Evaluation
13.28
The BPO is a digital financial product that was designed by the banks for the banks to intermediate in the open account space.
It adds a welcome flexibility to cross-border trade finance by extending the financing options potentially available for each of the segments of that transaction and permitting the banks to enter at any of those stages in the supply chain; for example, when the purchase order is created, or when the goods have been produced, shipped, or delivered. Thus, a BPO can be issued for a trade transaction already underway and does not have to be issued at the outset. Its superiority over documentary credits lies in its speed in executing payment and the objectivity and automaticity in determining whether payment should be made.13.29
The BPO has succeeded as a new financial instrument that has captured a sizeable, even though not overwhelming, proportion of the market.[1312] In this, it fared better than some of its earlier e-commerce predecessors that had more localised or shorter application.[1313] This is partly because of the adoption of global standards in the form of the URBPO, which are technically astute and, ideally, should facilitate the adoption of the new financial instrument globally. The structure and content of the URBPO are familiar, since they are based on the template of the UCP and other documents authored by the ICC, even though the URBPO are significantly shorter because of the limited topics covered. As seen previously, the URBPO neither cover the relations between the banks and their customers, which means that the customers cannot initiate a BPO transaction, nor the relationships between the TMA with its bank clients.
It was envisaged from the outset of the drafting of the URBPO that there would be a second phase of developing the Rules whereby the relations between the underlying parties, that is, the buyer and seller and their respective banks, would be added to the URBPO framework and it was also subsequently hoped that such a development might kickstart the widespread use of the BPO.[1314] Since the BPO is a relatively new financial instrument on which there is very little judicial or other commentary, the legal relationships that it establishes have not been tested and one can only reason by analogy to documentary credits, electronic communication, and general principles of modern commercial law.13.30
To date, the BPO has found a challenge in establishing its strong short- or medium-term value to displace the existing payment methods across the network of recipient banks, obligor banks, sellers, and buyers.[1315] The lack of widespread commercial application of the BPO illustrates, therefore, that astute rules, by themselves, do not create sufficient real value in the eyes of the business entities targeted by the new financial instrument.[1316] Several factors explain this lack of widespread acceptance. First was the negative publicity for the BPO on its launch, since there was a general, but mistaken, perception that the BPO was created to replace the popular documentary credit.[1317] Documentary credits, despite being document intensive, and, therefore, slow, expensive, and prone to error, have held their own not only because of the inertia by the banks but also because they provide the effective security that is not available in other financial instruments. Thus, they tend to be the instrument of choice in trade covering long distances, newly formed trade relationships and in countries with weaker contractual enforcement, less financial development, and higher political risk.[1318] They are also popular in some countries because of historical preferences and regulatory regimes that require the use of letters of credit.[1319] Furthermore, the letter of credit rules, including the UCP and its supplement for the electronic presentation of documents (‘eUCP 1.1’), are better known among banking and commercial practitioners. In contrast, the BPO is just as expensive as a documentary credit in terms of bank capital because the bank substitutes its credit for the customer’s credit and the bank assumes an obligation on behalf of its client and, yet, there are no documents that serve as collateral in the hands of the bank.
Open account transactions have also largely retained their share of business, thus fending off the competition from the BPO, because, first, whereas the BPO increases the finance options for corporations, some of them had found alternative financing solutions before the advent of the BPO, for instance using supplier networks.[1320] Secondly, the BPO was marketed exclusively to highly creditworthy customers, meaning that it was deprived of a critical mass since it was not generally available for use by all bank customers.[1321]13.31 The novel feature about the BPO is that it is an electronic payment and security mechanism to facilitate trade finance. Its boon is also its bane. In the twenty-first century, technological innovation in commercial transactions is rampant where banks and financial technology companies are competing and at the same time cooperating in investing in multifarious transactional applications and payment methods.[1322] There is, thus, stiff competition for investment capital and acceptability among the BPO and other different technological innovations. Its advantages overlap with those offered by the distributed ledger technology, commonly known as blockchain, which was introduced in 2014, one year after the launch of the BPO. The first trade-finance transaction with blockchain was completed in 2016.[1323] Blockchain, like the BPO and other digital innovations, has technology-based operational requirements,[1324] many advantages,[1325] and a wavering support in the commercial marketplace.[1326] At their core, blockchain and similar techniques intend to combine efficiency, costeffectiveness, and security of their transactions, which are the same values at the core of BPOs. Some innovations will thrive, others may develop into some inter-operable systems or see their advantages parsed out throughout the financial industry to improve different systems, while some will wither.
Currently, the BPO operates best in the niche market where the traders have prioritised 13.32 the electronic presentation of data.[1327] It will also be useful for traders involved in emerging markets and using the open account method when they could usefully benefit from having payment protection that they do not currently have.[1328] That niche market is small and more effort is required from the banks and corporate customers to give it clout in the market. Alternatively, the instrument may develop into something else with equivalent or enhanced values.[1329]
V.