Stepping Forward

These days, any bank worth its currency lets its customers conduct online transactions. Now financial services firms are taking their e-business efforts to the next level by widening the breadth of services they offer to businesses and consumers. And they are using the Internet to communicate with each other, suppliers and partners.

However, even for the largest of banks, much of their effort is still a work in progress as they attempt to build infrastructures to offer new services and add new forms of connectivity.

Still, the Internet already is letting these companies streamline traditional processes such as procurement, and many are already using the Net to conduct a broad set of B2B transactions-everything from trading equities and bonds between firms to procuring goods online.

And while B2B marketplaces are most often associated with procurement and supply chain logistics for companies that manufacture goods, banks are establishing their own exchanges. Still, according to a recent study conducted by InternetWeek, a New York-based sister publication to BS&T, while 68% of banks and brokerages surveyed are selling products and services online today, nearly half say they have not forged electronic links over the Internet with business partners and suppliers. And only 40% say they are operating an extranet-or Internet-based supply chain network.

Many banks are still using proprietary electronic data interchange networks or leased lines to conduct business with corporate customers, said TowerGroup analyst Larry Tabb. Mid-size and smaller banks in particular are reluctant to open up their networks because of security concerns, Tabb added.

But more financial services firms are likely to warm up to forging Internet-based links, observers said, as more banks use Internet technologies such as XML to streamline transactions as well as automate their own procurement efforts.

Overall, the largest financial services firms will spend in excess of $6.2 billion on IT this year, according to a forecast by the TowerGroup. Of that, $4.3 billion will be related directly to their Web sites.

"Financial services firms are using Internet technology to redefine the way they work with partners," Tabb said.

And in many cases, they are using the Internet to leverage their existing franchises to form new lines of business that generate transactions and payment processing revenues from the growing number of online marketplaces and e-procurement networks.

For example, Citibank teamed up with B2B software vendor Commerce One last year to build an Internet marketplace allowing its business customers to procure goods from its site and pay suppliers online. Its goal: To create a virtual marketplace linking buyers and suppliers to the new Citibank Procurement Center.

Risky Business

Still, it's too early to determine how successful financial services firms will be over the long term in offering such services. There's already evidence that even those with big names are finding it difficult to build e-marketplaces. For example, when American Express last year launched its B2B Commerce Network online procurement marketplace, it failed to gain critical mass. Then, in a shift in strategy, the company recently tapped Ventro Corp., formerly known as Chemdex, to operate its new effort, called MarketMile. American Express gave Ventro a 35% stake.

Although e-marketplaces in a number of industries help cut the manufacturing and distribution costs of companies that trade commodities, they can also expose companies to the financial risks of credit, transactions and settlement of payments. This has caused many companies to hesitate trading online.

In a bid to address those issues, FinancialSettlementMatrix Inc., or FSM.com, was formed last August by Citigroup, the parent of Citibank; Enron Broadband Services; i2 Technologies; Salomon Smith Barney; S1 Technologies; Travelers Insurance; and Wells Fargo. FSM.com plans to leverage its partners' respective expertise in the areas of transacting electronic payments and trades and building B2B e-marketplaces.

FSM will connect buyers and sellers in e-marketplaces with payment processing, credit and other services through participating banks and financial services firms. FSM.com will open for business during the first quarter of 2001, providing a full range of financial services including letter-of-credit management, escrow handling, electronic funds transfer support and short-term trade finance.

"FSM.com will provide buyers and sellers with the ability to expedite cash-flow processes and manage their working capital," said Ann Cairns, global e-solutions head at Citigroup.

Growth Market

A growing number of banks are also using the Internet to connect with suppliers, partners and customers. According to the InternetWeek study, 90% of all financial services firms are procuring supplies online from traditional suppliers. However, only 39% are procuring goods from online-only suppliers and 19% from e-marketplaces.

ABN AMRO, ranked the fifth largest bank in Europe and 16th globally, is among those letting customers procure goods directly from its site. It is using Ariba's Buyer e-procurement software to improve the procurement process and drive down its clients' cost of purchasing office materials.

The Ariba software lets ABN AMRO customers access suppliers' catalogs on the Internet so they can buy office equipment, for example, and then pay for it through the bank's purchase card payment system.

Already, the procurement platform has helped cut the bank's purchasing costs by 20%, said Harrison Tempest, CEO of ABN AMRO America.

"By using the Internet, we can be sure employees are purchasing from preferred vendors," Tempest said. "Without the Internet, they could be buying office products from the local Office Max."

EBPP Progress

One key barrier many banks are addressing is bill presentment between institutions and businesses. Settling corporate bills is highly complex. For instance, a company could electronically present a bill for multiple orders and find that the customer purchasing the equipment agrees on nine out of 10 items on the bill. Often when this occurs in the corporate marketplace, the bill is not settled.

New e-billing software from Bottomline Technologies lets Citibank sort disputed bills.

"I may have a bill out to you for $1.5 million, and there might be a dispute over an item for a couple of thousand dollars that's holding up the whole bill," Citigroup's Cairns explained. "So the Internet brings us the ability to go online and dispute that process." The bill can be split in such a way to let the buyer pay nine-tenths of the bill, but leave the disputed item unpaid.

The Web is opening the door for new payment services, said Anthony Jenkins, COO of Citigroup's payment services. For example, online auctions require a payment mechanism.

"We believe there is a big potential market for payment services that will grow exponentially in the first few years as users become more familiar with the technology," Jenkins said.

On the retail side, banks like Citibank are still struggling to make bill presentment and online bill payment more appealing. There are three major issues that concern consumers using online payment services, Jenkins said.

"Does the service simplify my life? Is it available when I want to make a transaction? And is it secure?" he said. "The Web is a scary place for many consumers."

Besides looking to develop a broader market for online bill payment services, banks are offering business clients and consumers alike a whole new set of services online. For example, ABN AMRO partnered with Intel's ICAP division earlier this year to create catalog Web sites for its clients.

Called e-Creator, the service is aimed at "companies that have a Web site but may not have sophisticated catalog management ability on the Internet or do not have a purchase card-enabled Web site," ABN AMRO's Tempest said. Several banks, such as Bank of America and Chase Manhattan Bank, have launched similar efforts.

Forging Relations

Although online banking and trading are as common as buying goods from e-retailers, many banks are taking their online efforts to the next critical stage: building closer relationships with their customers.

For example, Wells Fargo has spent the past year looking for e-businesses to partner with to enhance the online experiences of consumers.

Wells Fargo last year worked with a local San Francisco firm called Brodia to offer its customers an electronic wallet and online shopping services. "This way, we could extend the trust they have in our brand to allow them to feel more comfortable about shopping online," said Cathy Graeber, senior vice president of marketing for Wells Fargo Consumer Internet Services.

In fact, the bank has been on a mission over the past three years to "virtualize" services offered through other distribution channels such as branch offices or on the phone. Wells Fargo launched its PC banking service in 1989 and was the first bank to offer online banking through the Internet in May 1995.

But because such capabilities are no longer a differentiator among banks, Wells Fargo is looking toward new avenues of adding value, Graeber said. The bank is offering more personalized and customized services, and is now building out value-added services such as financial planning tools.

Wells Fargo is also moving to improve customer service. It replaced a call center system that relied on manual and batch processes with a real-time response system for its Private Client Services division. It also deployed Magic Total Service Desk from Magic Solutions, a unit of Network Associates Inc. The real-time help desk software responds to any customer accessing the bank's system from the Web.

Indeed, banks need to improve their online customer service. According to a recent survey by consultancy Celent Communications, 56% of the 150 financial services firms surveyed did not accept Web-based queries.

Technology Watch

As financial firms eye the future, more are gearing up to provide account aggregation as well as wireless e-commerce.

Citigroup launched Myciti.com last July, an account aggregation service, using technology from Yodlee. With users' permission, Yodlee's account aggregation technology pulls in banking, investment and other information from consumers' online accounts and displays it on one convenient statement.

Wells Fargo recently entered a partnership with Vertical One to pull together all account information, Graeber said.

Besides account aggregation, Wells Fargo is preparing for a wireless world. The bank recently began a wireless pilot project aimed at a new brokerage platform, which the company expects to launch soon. Wells will offer services from wireless devices in the United States later this year, Graeber said.