Opportunities for Action in Financial Services The Business-to-Business Race Is On
The Business-to-Business Race Is On Financial institutions have the chance to play leading and profitable roles in shaping the rapid growth of business-to-business e-commerce, but to do so they must move quickly. Because business-to-business e- commerce is redefining how companies do business, it is also changing their financial needs. Financial services are critical to business-to-business e- commerce. If banks don t provide them, others will. Such new competitors as Clareon, a nonbank payments network for business-to-business Internet transactions, and Bottomline Technologies, which provides comprehensive Internet solutions for billing and payment, are threatening to capture financial institutions traditional interface with business customers. As intermediaries between banks and their business customers, these newcomers gather transaction and payment information that is vital to tailoring the products and services that create competitive advantage. Banks should analyze data collected in businessto-business commerce to improve their understanding of customers behavior, hone their ability to manage risk, and lower service costs. Of course, financial institutions have other ways to more directly exploit the growth of business-tobusiness e-commerce. They can offer their own existing services to business customers online, effectively moving many of their off-line businesses onto the Web. These online enterprises are low-cost channels for delivering financial products to both existing and prospective business clients. Three models pervade business-to-business online commerce. Procurement ventures offer supply chain
management. Online marketplaces such as MetalSpectrum and Chemdex bring together many institutional buyers and sellers. This category includes Covisint, an auto industry enterprise owned by Ford, General Motors, and DaimlerChrysler. As an industry information hub, it connects participants in procurement, product design, and supply management. And online sales-and-service sites such as Dell.com and Gehe, which wholesales pharmaceuticals, serve business customers. Financial institutions can provide value-added services to all types of business-to-business ventures. Such services include cash management, certification, credit scoring, escrow accounts, factoring, lending, payment processing, risk management, and trade finance. As business-to-business markets grow, they will require extensive credit and trust services services that banks are well positioned to provide. Financial institutions also have unrivaled experience in managing financial positions and controlling risk, and their skills will be critical to the success of business-to-business e-commerce. Applying their understanding of the price discovery process, financial institutions can manage online business-tobusiness marketplaces for many diverse goods, and they can use those platforms to move into industries beyond traditional finance. Drivers of Business-to-Business E-Commerce Internet observers forecast explosive growth in business-to-business e-commerce. The Boston Consulting Group estimates that the volume of business-to-business e-commerce transactions will more than double by 2003. In the United States, BCG predicts that business-to-business e-commerce will
grow from $1.3 trillion in 2000 to $3.1 trillion in 2003; in Western Europe, it will grow from $0.6 trillion to $1.5 trillion. (These estimates include all business-to-business Internet commerce, as well as electronic data interchange.) In the United States, the consequence of this growth is that e-commerce, which currently represents 12 percent of all business commerce, will account for 24 percent by 2003. For that same period, BCG forecasts that Germany s businessto-business e-commerce market, the largest in Europe, will grow from 6 percent of business transactions to 14 percent. A powerful driver of this increased penetration is the explosive growth in business-to-business marketplaces, which are able to cut costs and reduce friction in transactions. In their most developed form, they promote a seamless, end-to-end, straight-through process for each transaction. Since 1999, the number of U.S. online marketplaces has grown sevenfold, to more than 700, and in Germany there has been a sixfold increase, to 120 marketplaces. There are now close to 300 online marketplaces in the Asia-Pacific region, compared with just 20 in 1999. Australia alone already has almost 150 marketplaces. As for online procurement, some companies, such as Cisco Systems, already make more than half of their purchases on the Internet. In Europe, however, Internet business-to-business development lags about two years behind the United States, and some Asian markets are even further behind. Nevertheless, the Internet is penetrating all industries. The willingness of each industry s largest companies to embrace business-to-business e-commerce will determine how far and how fast it will grow. The potential for
financial rewards is substantial: there are opportunities to reduce costs of direct goods by as much as 10 percent and indirect goods by as much as 18 percent. Setting Strategy As a financial institution seeks to participate in the rapid growth of business-to-business e-commerce, it should proceed carefully. Does it, for example, want an open architecture to support its online offering? Is the financial institution prepared to offer other companies products as well as its own, or will it plan to offer only proprietary products online? Will it help establish industry standards for the business-tobusiness world? If so, perhaps it should join a group of banks such as Identrus, which provides a framework for identity certification. Financial institutions can consider the following approaches as they assess the commercial opportunities of the online businessto-business world. Building Branded Portals. Such portals aim to answer the financial needs of business customers. They cut the cost of service for business clients and strengthen relationships, increasing customer stickiness. Through their online portals, institutions can deliver existing financial services such as foreign exchange, cash management and treasury, payments, guarantees, and working capital. Several big U.S. and European financial institutions now deliver services through such portals. Developing Portals in Partnership with Others. Some institutions will create their own portals. Others will partner with one or more institutions in order to achieve greater critical mass and share investment costs. An institution that builds a portal can, of course, also sell or lease it to competitors who will be
allowed to put their own names on the service. The portal owner, however, may well require its new partners to route back transactions and associated fees in exchange for use of the service. Managing Marketplaces. This approach offers an effective way to mobilize a bank s assets its customers, distribution network, market-making capabilities, and trust. Dresdner Bank s Allago venture, which caters to small and midsize companies, launched Europe s first business-to-business marketplace for indirect goods in May 2000. By aggregating its customers buying needs and automating procurement processes, Allago has been able to provide attractively priced products ranging from office supplies to IT. Providing Services to Online Marketplaces. The infrastructure behind these marketplaces is still being built. Fewer than half of all Europe s marketplaces can take payment orders online, and only 20 percent provide options for online payment. Even fewer marketplaces offer authorization and online order tracking. The benefits of straight-through processing cannot be realized until vital needs are met. Businessto-business e-commerce underlines the importance of automated billing, efficient processing, guaranteed payments, and other related services. These can include identification and authentication services that draw on a financial institution s own capabilities or work in partnership with other institutions. Online commerce, which often matches new business partners in cyberspace, needs such services to sustain trust and credibility. Identrus s Project Eleanor, for example, is a payment initiation project that aims to facilitate global Internet commerce by delivering trusted payments services. Partners in such undertakings need not be financial companies. FinancialSettlementMatrix.com, a company recently
formed by Citigroup, Wells Fargo, Enron, i2 Technologies, and S1 Corporation, aims to provide an end-to-end payment system for online marketplaces. Institutions that provide authentication, billing, bill presentment, logistics, industry information, and hosting services are all likely partners. Rating and certification companies such as VeriSign may also be valuable allies. Providing Seed Money to Promising Business-to- Business Ventures. For some financial institutions, it makes sense to provide seed money to promising business-to-business e-commerce ventures that can improve their understanding of online trends. Experimentation is essential in the online world, but its risks are becoming increasingly apparent. The challenge, of course, is to identify the opportunities that offer sufficiently plausible revenue models. Maximizing the Business-to-Business Opportunity Financial institutions should determine how they can best exploit the business-to-business opportunity. For most institutions, their strengths encompass financial products, rich capital resources, extensive customer relationships, enormous distribution power, marketmaking capabilities, and well-regarded brands. Recent experience suggests the following approaches: Exploiting Liquidity. Banks can use their liquidity and the liquidity of their key customers to build their business-to-business ventures. Because it enhances competitiveness and reduces costs, liquidity is important to online marketplaces. It also helps generate the excitement and reach that attract players to the venture.
Collaborating with Customers. Only through deep collaboration with customers will financial institutions properly understand how to customize and build the businesses and value-added online services that can make their business-to-business offerings profitable and successful. Developing Alliances with More than One Partner. Institutions are partnering as never before, but for every lasting alliance, there are several failures. Managers who are discussing alliances and partnerships need to prepare for such setbacks by developing several potential partners that can provide critical fallback positions. As they partner, financial institutions must also be prepared to join with financial players they traditionally have seen as competitors. By joining together in consortia, institutions have been able to build the critical mass to establish successful online marketplaces, as well as standards that are accepted in the business-to-business online world. Paying Attention to IT. Those planning and managing business-to-business ventures must recognize that IT is crucial. The role of the technology provider must be clearly defined, and the distinction between vendors and partners must be explicit. Getting the IT right will require substantial planning and navigation, as well as rapid reengineering along the way. Appointing Dedicated and Experienced Managers. Business-to-business ventures need committed management teams. Most such ventures take longer to establish than managers anticipate. In the case of an online marketplace, managers ought to have experience in the relevant industry. Giving New Ventures Sufficient Independence. Institutions should allow their new business-to-
business ventures the freedom they require. It may well be, as Dresdner Bank found when it launched Allago, that it is best to establish each new online venture as an entirely distinct organization with its own culture. Executives from the German bank serve on Allago s advisory board, but the organization is otherwise independent of its parent. * * * Financial institutions have more of the skills and assets required for building successful online businessto-business services and ventures than competitors in most other industries. This is, however, by no means easy. Building an effective business-to-business franchise may take years and cost millions of dollars, but there are huge dangers in ignoring the opportunity. Those that turn their backs on online business to business may eventually find it sweeping away much of their market. Juergen Schwarz Nick Viner Stuart Grief Juergen Schwarz is a vice president in the Frankfurt office of The Boston Consulting Group. Nick Viner is a vice president in the firm s London office. Stuart Grief is a vice president in BCG s Boston office. You may contact the authors by e-mail at: schwarz.juergen@bcg.com viner.nick@bcg.com grief.stuart@bcg.com The Boston Consulting Group, Inc. 2000. All rights reserved.
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