The Banks' New Bet on E-Business - Industry Trend or Event

Industry Standard, The, Oct 23, 2000 by Anya Schiffrin

Despite several frustrating years of trying to put payment services on the Net, many banks are pouring more money into the market.

FOR COMMERCIAL banks, the Internet has been more enigma than opportunity. Not only have consumers shied away from online banking, but trillions of dollars worth of business transactions seemingly made to move online have yet to translate into a substantial market for most banks.

But give bankers some credit. They're not discouraged. Many banks are redoubling their efforts in bringing online services such as handling payments and billing for companies. As more businesses get equipped to buy and sell online, banks are seeing their best chance to finally move the corporate financial services that has been their bread and butter for decades.

Last week, Bank of America said it will spend $50 million to set up an online-payments service early next year, joining banking giants such as Chase Manhattan and Citi-group in a race to create a suite of online financial payment systems. The banks are betting that changes in ever sophisticated technologies will give them a lead over rivals that could translate into a bigger market share.

"Whoever gets there first with a system that everyone else plugs into will have an advantage," says Peter Salvage, senior consultant with Zefer, an Internet consulting firm. "They will be the backbone and can probably eke out profits from this."

Bank executives say the online businesses will make margins shrink because of the ease and transparency of putting their activities online, but bankers hope increased volumes - and the chance to sell new products - will generate extra cash.

Ideally, these new systems will handle everything from credit checks to escrow and trade financing to loans. As the recent wave of banking consolidation reduces the number of big commercial banks, each remaining institution is hustling to cement ties to companies by offering all-in-one services.

Banks have used the Net to handle corporate payments for several years and electronic networks to manage them even before the Internet. But the rise of online marketplaces is letting banks create new systems that they say will be more comprehensive, not to mention easier and cheaper to use. Many of those older systems were built for two parties that knew each other, whereas newer systems will allow companies to find and check out potential partners.

For banks, it all hinges on whether the online marketplaces being set up by business-to-business companies will succeed. If so, a car-parts maker that wants to sell its products on a marketplace could tap into a bank's online database to find out if a prospective buyer exists, what his credit limit is and whether he's authorized to make the transaction. Similarly, a buyer could go through his bank to borrow money for the purchase, get the bank to put the funds in escrow and perform any foreign exchange necessary to complete the purchase.

In short, the new generation of online payment systems can speed up the vetting of potential business partners. "If someone says he wants 10 tons of iron ore, a distributor needs to know if he's dealing with an authorized purchaser, not some disgruntled employee or even worse, some kid in a garage hacking into the computer system," says Christian Schneider, the director of the North American b-to-b division of Amsterdam-based banking giant ABN-AMRO.

The simplification of online transactions will mean the time-honored business of handling corporate payments can be done at a lower cost, bank executives say. That's good news for banks under pressure from investors to squeeze out higher profits. But there's a more immediate incentive: If a bank can't make its corporate business work online, someone else probably will. And the bank will lose customers.

The risks are heightened by the costs of setting up the technology in the short term. Ann Cairns, head of global e-solutions at Citibank, estimates it will take between 10 percent and 12 percent of a bank's annual revenues to adapt all businesses to the Internet. Others estimate that building an entire system will cost in the tens of millions of dollars. Partnering with another bank, as Citigroup and Wells Fargo have done, is one way to spread out the cost. Hooking up with infrastructure companies like Ariba and Commerce One is another option, especially for smaller banks.

"What is emerging is a whole lot of gateway service providers," says Randy loss, director of commerce services at b-to-b infrastructure provider Ariba. "These are single product companies with protocols that can connect to the Internet. These will be used by less-sophisticated financial institutions that don't want to build their own system."

Developing these systems isn't easy. It involves cutting across a number of different bank divisions often staffed by people who don't work together. This heady mixture of bureaucracy and turf battles can make it hard to come up with a comprehensive system, as bankers are the first to admit.