Comparison between BPO and other method of settlements
1.2.2.1 Comparison between BPO and L/C in terms of the nature, obligations arisen and transaction flow
Letters of Credit (L/C) and Bank Payment Obligations (BPO) serve as effective tools for minimizing risks for sellers, buyers, and banks alike Both mechanisms provide sellers with a guarantee of payment, enhancing financial security in transactions Additionally, L/C and BPO act as collateral in financing relationships between banks and their clients, reinforcing trust and facilitating smoother trade operations.
Table 1.4 Comparing L/C and BPO in terms of the nature, obligation arisen and transaction flow
Definition An irrevocable arrangement constitutes a definite undertaking of the Issuing Bank to honour a complying presentation (ICC, Uniform Customs and Practices for Documentary Credits (UCP
An Obligor Bank provides an irrevocable and independent commitment to pay a specified amount to a Recipient Bank upon the submission of all required data sets that meet an Established Baseline, resulting in either a Data Match or an accepted Data Mismatch, as outlined in sub-article 10(c) of the ICC's Uniform Rules for Bank Payment Obligation (URBPO 1.0, 2013).
Obligation of Issuing Bank to pay to the beneficiary.
Obligation of Obligor Bank to pay to the Recipient Bank. Document flow Seller ÷ Nominated banks/
Issuing bank ÷ Advising bank÷ Buyer
Some special documents such as Bill of lading or Insurance Policy would be required a full set.
In the context of a Letter of Credit (LC), "honour" refers to three key actions: (i) making payment upon presentation, (ii) agreeing to a deferred payment, or (iii) accepting a bill of exchange where the seller is the beneficiary, as outlined in the ICC's Uniform Customs and Practices for Documentary Credits (UCP).
In comparing the Bill Payment Obligation (BPO) with a Letter of Credit (L/C), it is important to note that the acceptance of a bill of exchange is not addressed in the URBPO document This distinction arises because an L/C serves as a document that formalizes the relationship between the Issuing Bank and the Beneficiary, whereas the BPO represents an agreement between two banks Furthermore, if a draft is utilized in this context, it must be a bank draft rather than a commercial draft, as is typical in Documentary Credit transactions, with a bank draft being an order from one bank to its correspondent bank.
The Obligor bank is responsible for paying the beneficiary of a commercial draft and cannot delegate this obligation to another bank, making the use of a bill of exchange unnecessary Further details on the transferability and confirmability of a Bank Payment Obligation (BPO) will be explored in the subsequent comparison.
A compliant presentation refers to a presentation that adheres to the terms of the credit, the stipulations outlined in UCP 600, and the standards of international banking practices as established by the ICC's Uniform Customs and Practices for Documentary Credits.
UCP 600 outlines specific rules that govern the acceptance of presentations for payment, detailing requirements for original documents and copies as per Article 17, commercial invoices in Article 18, transport documents in Articles 19 to 24, and insurance documents in Article 28 Unlike UCP 600, the URBPO does not provide a basis for determining acceptance; instead, it relies on the functionality of the applicable Transaction Management Application (TMA) and its terms and conditions Essentially, the established baseline within URBPO acts as the backbone of transactions utilizing Bank Payment Obligation (BPO) as a payment method, serving as a data reference for comparing data sets.
Credit agreements are irrevocable, while Bank Payment Obligation (BPO) agreements are both irrevocable and independent, meaning the Recipient Bank's role cannot be transferred Unlike beneficiaries in a Letter of Credit (L/C) who can assign their rights, a Recipient Bank involved in a BPO cannot delegate its rights and obligations to another party Should the Recipient Bank wish to designate a different institution to fulfill its role, an amendment to the Established Baseline is required According to Article 16 of URBPO 1.0, the assignment of proceeds is permitted under applicable law, but it clarifies that this article pertains solely to the assignment of proceeds, not the transfer of the Recipient Bank's role.
Since the only obligation of payment arising from a BPO is the obligation of Obligor Bank to Recipient Bank, there is no opportunity to “confirm” the BPO like
Open Account Documentary Credit BPO
In a Letter of Credit (L/C) transaction, the Recipient Bank is not obligated to pay the Seller if the Obligor Bank refuses or is unable to make the payment, unless there is a separate agreement between the Recipient Bank and the Seller To enhance security for the Seller, both parties can enter into a bilateral agreement ensuring that the Recipient Bank will compensate the Seller regardless of the Obligor Bank's payment status This additional undertaking is not governed by existing rules in the Bank Payment Obligation (BPO) framework, creating a competitive environment for banks On August 19, 2015, the ICC published the "ICC Guidelines for the Creation of BPO Customer Agreement" to assist in establishing such agreements.
In a Letter of Credit (L/C) transaction, all documents must be submitted through a bank, whereas in a Bank Payment Obligation (BPO) transaction, documents are sent directly to the buyer, with only essential information extracted for the banks L/C transactions typically require a complete set of documents, such as a full Bill of Lading or insurance policy, while BPO transactions focus solely on data The involved bank needs to know the number of originals and copies issued, but this data extraction must comply with national laws regarding electronic documents and signatures to ensure the authenticity of the documents For a more detailed understanding of BPO operations, refer to Section 1.1.3, which outlines the typical transaction flow.
- Differences in the forms of documents:
There is a common misconception that utilizing electronic documents (eDocs) in a letter of credit (L/C) transaction is equivalent to using a bank payment obligation (BPO) However, eDocs typically consist of scanned images of physical documents, which differ significantly from the extracted data format used in BPOs Additionally, it is important to note that scanned images can vary in form, whereas BPOs adhere to standardized messages defined by ISO20022, specifically ISO20022 TSMT messages.
The use of Bank Payment Obligation (BPO) transactions significantly reduces errors in data matching compared to traditional document examination under a Letter of Credit (L/C) To facilitate the adoption of electronic documents, the International Chamber of Commerce (ICC) introduced the eUCP as a complement to the Uniform Customs and Practice for Documentary Credits (UCP) Despite their differences, eUCP and URBPO will continue to coexist in the financial landscape.
1.2.2.2 Advantages and disadvantages of BPO compare to Documentary Credit and Open Account
This section evaluates the advantages and disadvantages of three settlement methods: Open Account, Documentary Credit, and Bank Payment Obligation (BPO) The primary parties involved in these transactions are the Seller, Buyer, and Banks, each playing a crucial role in the process.
Table 1.5 Advantages and disadvantages to Sellers, Buyers and Banks of using an
Open Account, an L/C, and a BPO term
- Assured to be paid - Assured to be paid
Buyer - Lower cost of capital
Improving relationship with the seller
- Improving relationship with the seller
- Opportunity for a larger volume of contract Bank Not be exposed to credit risk
More charges and fees taken
More charges and fees taken
Seller Exposed to credit and financial risk
Higher fee than Open Account
Buyer Goods are not as it is descripted in the contract
Goods are not as it is descripted in the contract
Bank - Less charge and fee collected
The Open Account payment method simplifies transactions for companies, including those with less experience, by minimizing documentation requirements With banks playing a limited role primarily in payment remittance, the transaction costs associated with Open Account payments remain competitively low Additionally, allowing buyers to defer payment until after receiving goods provides sellers with a competitive advantage in a buyer-driven market.
When a buyer and seller engage in a transaction for the first time, the seller may be hesitant due to limited knowledge of the buyer's creditworthiness However, utilizing a Letter of Credit (L/C) can provide assurance to the seller, as the bank guarantees payment, mitigating the risk involved in the transaction.
DEVELOPMENT ORIENTATION OF USING BPO IN VIETNAM
3.1.1 Development orientation of using BPO in Vietnam
To effectively implement Business Process Outsourcing (BPO), several key requirements must be fulfilled: the application of ISO20022, particularly ISO20022 TSMT for Transaction Service Management; the registration of Transaction Service Units (TSU); comprehensive training for employees to ensure they possess the necessary skills to operate TSU and related software; the establishment of correspondent banks; and obtaining customer approval.
Vietnam's commercial banks have yet to meet the necessary conditions for full operational readiness, resulting in many BPO projects remaining in the planning or testing phases over the next five years However, the State Bank of Vietnam's proposal to implement ISO20022 in the Interbank Payment System could accelerate the deployment process across all commercial banks in the country.
3.1.2 SWOT matric analysis of deploying in Vietnam
Vietcombank is anticipated to be the pioneering commercial bank in Vietnam to offer Business Process Outsourcing (BPO) as part of its services A SWOT analysis will outline the motivations behind this initiative and the potential challenges Vietcombank may encounter while developing a payment and trade finance service that incorporates BPO.
Table 3.1 SWOT matric of deploying BPO at Vietcombank
- A high growth of international trade and technology
- Support of SWIFT in deploying
- Unawareness of corporates to BPO
JSC Bank for Foreign Trade of Vietnam, originally established as the Bank for Foreign Trade of Vietnam on April 1, 1963, evolved from the Foreign Exchange Bureau of the State Bank of Vietnam Transitioning from a national bank, Vietcombank became a joint-stock commercial bank in 2008 and was subsequently listed on the Ho Chi Minh Stock Exchange (HOSE) on June 30, 2009, under the stock code VCB As of December 31, 2019, Vietcombank operates 111 branches across the country.
472 transaction offices in 54/63 cities and provinces Vietcombank establishes and maintains a comprehensive relationship with 1316 banks in 102 countries and territories.
Vietcombank is the highest brand value in the banking section in three years from 2017 to 2019.
Table 3.2 Brand value OfVietcombank in 2018 and 2019 (million USD)
Year Income Change(%) Market share (%)
Value Change Value Change Value Change
Vietcombank is the leading bank in International settlement and trade finance.
Table 3.3 Changes in income of international settlement and trade finance of
Vietcombank from 2017 to 2019 (unit: million USD)
Vietcombank delivered an impressive performance in 2019 and became the first commercial bank of Vietnam to reach over one billion US dollar of consolidated profit before tax.
Table 3.4 Some important financial indexes of Vietcombank from 2017 to 2019
Element Fitch Ratings Moody’s Standard &
Stand-alone credit profile b- b1 bb-
Stand-alone credit profile b ba3 bb-
Stand-alone credit profile b ba3 bb-
Vietcombank aims to be the leading risk management bank in Vietnam by investing in modern credit management practices that align with international standards and the guidelines of the State Bank of Vietnam The bank consistently evaluates its risk management framework, employing a three-line defense model to ensure robust oversight and control.
Vietcombank prioritizes the identification, control, and mitigation of risks by implementing a comprehensive risk management policy and internal regulations that ensure compliance with legal standards The bank emphasizes the development of advanced risk measurement tools, methods, and models, alongside a robust internal auditing process to enhance its risk management framework.
Vietcombank has successfully implemented Basel II since 2012 and became the first bank in Vietnam to fully comply with the capital adequacy ratio requirements outlined in Circular No 41, achieving this milestone one year ahead of schedule This accomplishment reflects the bank's commitment to regularly updating its IT systems to align with management needs and regulatory standards.
Table 3.5 Credit rating rank of Vietcombank by Fitch Ratings, Moody’s and
Despite the optimistic assessments from rating agencies, Vietcombank's credit ranking remains low, which may hinder its ability to attract foreign corporates for BPO transactions These companies often consider credit ratings when deciding whether to engage with Vietcombank as the obligor bank, potentially impacting the bank's business opportunities.
- There is no short-term need of BPO, universities and colleges barely teach deeply about BPO and use the time for remain methods especially Documentary
Credit People have to learn by themselves if they want to improve their knowledge of BPO.
- Synchronisation in technological infrastructure is also a problem not with only Vietcombank but banks in Vietnam Let take a payment system as an example.
Banks in Vietnam are using different payment systems at the same time They are
The Interbank Payment System (IBPS) encompasses various payment systems, including the National Payment Corporation of Vietnam (NAPAS), bank payment systems, and intermediary payment systems The diversity of message types and standards poses challenges, as different systems utilize specific messaging formats For instance, SWIFT MT messages facilitate interbank and international transactions, while ISO 15022 messages are designated for stock market payments Additionally, card transactions adhere to ISO 8583 standards Therefore, when Vietcombank needs to send a message to NAPAS, it must comply with the ISO 8583 format to ensure effective communication.
With the rise in global trade, characterized by increasing transaction volumes and values, there is a growing demand for faster and safer settlement methods Corporations are also seeking enhanced trade financing services, highlighting the critical role of Bank Payment Obligation (BPO) in meeting these evolving needs.
Table 3.6 Exporting and importing volume of Vietnam in 2017 and 2018 (data of
Ministry of Industry and Trade of Vietnam)
(Source: Ministry of Industry and Trade of Vietnam, Export - Import Report of Vietnam 2017, 2018) Table 3.7 Exporting and importing volume of Vietnam in 2017 and 2018 (data of
In a 2017 survey conducted by the ICC regarding the digitalization trends in the banking sector, participants were asked about the potential elimination of physical paper usage in their banks The findings, illustrated in the accompanying chart, highlight the industry's movement towards more digital solutions and the decreasing reliance on traditional paper-based processes.
■ To no extent, not implemented at this time
■ To some extent, implemented for some transactions
■ To a great extent, fully implemented for all
Figure 3.1 Survey about digitalisation trend in banking industry conducted by ICC in 2017 (unit: %)
The document verification process is often a significant bottleneck in the digital transaction landscape By implementing Business Process Outsourcing (BPO), organizations can streamline this process, utilizing a centralized matching engine for efficient document checks, thereby reducing reliance on human intervention.
ISO has established a dedicated standard for Business Process Outsourcing (BPO) known as ISO 20022 TSMT This international standard ensures that all BPO transactions are synchronized globally, resulting in fewer disputes With reduced disputes, organizations can save on costs and minimize wasted time, ultimately enhancing the efficiency of both corporations and banks.
In accordance with the URBPO, banks participating in a BPO operation are required to utilize the same TMA, which means that the deployment of one bank is contingent upon the deployment of its counterpart This interdependence can lead to a cycle of ongoing challenges.
In Open Account transactions, banks are limited to remittance responsibilities, while in Documentary Credit, effective communication systems must adhere to standards like MT 700 messages International payment specialists should enhance their skills, and banks need to secure permission to use a TMA, such as the TSU of SWIFT, for BPO transactions Additionally, banks must upgrade their IT infrastructure to comply with the ISO20022 TSMT standard Vietcombank should evaluate the initial costs before deciding on BPO deployment Currently, only 21 banking groups globally, including 18 of the top 20 trade banks based on Cat 7 traffic, maintain over 60 corporate relationships active in BPO/TSU, with 22 other groups still in the testing phase.
CONCLUSION
This study defined what is a BPO and governing rules to BPO The study also clears some terminologies in the URBPO which is the voluntary rules to BPO.
This study provides insights into the necessity of implementing Business Process Outsourcing (BPO) in the banking sector, highlighting the reasons behind the limited adoption of BPO among banks Through a SWOT analysis of Viecombank, the research identifies key limitations and weaknesses that must be addressed to facilitate successful BPO transactions, and it offers strategic solutions for improvement.
The author lacks firsthand experience with the Trade Service Utility (TSU), limiting their ability to provide an in-depth analysis of its interface and usage For comprehensive guidance, users can refer to the Trade Service Utility 2.0 Interface User Guides published by SWIFT Additionally, SWIFT provides support to banks that register for the TSU, ensuring assistance is available for effective utilization.
This study relies on publicly available information from Vietcombank's website and other online sources, as access to internal data is restricted Consequently, this may limit the ability to provide a thorough analysis of Vietcombank's international settlement and trade finance activities.
Future research could focus on the implementation of Business Process Outsourcing (BPO) at Vietcombank, providing a detailed analysis of its technological infrastructure, human resources, and the current state of international settlement and trade finance activities.
CONCLUSION OF THE CHAPTER THREE
The government actively promotes the digitalization of operations, presenting a significant opportunity for commercial banks and enterprises to leverage the benefits of Business Process Outsourcing (BPO) However, the implementation of BPO may face challenges over the next five years due to inadequate infrastructure and complex legal frameworks Additionally, raising awareness among companies about the advantages of BPO compared to traditional settlement methods is crucial for its acceptance in Vietnam This chapter also outlines key elements of the SWOT analysis regarding BPO deployment in Vietcombank.
The increasing demand for digitalization in the banking sector, particularly in international settlement and finance, highlights the need for improved payment methods While current payment systems may suffice for the near future, they have notable shortcomings that require attention Business Process Outsourcing (BPO), recognized as a cutting-edge financial solution for the 21st century, has the potential to address these challenges effectively.
The article "Using Bank Payment Obligation: Lessons for Vietnam" explores the essential requirements for implementing Bank Payment Obligation (BPO) in Vietnam's banking sector It analyzes the current state of commercial banks in the country and offers strategic solutions to enhance the adoption of BPO, aiming to improve efficiency and security in international trade transactions.
The article discusses the fundamental aspects of Business Process Outsourcing (BPO), including its definition, key terminologies, and unique features that set it apart from other settlement methods like Open Account and Documentary Credit It examines the current state of BPO implementation in Vietnam, highlighting the challenges faced by commercial banks, particularly in technology infrastructure, human resources, legal frameworks, corporate awareness, and the role of correspondent banks The third chapter outlines the development strategy for BPO in Vietnam through 2025, proposing solutions to the identified challenges It focuses on Vietcombank, the leading commercial bank in Vietnam, utilizing a SWOT analysis to evaluate BPO deployment potential, and suggests improvements in technology, human resources, and legal adjustments in Vietnam's Customs Law to facilitate BPO growth.
The study acknowledges limitations due to time constraints and restricted access to documents; therefore, constructive feedback and additional insights are encouraged to enhance the research.
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