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Space At The Table: Banks seek a niche in the evolving B2B exchange marketplace

First International Bank early last year signed partnerships with several B2B exchanges.

Hoping to gain a foothold as a premier financial services provider for emerging industrial trading hubs, First International Bank early last year signed partnerships with several B2B exchanges.

But this strategy to become a major player in the B2B marketplace did not turn out as planned for Hartford, Conn.-based First International. The bank immediately encountered a number of obstacles-not the least of which was the volatility inherent in most B2B exchanges. Indeed, many of the hubs the institution initially inked deals with no longer exist, including the Online Asset Exchange, a marketplace for surplus industrial equipment.

"We still believe in the business and the model. We believe that it will be successful one day," said Frank Berlage, CEO of the Online Asset Exchange, San Diego, which closed its doors in November. "However, given the slowness of businesses to purchase used capital equipment online, we thought it prudent to cease operations."

Much like Berlage, financial services executives across the country agree that the B2B electronic commerce model has practically unlimited upside. Consequently, financial firms are drawing upon their core strengths to claim a seat at the B2B table. Whether it's Citibank emphasizing its global reach (see sidebar page 26), or J.P. Morgan Chase encouraging customers to adopt Six Sigma process improvements, the major players in financial services have designed strategies to maintain relevancy in a commercial marketplace forever changed by B2B e-commerce.

For smaller players without the wherewithal to compete head-on with banking's giants, there are other options, including partnerships outside of financial services. First International Bank, by virtue of its leadership in working with industrial B2B exchanges, ended up being acquired last year by UPS Capital, the financial services subsidiary of UPS.

Drawing upon the intellectual capital of First International Bank, UPS Capital has since rolled out an expanded menu of financial services-including leasing, inventory finance, global trade, and insurance-to its 1.8 million small business customers.

"The core customer of UPS is the small business enterprise," said Stephanie Hill, chief information officer at UPS Capital, Atlanta. "As they grow their businesses, we are in the position to be their number one financial services provider."

So rather than investing in the racetracks, UPS Capital trains and feeds the horses. "We understand their business, we understand their financial model and we understand their cash flow needs," said Hill.

Furthermore, since UPS provides supply chain management services to many of its customers, it has a better-than-average picture of its loan exposures. "Knowing their shipping volume is certainly a great trend indicator," said Rich Bradshaw, chief administrative officer at UPS Capital and a former officer at First International. "You know if it's on the uptick, and conversely, you know if it's on the downtick."

Indeed, supply chain management seems to hold the key to understanding where the B2B marketplace will likely prevail. "Marketplaces will continue to stay and make progress in industries and sectors where there's a huge supply chain factor, in which companies and firms are spending lots of money acquiring goods," said Ravi Manchi, senior manager in global financial services for CGE&Y, New York. "The transaction volume may fluctuate, but the economies of scale and savings potentials are pretty high."

Yet business interactions reach beyond just the buyer and seller. Original equipment manufacturers, or OEMs, at the head of a complex procurement process require accurate information about not only their "Tier 1" suppliers, but of their suppliers' suppliers as well.

"Between OEMs and Tier 1s, there was usually good EDI collaboration going on," said Peter Weiss, senior vice president of global alliances and business development at Covisint, an automotive industry exchange sponsored by DaimlerChrysler, Ford Motor Company and General Motors. "But from Tier 1 to the Tier 'N', there was hardly any."

Lack of connectivity on the lower tiers creates real problems for companies in the upper tiers. "Many of the Tier 2 to Tier 'N' suppliers had to hold inventory in order to avoid shutting plants down," said Weiss.

Detroit-based Covisint-which provides collaboration, procurement, supply chain and quality management solutions using software from Oracle and Commerce One-intends to connect all of the various tiers, so that supply chain disruptions at one end have a minimal impact at the other.

But there's still a lot of work to do on the payments side. Despite the availability of more sophisticated technological solutions, EDI persists as the lingua franca across many industries. "The world's major manufacturers from the buy and sell side have connectivity through EDI-almost 85% of transactions still happen that way," said CGE&Y's Manchi. "That means they still have these huge back office processes."

Once in place, these back office processes are difficult to dislodge. That's an opportunity for banks and payments networks seeking to integrate with the successful industrial hubs of e-commerce.

"When the payment has to happen it's still happening through EDI," said Manchi. "Banks and financial institutions have entered into this market with some very high hopes."

But for B2B exchanges in industries that aren't as dependent upon supply chain management, it's a different story. That's where the biggest adoption hurdles have been found, despite the relative ease of starting an exchange in these industries.

"Eighteen months ago, most everybody felt that marketplaces were the wave of the future," said Jorge Bermudez, executive vice president and head of Citibank e-Business, Stamford, Conn. "The technology was probably very efficient in getting a buyer and a seller together, but it was a lot less efficient in actually closing the transaction and in allowing billing and payment to take place."

Strategic concerns also help explain why B2B exchanges didn't get the volume that had been expected.

"We spent a lot of time in the field meeting with our member banks globally and their corporate clients," said Philip Philliou, vice president of electronic commerce and emerging technologies at MasterCard International, Purchase, N.Y. "Although they understand the value propositions of these marketplaces, they were not ready to commit."

"The customers of the bank really had an appetite for bread-and-butter initiatives, not experimental ones," he added.

Responding to that feedback, MasterCard developed B2B e-commerce offerings including MasterSource, a supplier performance rating service (analogous to eBay's feedback ratings); SmartLink for SAP, which integrates card purchase data into existing ERP systems; and an alliance with TradeCard, based in New York.

"Having a New York-based buyer purchasing tires from a Seoul, Korea-based seller is infinitely more complicated than your vanilla credit card transaction," said Philliou. "We created a robust system where a buyer can not only validate who the seller is, but can process all of the documents associated with in ternational trade and then settle this large-ticket transaction through the same program."

Banks can also help their business customers increase their e-commerce activity through electronic invoice payment and presentment (EIPP) services. EIPP provides a great starting point for taking full advantage of evolving Internet marketplaces and standards. But it's not an easy installation.

"EIPP is a product which is rarely sold out of the box," said Paul Simons, senior product manager at J.P. Morgan Chase, New York. "Customization is the rule, not the exception."

Furthermore, the market for electronic bill and invoice providers has remained a fragmented one, despite efforts to the contrary. "An end state which would be nice is a single EIPP provider that works across suppliers and across buyers," said Simons. "It's something the market will migrate towards once there is broader adoption, but that's not something the market will likely see anytime soon."

Overcoming inertia among potential EIPP customers takes persistence, along with a strategy tailored to fundamental industry and company characteristics.

"You really have to look at it from the buyer's perspective or the seller's perspective," said Simons. "Who has the power to drive adoption?"

For example, if a dominant coalition of buyers can be persuaded to switch to electronic invoicing, the effects can cascade upstream. "If we get five or six large buyers to dictate to other suppliers that EIPP is the way to go, those suppliers are more likely to turn around and do it with other buyers," said Simons. "That's where adoption can be realized very quickly."

Dominant buyers tend to require integration with their existing enterprise systems, including those for supply chain management and accounts payable. Conversely, in industries where the sellers hold power relative to buyers (e.g., Intel in computer chips), the value of EIPP revolves around dispute resolution, purchase approval and workflow capabilities. Either way, there are numerous solutions that banks can offer to their clients.

Whether buyer or seller, the best deployments of EIPP result from its use in different areas of the organization-treasury, billing operations and collections, customer service and sales. "The value proposition for EIPP really cuts across functional areas in an organization," said Simons. "Where we have had the best success is where the project has a cross-functional team in place."

Indeed, J.P. Morgan Chase has embarked upon a cross-functional Six Sigma project to streamline its own operations, and has begun to implement EIPP for interactions with its own customers. "When we have lengthy invoices which run hundreds of pages, our salespeople spend time on the phone and e-mail negotiating line items," said Simons.

Now, with EIPP, interactions between the bank and its clients are managed online. "To the extent that EIPP reduces or expedites disputes, the entire supply chain is made more efficient," said Simons.

There are many ways to realize supply chain efficiencies from EIPP. "Almost every business fails to take advantage of the trade discount. It's better to take advantage of the trade discount than to hold onto the money," said Harvey Seegers, president and CEO at GE Global eXchange Services, Gaithersburg, Md., at an industry conference. "We intend to pay all of our suppliers within 10 days and take advantage of those trade discounts."

That's quite an undertaking. General Electric has 36,000 suppliers, with whom it has conducted $20 billion worth of transactions through online auctions.

As a major industrial trading partner in its own right, GE also has been staking out a formidable position in the exchange market. The company has over 100,000 trading partners in 58 countries, executing one billion annual transactions representing $1 trillion in goods and services.

"We stand between the buyers and sellers in electronic transactions," said Seegers. "I'm going to be in business for a long time serving as the sheriff, providing intermediation between business communities."

However, the business of intermediation is a fast-moving target, especially in B2B e-commerce. Emerging standards might change everything yet again, according to some industry participants.

It all starts with XML (eXtensible Markup Language). "The world is converging in agreement that XML is the universal format for representing data," said Chris Atkinson, vice president at Microsoft's .NET enterprise solutions group.

Now, the software industry has started to promote XML-based standards that work across industries. Buyers and sellers adopting the latest generation of Web services technology will be able to find each other using UDDI (Universal Description, Discovery and Integration); discover their respective capabilities using WSDL (Web Services Description Language); and exchange information between disparate applications without extensive custom integration, using SOAP (Simple Object Access Protocol). With that kind of functionality, who needs exchanges?

"There's a core set of new Internet standards that will essentially transform the Internet from solar systems to a constellation of stars," said Atkinson. "The software industry, absolutely, is at an inflection point."

Still, no matter how the B2B exchange evolves in various industries, there's a trend toward open access to numerous financial institutions.

"You have to have an open model," said Citibank's Bermudez. "You won't have any one bank, regardless of how global or how large, being able to provide exclusive service to an exchange."

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