Oman in 2012. We were also the first bank to exe-cute a BPO transaction under the International Chambers of Commerce (ICC) ratified Uniform Rules for BPO (URBPO) for our client, the PTT Group.

When BPO started out, it had some shortcomings, notably the obligation for the seller to extract data from the original documents for matching on the TSU. For larger companies with long trading histories, this was no barrier, but for SMEs and companies without track records, the potential for fraud slowed adoption in Africa. Today, however, e-solution providers have made big strides in integrating electronic documentation into the platform, creating the possibility for a much more independent and secure process for transferring data from shipping documents directly into the BPO system, and for integrating it into regulated document escrows or single window environments. A single, integrated, digitised platform like this should be transparent and efficient enough to accelerate adoption of BPO by trade finance participants in Africa.

Africa stands to benefit from the developments in the BPO space. But it must make bold and swift commitments to adopt technology and build the necessary infrastructure. Much depends on how governments and business collaborate to establish clear rules and institutional frameworks to facilitate adoption.

We have seen great progress in some countries, which have seen the benefits of using new technology to streamline their trade processes. In 2012, Nigeria established a single window portal for trade – an online electronic trade platform connecting public and private sector entities – with the objective of becoming a “one-stop shop” for paperless trade and e-governance, positioning the country as a leading nation in Africa for electronic trade.

Nigeria and other African countries can leverage on the recent developments in the BPO space to enhance their single window propositions and achieve the objectives they set out for themselves. They can also explore possibilities of exchanging information on single window systems with their trading partners to improve the transparency and integrity of trade documents flowing between both countries. Such efforts can reduce fraud and boost cross border trade significantly.

The ICC Banking Commission, SWIFT and Standard Chartered Bank have been working together to promote the benefits of BPO to regulators, banks and businesses in Nigeria. More of such engagements are needed if digital trade is to gain traction in the continent.

Indeed, the upside for African businesses accessing BPO could be profound. By nature, small and medium enterprises (SMEs) in Africa tend to focus their efforts on securing post-shipment finance, as adequate security for pre-shipment finance can be challenging to secure.  With BPO, pre-shipment finance will be more accessible given the greater visibility of transactions, electronic verification of data and third party authentication in the BPO workflow. By easing access to financing, BPOs have the potential to finance larger trade flows and boost existing trade partnerships, ultimately benefiting much needed economic growth and job creation for the continent as a whole.

In conclusion, BPO can make African economies more competitive by driving efficiencies in international trade. An efficient international trade environment can fuel economic opportunities and improve living standards even in smaller countries with limited domestic markets.