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Electronic Commerce: To B or not to B2B
Even before the demise of such consumer Internet plays as Boo.com, Garden.com and Pets.com, most analysts rated business-to-business as the e-commerce market most likely to succeed.
Even before the demise of such consumer Internet plays as Boo.com, Garden.com and Pets.com, most analysts rated business-to-business as the e-commerce market most likely to succeed.
By Jeffrey Kutler
January 2001
Institutional Investor Magazine
Even before the demise of such consumer Internet plays as Boo.com, Garden.com and Pets.com, most analysts rated business-to-business as the e-commerce market most likely to succeed. As researchers pegged annual B2B sales at anywhere between $2.5 trillion and $7 trillion by 2003, technology upstarts such as Ariba and Commerce One outdid their business-to-consumer counterparts on the stock market, and established leaders like Microsoft Corp. and Oracle Corp. launched high-profile initiatives in this direction.
Several major commercial and investment banks also took steps to usher themselves and their business customers into cyberspace. Chase Manhattan Corp., for example, is the lead investor in Metiom, a software company that competes against Ariba and Commerce One in the online exchange market.
Yet financial institutions and their technology generally don't stand out in the big B2B picture. Either they have been overshadowed by the noise and hype surrounding more visible B2C pursuits, or, in the grand tradition of financial industry caution and conservatism, many of these companies are hanging back until the B2B proposition looks more like a sure thing.
It's some of both, it turns out.
"This is a market with great potential. You'd think that the financial services providers would be moving faster than we've observed," says Chicago-based consultant Waino Pihl, partner in charge of Arthur Andersen's financial services e-commerce practice.
In a global survey of 226 senior executives that Andersen conducted in mid-2000, fewer than half had adapted key aspects of their operations - including payments systems and investment distribution - to the demands of e-business (see graph). Much larger numbers said that they would not complete their upgrades within a year, or that they had no plans at all.
"That was a bit of a downer," says Pihl, who adds that he perceived no major acceleration in these strategies in the second half of 2000.
Adds Nicholas Viner, head of Boston Consulting Group's global payments practice: "It's still an emerging landscape, and there is a lot of jockeying for position. Outside of the financial services industry, you see a mad dash to establish supply chains and procurement networks, but very few are doing anything significant, and not all will be around for very long. The technology is proving very challenging, and it's still not entirely clear how and where financial services will fit in with these exchanges."
Among the financial B2B projects that are under way, one worth watching, says Viner, is Identrus, a two-year-old joint venture that started operations in December. Owned by ABN Amro Holding, Bank of America Corp., Chase Manhattan, Citigroup, Deutsche Bank and several other multinationals, Identrus aims to build an infrastructure for secure B2B payments by issuing digital certificates to business customers. With a certificate attesting to its legitimacy, any entity within the Identrus web could safely do business electronically with any other. And that network is likely to get bigger through a partnership that Identrus announced in September with the Swift banking communications consortium.
"The combination of partners and what they are trying to do has a good feel to it," says Viner. "But I still can't say with certainty where this will end up and how it fits into B2B in the long run."
Citigroup's B2B efforts extend further than most. With money to spare, Citi has joined other cooperative enterprises. These include Atriax, an online foreign exchange network that it cofounded with Chase, Deutsche Bank and Reuters Group (and that, along with rival FXall, has prompted preemptive scrutiny from the U.S. Department of Justice for potential price-fixing); and FinancialSettlementMatrix.com, a partnership with Enron Corp., i2 Technologies, S1 Corp. and Wells Fargo & Co. offering payment services to B2B marketplaces.
"The nature of competition is very different today," explains Jorge Bermudez, head of Citibank e-business. Even Citigroup can no longer presume to be, he says, "large and innovative enough that we can do most things in-house." By virtue of both its size and its willingness to spread its bets - the company's other e-commerce allies already include America Online, Commerce One, Oracle and SAP - Citi is moving too fast for many traditional competitors to keep up, even as it cooperates with some of them.
Says Bermudez: "One of the primary differentiators for success in the B2B space is the ability to invest. You have to develop new technologies to serve the customer base, and technology doesn't come cheap. Citi is able to do that."
Citi may even be outpacing the B2B market's ability to assimilate all the available options. Rembert de Villa, a consultant in A.T. Kearney's financial institutions group, points out that in the relatively popular cataloguelike networks using Ariba and Commerce One software, "there's not a lot of volume yet, and a lot of the deals can be closed offline. The technology is there. The real issue is the pace of development, how it gets deployed and in what context."
KeyCorp of Cleveland has found a context appropriate to its status as a regional bank. In November its KeyNext B2B commerce unit handled an electronic procurement by Controx, a toolmaker in Springfield, Ohio, said to be the first fully online payment using an Ariba platform. "We can make the payment as hands-free as the company wants it to be. That drives the processing costs down, and the customer can redeploy resources to its core business," says KeyNext CEO Linda Grandstaff.
Similarly, PNC Financial Services Group in Pittsburgh has moved to bolster its position as a leading lockbox, or bill-processing, bank. "We have payments system knowledge and expertise, but that's not necessarily enough to go into a company and help reinvent their billing process," says PNC's Thomas Kunz, director of e-business. PNC filled its technology gap by forming a joint venture with Perot Systems Corp. called BillingZone.
"We have made some pro-active, focused bets and are reasonably happy with our positioning," says Kunz. "But we are not smug. We have aspirations to go a lot higher than where we are now."
Such aspirations often turn toward a higher order of B2B - liquid marketplaces that look more like securities exchanges. The models for these include electronic communications networks and fixed-income markets backed by major investment banks. The technology is inherently global. Creditex, a credit derivatives marketplace launched last March in New York with funding from Morgan Stanley Dean Witter, Westdeutsche Landesbank Girozentrale and others, had set up shop in Europe and Asia before the year was out.
Going industry-specific, Citigroup in November said it would play a central financial role for the ChemConnect World Chemical Exchange. Citigroup aims to smooth e-commerce dealings among the 11,000 members by offering credit facilities, funds transfers, foreign exchange and an escrow service for transactions between parties unknown to each other.
Such moves suggest how major financial institutions, or the technologies they control, might make their ultimate B2B impact.
Harpal Sandhu, CEO of Integral Development Corp., a technology supplier to the Atriax network, says that all online markets, financial and not, will move toward dynamic pricing and customization of orders. Systems forged in the crucible of financial markets, Sandhu believes, will ultimately triumph over the early-generation B2B programs that perform limited purchasing functions. "When is the last time you ordered foreign exchange out of a catalogue?" he asks.
Bank of New York, which is providing its iFX Manager foreign exchange software to FXall, is also eyeing broader opportunities. Says BoNY president Gerald Hassell, "Our technology can work with other tradable assets."
Elsewhere on Wall Street, trading technology providers are making similar noises about their systems' wider applicability. Automated Trading Systems has been approached by groups that want to use its software to trade various commodities, says ATS founder and chief information officer Stephen Hanson. "What they have in common is securitized or fungible assets. The world is full of nascent over-the-counter markets that would benefit from our anonymous trading and intuitive negotiating features," he says.
Adds Frederick Varacchi, president of eSpeed, a Cantor Fitzgerald spin-off, "A market is a market. I don't care if it's orange juice, electricity or bonds." Its most visible B2B extension to date is TradeSpark, an energy exchange linking Coral Energy and Williams Energy Marketing & Trading Co., among others.
But with most current B2B programs far more elementary than that, financially powered marketplaces still seem futuristic. Says KeyNext's Grandstaff: "Everybody is talking about exchanges, and there are certainly desires to extend beyond the procurement model into, say, auctioning. But in our marketplace there is a lot of learning to be done, and e-procurement is as good a place as any to start."
By Jeffrey Kutler
January 2001
Institutional Investor Magazine
Even before the demise of such consumer Internet plays as Boo.com, Garden.com and Pets.com, most analysts rated business-to-business as the e-commerce market most likely to succeed. As researchers pegged annual B2B sales at anywhere between $2.5 trillion and $7 trillion by 2003, technology upstarts such as Ariba and Commerce One outdid their business-to-consumer counterparts on the stock market, and established leaders like Microsoft Corp. and Oracle Corp. launched high-profile initiatives in this direction.
Several major commercial and investment banks also took steps to usher themselves and their business customers into cyberspace. Chase Manhattan Corp., for example, is the lead investor in Metiom, a software company that competes against Ariba and Commerce One in the online exchange market.
Yet financial institutions and their technology generally don't stand out in the big B2B picture. Either they have been overshadowed by the noise and hype surrounding more visible B2C pursuits, or, in the grand tradition of financial industry caution and conservatism, many of these companies are hanging back until the B2B proposition looks more like a sure thing.
It's some of both, it turns out.
"This is a market with great potential. You'd think that the financial services providers would be moving faster than we've observed," says Chicago-based consultant Waino Pihl, partner in charge of Arthur Andersen's financial services e-commerce practice.
In a global survey of 226 senior executives that Andersen conducted in mid-2000, fewer than half had adapted key aspects of their operations - including payments systems and investment distribution - to the demands of e-business (see graph). Much larger numbers said that they would not complete their upgrades within a year, or that they had no plans at all.
"That was a bit of a downer," says Pihl, who adds that he perceived no major acceleration in these strategies in the second half of 2000.
Adds Nicholas Viner, head of Boston Consulting Group's global payments practice: "It's still an emerging landscape, and there is a lot of jockeying for position. Outside of the financial services industry, you see a mad dash to establish supply chains and procurement networks, but very few are doing anything significant, and not all will be around for very long. The technology is proving very challenging, and it's still not entirely clear how and where financial services will fit in with these exchanges."
Among the financial B2B projects that are under way, one worth watching, says Viner, is Identrus, a two-year-old joint venture that started operations in December. Owned by ABN Amro Holding, Bank of America Corp., Chase Manhattan, Citigroup, Deutsche Bank and several other multinationals, Identrus aims to build an infrastructure for secure B2B payments by issuing digital certificates to business customers. With a certificate attesting to its legitimacy, any entity within the Identrus web could safely do business electronically with any other. And that network is likely to get bigger through a partnership that Identrus announced in September with the Swift banking communications consortium.
"The combination of partners and what they are trying to do has a good feel to it," says Viner. "But I still can't say with certainty where this will end up and how it fits into B2B in the long run."
Citigroup's B2B efforts extend further than most. With money to spare, Citi has joined other cooperative enterprises. These include Atriax, an online foreign exchange network that it cofounded with Chase, Deutsche Bank and Reuters Group (and that, along with rival FXall, has prompted preemptive scrutiny from the U.S. Department of Justice for potential price-fixing); and FinancialSettlementMatrix.com, a partnership with Enron Corp., i2 Technologies, S1 Corp. and Wells Fargo & Co. offering payment services to B2B marketplaces.
"The nature of competition is very different today," explains Jorge Bermudez, head of Citibank e-business. Even Citigroup can no longer presume to be, he says, "large and innovative enough that we can do most things in-house." By virtue of both its size and its willingness to spread its bets - the company's other e-commerce allies already include America Online, Commerce One, Oracle and SAP - Citi is moving too fast for many traditional competitors to keep up, even as it cooperates with some of them.
Says Bermudez: "One of the primary differentiators for success in the B2B space is the ability to invest. You have to develop new technologies to serve the customer base, and technology doesn't come cheap. Citi is able to do that."
Citi may even be outpacing the B2B market's ability to assimilate all the available options. Rembert de Villa, a consultant in A.T. Kearney's financial institutions group, points out that in the relatively popular cataloguelike networks using Ariba and Commerce One software, "there's not a lot of volume yet, and a lot of the deals can be closed offline. The technology is there. The real issue is the pace of development, how it gets deployed and in what context."
KeyCorp of Cleveland has found a context appropriate to its status as a regional bank. In November its KeyNext B2B commerce unit handled an electronic procurement by Controx, a toolmaker in Springfield, Ohio, said to be the first fully online payment using an Ariba platform. "We can make the payment as hands-free as the company wants it to be. That drives the processing costs down, and the customer can redeploy resources to its core business," says KeyNext CEO Linda Grandstaff.
Similarly, PNC Financial Services Group in Pittsburgh has moved to bolster its position as a leading lockbox, or bill-processing, bank. "We have payments system knowledge and expertise, but that's not necessarily enough to go into a company and help reinvent their billing process," says PNC's Thomas Kunz, director of e-business. PNC filled its technology gap by forming a joint venture with Perot Systems Corp. called BillingZone.
"We have made some pro-active, focused bets and are reasonably happy with our positioning," says Kunz. "But we are not smug. We have aspirations to go a lot higher than where we are now."
Such aspirations often turn toward a higher order of B2B - liquid marketplaces that look more like securities exchanges. The models for these include electronic communications networks and fixed-income markets backed by major investment banks. The technology is inherently global. Creditex, a credit derivatives marketplace launched last March in New York with funding from Morgan Stanley Dean Witter, Westdeutsche Landesbank Girozentrale and others, had set up shop in Europe and Asia before the year was out.
Going industry-specific, Citigroup in November said it would play a central financial role for the ChemConnect World Chemical Exchange. Citigroup aims to smooth e-commerce dealings among the 11,000 members by offering credit facilities, funds transfers, foreign exchange and an escrow service for transactions between parties unknown to each other.
Such moves suggest how major financial institutions, or the technologies they control, might make their ultimate B2B impact.
Harpal Sandhu, CEO of Integral Development Corp., a technology supplier to the Atriax network, says that all online markets, financial and not, will move toward dynamic pricing and customization of orders. Systems forged in the crucible of financial markets, Sandhu believes, will ultimately triumph over the early-generation B2B programs that perform limited purchasing functions. "When is the last time you ordered foreign exchange out of a catalogue?" he asks.
Bank of New York, which is providing its iFX Manager foreign exchange software to FXall, is also eyeing broader opportunities. Says BoNY president Gerald Hassell, "Our technology can work with other tradable assets."
Elsewhere on Wall Street, trading technology providers are making similar noises about their systems' wider applicability. Automated Trading Systems has been approached by groups that want to use its software to trade various commodities, says ATS founder and chief information officer Stephen Hanson. "What they have in common is securitized or fungible assets. The world is full of nascent over-the-counter markets that would benefit from our anonymous trading and intuitive negotiating features," he says.
Adds Frederick Varacchi, president of eSpeed, a Cantor Fitzgerald spin-off, "A market is a market. I don't care if it's orange juice, electricity or bonds." Its most visible B2B extension to date is TradeSpark, an energy exchange linking Coral Energy and Williams Energy Marketing & Trading Co., among others.
But with most current B2B programs far more elementary than that, financially powered marketplaces still seem futuristic. Says KeyNext's Grandstaff: "Everybody is talking about exchanges, and there are certainly desires to extend beyond the procurement model into, say, auctioning. But in our marketplace there is a lot of learning to be done, and e-procurement is as good a place as any to start."