Decoding B2B

By Kenneth Cline

Mellon's Janey Place sees opportunities for banks in B2B e-commerce, but only if they first agree on technical standards.

Was business-to-business e-commerce a flash in the pan or a true revolution in the way companies do business with each other? The jury is still out on that question, leaving bankers confused about the role their institutions should play in a technology that allows companies to buy and sell among themselves over the Internet.

In the late '90s, many bankers eagerly seized on B2B as a way to offset their disappointing online business-to-consumer projects. B2B technology vendors are struggling in the wake of the dot-com crash, however, and many of the once-ballyhooed e-marketplaces have shut down. FXA11, a foreign exchange service owned by some of the world's largest banks, is even being investigated by the Justice Department for possible antitrust violations.

The grim landscape doesn't deter Janey A. Place. Executive vice president of e-commerce at Mellon Financial Corp. and president of its Mellon Lab technology unit, Place still believes banks can harness B2B to extend their services deep into the "commerce chain" that links companies with their customers and suppliers. "We're well into the process of creating the technological capabilities, but surely not close to the end in terms of the benefits that are going to be realized," she says in a recent interview.

The key to greater payoffs will be getting the industry to agree on technical standards that will allow banks and everyone else involved in this commerce chain to exchange data files without having to laboriously translate the information from one format to another. Place is emphatic that a "winner-take-all" approach by technology vendors will hinder the development of B2B, just as it has electronic bill presentment and payment.

Generally considered one of the banking industry's leading technology and e-commerce theorists, Place worked with Bank of America Corp. and Wells Fargo & Co. before joining Mellon in 1999. We spoke with her during BAI's B2B e-commerce and payments conference, which was held this past February in New Orleans.

Banking Strategies: B2B means different things to different people. What's your definition?

Place: There was a time when it seemed to be something very new and different. Many people had faith that if you put your traditional processes online, you somehow changed them in a fundamental way. As we certainly learned in B2C, that's not true. Simply moving procurement activity online is not transformational.

I frequently get calls from vendors who claim to possess a "global B2B e-commerce solution" that is seamless, integrated and secure. That sounds wonderful, but I don't have a clue as to what it means. I got so irritated with all these pitches that I told them, "If you can't e-mail me with an explanation of exactly what you do, without all that marketing jargon in it, then I don't even want to talk to you."

What B2B does give you is another channel for reaching your customers. And it provides great efficiency advantages over some of those other channels. It also can extend your reach to potential new customers.

Within a company, B2B e-commerce technologies can span the operating and processing silos between purchasing, raw materials management, manufacturing, invoicing, payments, accounts receivable, etc. I like to refer to this as "the commerce chain." What B2B can do is take much of the noise and cost out of the commerce chain.

Now that's easy to say. There are enormous challenges in trying to do anything there in a practical sense.

Banking Strategies: The lack of technical standards is a big obstacle, right?

Place: Yes. That's the messiest problem we have. System-wide standards would allow everybody to move much more quickly in terms of building applications. Instead of collaborating, however, every technology vendor wants its own proprietary technology to become the standard, which is probably not the most efficient way to go about it.

The situation is similar to electronic bill payment, where everybody wants to own the transaction hub. But B2B, like electronic billing, can't be a winner-take-all situation.

Some years ago, I worked with a financial services group that was considering using Microsoft Corp.'s TransPoint venture for electronic billing and I had my only face-to-face meeting with Bill Gates. It was just him, myself, and a couple of other people. I remember arguing with him over whether bill payment was a winner-take-all kind of game. I said it wasn't, but Gates doesn't want to be in any game where he can't take everything. And of course, he later sold TransPoint to CheckFree Corp.

B2B likewise needs open standards and open architecture to reach its fullest potential. Mellon is a member of the Banking Industry Technology Secretariat, an industry consortium that's trying to promote the development of appropriate standards for online financial services, including B2B. A useful analogy, I think, is the development of the magnetic ink character recognition, or MICR, line for checks. People collaborated on defining that standard and more than one technology company was able to build hardware and software for it.

The opportunity in B2B may involve Extensible Markup Language, a programming language that allows companies to share data over the Internet. Although XML is often referenced as the be-all and end-all in interoperability, an XML implementation may be more specific than an implementation of UNIX, an older programming language. Just as we now have many different flavors of UNIX, we're going to wind up with many different flavors of XML if we're not careful.

BITS is now working on a project to facilitate the development of appropriate XML standards for the financial services industry. But I wouldn't give it more than a 50% chance of success. It's very hard to create a standard unless you've got the kind of money Bill Gates has, or can identify standards elements that all stakeholders agree on.

Banking Strategies: Even if the standards issue is solved, there's still the question of customer demand. Many banks have said it's just not there
yet for B2B services. What's Mellon's experience?

Place: You have to understand what people need, as opposed to what they specifically ask for.

For example, we developed a product at Mellon that extends the life and value of investments customers made in Electronic Data Interchange, a technology that links one computer to another but can't be used on the Web. EDI is very rigid and fairly expensive to implement, which limits its use to a General Motors-size company and its major trading partners. Some of our customers wanted to trade with smaller companies that weren't EDI-enabled. But they couldn't ask their partners to make the required investment in EDI.

So we provided a product that connects XML and EDI. This allows a customer to expand its trading network while simultaneously preserving and extending its investment in EDI. Is that B2B? We think it is, but the customer might not think of B2B in those terms. If customers even have a clue as to what B2B means, they probably don't have a vision of what they want out of it. But they do know, for example, that they'd like to interface between their accounts payable system and lockbox vendor.

So it's partly a matter of listening to your customers and partly understanding what's currently available and what future capabilities in e-commerce can do for those customers.

Banking Strategies: Banks have traditionally focused on their core competencies of payments and credit extension. How deeply should they become involved in the business processes of their customers, or what you describe as the "commerce chain?"

Place: I think you can go very deep. Corporations are increasingly outsourcing non-core activities. It's not unusual, for example, to find companies outsourcing their entire human resources function.

If you look at the structural components of the commerce chain, many functional components are the same across different industries. The central problem is that most business processes, both internal and external to a company, function separately and pass information to one another sequentially. For example, sales data goes first through a salesperson's sales tracking system to an accounting system, then to a compensation system, and eventually to the manufacturing, profitability and risk management systems.

A financial institution that currently handles cash management for a company could extend into that customer's enterprise resource planning system, or into functions handled by an ERP system. As chief financial officers continue to grapple with the need to do more with less, they will look to outsource non-core processes. It would be natural for a company to tap its payments and cash management service provider to handle other components of the commerce chain.

Banking Strategies: What's your opinion of the online marketplaces, which early on became one of the rallying points for B2B activity? Banks such as KeyCorp and FleetBoston Financial Corp. have become active in this area, as well as eScout.com LLC, which is run by a former banker, Alexander "Sandy" Kemper.

Place: As I understand eScout, it's a marketplace for small businesses — an attempt to create a kind of self-interested community on the Web. While I think the Web certainly has the ability to create or nurture cultural communities, like self-help groups, I've become pretty disillusioned with the notion of creating economic communities on the Web.

Take small business, for example. A small business might use a Web marketplace that provides travel services. But at some point, it's going to look at Travelocity or some other specialized Web site and probably find cheaper fares. Why would small businesses limit themselves to a range of partners for office supplies when they can probably get a better deal from Staples or Office Depot?

I don't see any fundamental advantage for the economics of a Web within a Web. The Web itself is fundamentally very efficient, and unlike physical space, everything is next door to everything else. The convenience of space offered by a shopping mall simply has no analog on the Web, where everything is just a click away.

Vendors used to ask us to sign up for their e-marketplace, where our customers could buy and sell everything from insurance products to refrigerators and we'd get a 5% cut in perpetuity. I had two basic problems with this idea. One, our customers and their trust in us is probably the number one asset we've got. Why would we want to sell them, say, car insurance? Have you ever liked anybody who sold you car insurance?

The other issue is, who's going to pay 5% in perpetuity? Those marketplace margins are going to come under the same sort of pressure that you see with every other Internet-based product or service. This strikes me as an irrationally exuberant business model.

Banks face a real challenge deciding what to do in this area. Mellon has a lot of cash management services, for example, so we're increasingly expanding that suite of services based on what our customers tell us they want. We do participate in a couple of the foreign exchange marketplaces.

But we really haven't put too many eggs into any of those baskets because e-marketplaces give all the advantage to the buyer rather than the seller. Buyers enjoy price transparency, for example, and the ability to search out quickly, within the privacy of their own offices, any number of options.

So when one company approached us about their foreign exchange marketplace, we analyzed the value proposition. It went like this: we could pay them a fee, interface our technology to their exchange and then post all our prices besides those of our competitors. And should we then be so lucky as to sell anything, we'd have to give the marketplace a piece of it. What's wrong with that picture?

To be sure, there are marketplaces that provide benefit for all the players. Some trucking companies, for example, sell excess capacity to each other so they don't have to travel with half a truckload. I think that's great. With that kind of arrangement, you use up capacity and drive more liquidity to that particular activity. Everybody wins.

Banking Strategies: How important is B2B to Mellon, strategically? Is it a separate investment category for your company, or just part of the whole e-commerce picture?

Place: It's really the latter. Although Mellon still has some retail presence with affluent investors, our primary focus is institutional and commercial. We only have about 6,000 customers, primarily institutional or commercial. Our whole world is very B2B focused and we look at e-commerce as just a way to serve that marketplace.

Banking Strategies: How important is B2B to the rest of the banking industry? You often hear dire warnings that if bankers don't move quickly into this space, they'll forfeit the territory.

Place: I get a little nervous when bankers say we have to retain control of something or it will go to the technology people. The way to retain control is to develop the technologies that allow you to offer a service more efficiently. Whoever does that the best is going to get the business.

When I first came into financial services about 10 years ago, people worried about losing the value-added services around the payment system. But we forget the advantages banks possess around their core competencies. For example, when I was talking to TransPoint, it became obvious to me that those people didn't understand the risks involved with moving money around. It would have been very dangerous to have that company as a hub through which large amounts of money flowed. Banks understand those risks.

At Mellon, we do a lot securities servicing, which is a very technology-oriented, scale-driven business. We invested heavily in that business because we know how it works and understand all the fiduciary obligations.

Banking Strategies: Putting it all together, how should bankers think about investing in B2B technology to the benefit of their institutions and customers?

Place: It is never useful to think of B2B in a vacuum, but rather in terms of how it fits with your overall corporate strategy.

Mellon has a lot of processing businesses. So we invest in capabilities that promise to drive more business to our established platforms. Does the investment help us build scale? Does it make the platform more efficient? These are the questions we ask.

The investments tend to be huge, so it's a challenge. But it's important to be proactive. If you wait for a customer to come to you with a request, like facilitating automated clearinghouse transactions from the retail point-of-sale back to the bank, you would have to procure that service from a third-party and then worry about integrating it into your receivables processing operation. It's better to make some of those investments ahead of time based on your knowledge of customer needs and industry developments.

A final point I'd make is that the need for open standards can't be over-emphasized. You need to continually ask the partners and service providers you're dealing with: how much of your architecture is open? And I don't just mean open in terms of technology, although that's certainly important. I mean open in terms of business process. For example, does the technology simultaneously expose data to other businesses' processes?

My grand vision would be to bring more transparency to international trade finance, which is one of the most opaque areas in financial services. A big problem there is lack of liquidity: there's currently no consistent way to securitize or to create a secondary market in those deals. You could really do an enormous amount of good by bringing standardization, simplification, automation, real-time information and standard products and technologies to those transactions. An ability to securitize trade finance would drive a lot more liquidity to that business.

When people talk about the B2B "gold rush" being over, I just shake my head. I think we're well into creating the technology capabilities, but surely not close to the end in terms of the benefits that are going to be realized. As with other technology revolutions, the "golden age" of value creation in e-commerce will come after the investment boom-and-bust cycle runs its course.

Mr. Cline is senior editor with Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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