B2B: Where's the Gold?

by Kenneth Cline

B2B e-commerce has hit a wall, but roundtable participants say banks that stay the course and partner intelligently ultimately will find a payoff.

It was only a year ago that bankers embraced business-to-business e-commerce with high hopes. Frustrated by their inability to make money over the Internet by serving consumers, several major institutions launched high-profile B2B programs to capture the profit potential they saw in the world of corporate online marketplaces.

Though most of these projects continue, they now are tempered with a strong sense of realism, if not actual pessimism. In the short run, it turns out, corporate e-commerce is more glitter than gold. Several B2B procurement sites serving biotech, power and shipping companies already have closed. And IDC, a Framingham, Mass.-based research company, predicts that only 200 to 300 of the 1,500 existing e-marketplaces will still be around in 2004.

The main reason: B2B exchanges don't yet deliver the goods, according to 94% of the more than 400 purchasing and supply chain managers recently surveyed by the National Association of Purchasing Management and Forrester Research. Survey respondents said the Internet had produced little to no change in the way they buy products. Nonexistent cost savings and poor service were frequently cited complaints.

Still, 88% of purchasing managers also considered the Internet to be important for their future procurement efforts, which suggests that the medium and its supporting technology simply need more time to develop. That's also the view of a panel of three experts recently assembled by Banking Strategies to discuss B2B e-commerce opportunities for financial institutions.

The trio agreed that corporate e-marketplaces remain embryonic, but said banks still need to be ready to meet customer demand when it finally materializes. E-commerce requires a financing mechanism, they point out, and banks are best positioned to provide that service by virtue of their payments expertise.

Given the scarcity of customers, however, financial institutions cannot expect much of a return on their investments in the short term. Institutions clearly will find it challenging to stay the course, underscoring the fact that B2B e-commerce is, as one panelist said, "a marathon and not a sprint." So while the logic behind B2B remains compelling, execution is critical. In most cases, the path to the prize entails partnering intelligently and taking a long-term view.

The three panelists were: Kenneth J. Deveaux, senior vice president, FleetBoston Financial Corp.; Rahul Gupta, CEO, Financialsettlementmatrix.com; and Alexander "Sandy" Kemper, CEO of eScout.com LLC. Mr. Deveaux leads the B2B e-commerce solutions unit at FleetBoston, one of the most active banks in this arena. Mr. Gupta heads a joint venture designed to facilitate B2B e-commerce that includes Wells Fargo & Co., Citigroup Inc., and vendors S1 Corp. and i2 Technologies Inc. Mr. Kemper's eScout operates a B2B marketplace for roughly 1,200 community banks and their customers.

We spoke with the executives during BAI's B2B e-commerce conference, which was held in Miami last February.

Banking Strategies: What are the opportunities for banks, generally speaking, in the B2B space?

Deveaux: For banks that want to remain in the commercial or corporate business, I don't think there's a choice. If you want to continue to support your customers, you need to participate.

Now, there is a lot of discussion about timing. This year and the next, it might not be necessary for all banks to deliver new B2B products to their customers to remain in the business. But beyond then, participation becomes more critical.

Kemper: Banks need to experiment. They need to study the market in order to be prepared when it does come time for them to offer a B2B service. And you can mitigate some of the risk associated with early entry by using an application service provider or a service bureau model.

Deveaux: I absolutely agree. There is no sideline strategy here. Banks need to become engaged and make decisions about how they're going to participate, whether that means taking part in industry groups or working with partners in a co-marketing or outsource mode. They need to understand what's going on.

Banking Strategies: What's at stake? What is the compelling reason for banks to get into B2B e-commerce?

Kemper: B2B is banking. I don't think you can have commerce without a financial transaction. The financial products derive from the commercial transaction. If the commerce gets stripped away and taken to another market, how can we then reattach the financial part?

I don't see much future in banking if we can't keep commerce and payments together. And the way banks can do that is by moving upstream into the B2B marketplaces.

Deveaux: I agree. What's in play here is the commercial franchise, at least on the payments side.

Gupta: Real B2B e-commerce is not going to take off until financial services are brought into the mix. Banks are obviously in the best position right now to provide those financial services. Even if they don't have all the delivery engines right now, they are the trusted parties. And trust is a big issue. So banks have to get involved.

Banking Strategies: There's also a lot of information processing involved in B2B e-commerce. Are banks equipped to handle it?

Deveaux: Banks need to continue improving ways of connecting a payment with information that the parties to a transaction will find relevant. For the accounts payable department, for example, the information centers on invoices the company has paid. For the accounts receivable department, it involves the cash received.

Reconciliation has been a challenge for both banks and their commercial customers in the offline world. In the online world, there are tremendous opportunities for efficiency gains when the information is digitized. That's where banks need to focus.

Kemper: Banks can use payments as a foundation to reclaim some of the momentum lost to the dot-coms. Though the payments function diminishes in value over the longer term, it's the point of entry that enables banks to capture other forms of value.

Banking Strategies: What does it take to capture that value?

Deveaux: Providers must make significant investments to get their systems ready for B2B e-commerce.

The applications that banks are running today are extremely efficient for the purposes they were designed for. For example, banks that invested in electronic data interchange products recognized the importance of extending their services as deeply as they could into their customers' enterprise resourceplanning systems — essentially customers' infrastructure for conducting commerce.

A similar level of commitment to upgrading the technology infrastructure is required for B2B. The challenge in B2B, as with EDI, is to extend financial services as deeply as possible into a customer's systems for conducting commerce. With B2B, the differences are the emergence of new business models, such as exchanges and Net markets, and the depth of integration expected by companies.

Banking Strategies: Can banks go it alone, or do they need partners?

Deveaux: We need to pick our openings. In many cases, we've done a good job of building things ourselves. But we also have to do a better job at partnering with companies that have particular types of expertise.

The bigger picture is about serving customers. We have to assume the role of a "general contractor" on their behalf, and that requires an end-to-end understanding of their businesses. If customers' back office systems need to be integrated, maybe banks should do that, or maybe they shouldn't. Either way, banks should take responsibility for making sure that it's done well.

Kemper: The analogy is a good one. Banks are the general contractors, bringing together the subcontractors to create solutions for customers. It's the solution that's important. After all, banks are not successful unless their customers are successful.

Banking Strategies: There's an issue concerning customer demand, however. Recent surveys suggest that corporations are lukewarm about B2B e-commerce. What's your take?

Kemper: If you don't anticipate demand, you might be surprised to find yourself overtaken by others who have.

At eScout, we see extraordinary demand in the Midwestern markets where we began operations. Once companies reach a certain purchase volume, we see them increase the amount of time and money they spend on our eScout MarketPlace. I can't attest for very large companies, with the exception of the few that are in our marketplace. But I can confirm the mass appeal of this capability. We're seeing good transaction volume and fine growth once we reach a certain stage.

Deveaux: Companies aren't articulating strong demand today for complex B2B financial services that are delivered over the Web. But there's a leadership issue here. Companies are working towards building new business models. As their efforts begin to bear fruit, say, within the next six to 12 months, they'll expect us to be ready to support them. We can make some prudent investments in technology now to better prepare us to meet those demands, to fulfill that leadership role.

Gupta: I agree. Companies are preoccupied right now redoing their supply chains. The new models have not gelled yet, but to say they're not coming would be to ignore the tremendous supply chain reengineering underway. Leaders such as Cisco Systems Inc. have made it their mission to have total demand and supply visibility. To this end, they are hosting supplier hubs that share forecasts, inventory and other information. The idea is to speed up the flow of transactions based on total information.

Financial services are essential to keep the supply chain greased. This could take many forms, such as financing a specific sale, presenting an export invoice, or moving money. These services must be executed inside the supply chain, and with total visibility for all parties involved. And they must be totally integrated into the buyers' and sellers' technologies.

Deveaux: Unfortunately, there are no specifications or standards that will give us a roadmap of how our customers will do business in the future. Banks will need to work to understand the changes and decide how to act in ways that create real business value.

Banking Strategies: Some bankers are nervous about getting into B2B e-commerce because of the potential to get entangled in disputes between customers. Is that a legitimate concern?

Kemper: While I agree that it is a brier patch, there is some compensation that comes from providing dispute resolution. I mean, there is a way to monetize that process and do a good job for both sides while taking care of your shareholders.

We have disputes today in the banking industry all across our customer portfolios. As the former chairman and CEO of an $8 billion bank, Kansas City-based UMB Financial Corp., I can tell you we had disputes every day inside that loan portfolio. And we didn't have many bad loans. So banks are in the dispute resolution business today — they're just not paid for it.

A lot of the disputes that take place today are based on credit information. So if we develop a better way to get information into the marketplace through B2B technology, maybe there will be fewer disputes. And maybe there's a way to charge for dispute resolution.

Deveaux: Disputes are a normal part of the business cycle. Some goods will arrive damaged, and some parties won't adhere to the terms of their transactions. I don't think that we can avoid such outcomes completely, but that doesn't mean that the resolution process has to be messy or inefficient.

The opportunity is there for banks to step up — both in terms of the tools that they provide, and in terms of the standards and policies that they maintain between partners. Think about something as simple as a dispute over an invoice. In the paper-based world, solving the problem requires a lot of phone calls, and moving a lot of paper back and forth. With the online tools becoming available, banks can add value to the whole dispute resolution process.

No bank should get involved in any of these B2B services or products expecting immunity from dispute resolution. Start off assuming that you need to manage it and, perhaps, find others to help in that process.

Banking Strategies: As e-commerce becomes more popular with corporate customers, they will begin interacting more directly with each other. Does this pose a risk to banks' status as intermediaries?

Gupta: Not if they act like general contractors. It goes back to the trust issue. The center of gravity is not technology; it's trust. As long as banks maintain their customers' trust, build partnerships and perform to their customers' satisfaction, they will do fine. At the end of the day, who cares which entity actually presents the invoice? Ultimately, the customer just wants solutions.

Kemper: It's more likely that banks will lose their importance if they don't get in the game. Look at account aggregation technology, which involves the gathering of customer information on one Web site.The banks thought no one really wanted to send their financial information to a non-bank. Well, off that data went, and it didn't come back.

Banking Strategies: We've framed this issue in terms of defensive strategy to a large extent. But a lot of bankers might be wondering when they will see a realistic return on their investment. Where's the money in B2B?

Kemper: It depends on the way you enter the market.

If you are going to build a solution yourself, you had better have deep pockets. If you've got the deep pockets, with the capital up front, you will have the opportunity to earn a greater reward at the end.

We don't recommend that a $10 billion- to $30 billion-asset bank do this because building solutions like this would require tens upon tens of millions of dollars. I can tell you that at eScout we raised more than $55 million, and then spread that cost over the 1,200 banks that are members of our network, mostly community and regional banks. Those banks are getting in cost-effectively.

Deveaux: It's useful to look at bank investments in B2B as a portfolio — as a series of investments or bets. If you look at these investments collectively, as opposed to individually, you can focus on the overall return as opposed to an individual return for each project.

Banking Strategies: In a practical sense, has the dot-com implosion cast a pall over these investments? Do you find it harder to get management to support these initiatives? Is it more difficult to raise money?

Kemper: At least at eScout, we've not seen any diminution of desire from our bank customers to bring solutions like this to the marketplace. It's been a little easier for us, in fact, because we have significant capital on hand now. And I don't see too many competitors out there.

Deveaux: It's been a real litmus test of commitment. We have had initiatives that didn't work out. The good news is that we remain in the game. That says to me that FleetBoston management has embraced this as a marathon and not a sprint. We need to continue to look for good opportunities and push forward.

In some ways, the technology correction has helped in the decision-making process because it weeded out some marginal projects.

Gupta: I agree that lots of marginal stuff got funded. So some pullback is natural and constructive. It's good that people are getting back to more realism and longer time horizons. None of this comes about as fast as one likes.

Banking Strategies: As practitioners in this B2B e-commerce space, what final bits of advice would you share with our readers?

Kemper: Develop some frameworks for selecting the right partners, then associate with those of like mind. Align the business plan, the business model, risk and reward, so that they are shared across the partnership.

Gupta: Banks need to look at their own customer bases. Look at the opportunities surrounding that, and don't go blindly spending money.

The action really centers on the e-transformation of customers. Banks need to talk to their own customers and anticipate their needs. If the core customer base of a bank represents a good portion of a supply chain, say automotive, then forge partnerships with guys who are delivering automotive solutions.

Deveaux: It's also important to move towards a more dynamic decision-making environment, where a broader base of people within the bank collaborates on decisions. You need to create a culture of continuous learning, where people share ideas and collaborate. Of course, you always have to relate that information back to the impact on customers.

Finally, you have to establish some means of constantly reviewing the B2B entity, of the component of the bank that is responsible for establishing and executing strategy. Make sure that the strategy is aligned with what's happening in the market, and that resources are properly aligned with the strategy.

Mr. Cline is senior editor with Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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