For Fifth Third Bancorp, offering letters of credit online was the next logical step in digitizing its products. So it struck a deal with ec-Finance, ane-commerce software firm, to issue L/Cs for customers of online exchanges using ec-Finance's online platform.
The $45 billion bank is offering L/Cs live on some exchanges, although at presstime it had yet to execute any.
An important revenue source for the bank, L/Cs are running $25 million ahead of projections for 2000. The L/Cs are a perfect financing vehicle for online B2B exchanges, where participants tend to be unfamiliar with each other, said John Perez, vice president of international banking at Cincinnati-based Fifth Third. "We think some of these B2B sites are going to be popular," he said.
But, Perez added, he's "not confident enough or arrogant enough to say this is where the deal flow will be 10 to 15 years down the road. We're hedging our bets."
Transaction volumes on B2B exchanges are projected to hit $1.4 trillion by 2004, according to Steve Kafka, an analyst at Forrester Research. He estimated that there are about 600 B2B exchanges worldwide. Although only 52% of them offer credit and alternative payment options, almost all of those that don't say they are heading in that direction.
That's where ec-Finance comes in, said Janet Hindal, president and chief operating officer of the New York-based company. The company created the FASTLC system that Fifth Third has signed up for. Commercial Bank of San Francisco has also signed on as a third-party payment provider.
ec-Finance is angling to get a slice of the estimated $1 billion in L/C financing fees earned by the approximately 1,700 banks that are in the market. The company has signed on 37 B2B exchanges and is in discussions with several others. "We're bank neutral, bank friendly," Hindal said.
Other payment options, such as credit cards, are inferior to L/Cs for B2B exchanges, Hindal said. "They are painful, tedious and virtually never satisfactory." On the other hand, L/Cs provide protection for both the buyer and the seller, she added.
As for security, Fifth Third's Perez said, "We're doing everything we would on a B2B exchange transaction that we would in a normal transaction. We're running through all the same hoops and ladders."