B2B and E-Commerce - what it really means for the banks   Bryan O'Connell specialises in providing strategic and marketing consultancy services to banks and financial service providers. He has more than 18 years experience in the industry both as a banking lawyer and strategic consultant.He has worked and acted for a wide range of banks, non bank financial institutions and corporations involved in the financial services industry. He can be contacted via email: bryanac@aibf.com.au

Far more than a fancy acronym, B2B will alter the way in which banks do business with their suppliers and business partners, as well as their customers. It also gives banks the opportunity to tap into the rapid development of procurement services and e-market places.  

As a result, the banks' potential roles will be as both direct participants and intermediators. At the same time, there are challenges and pitfalls in the way of realising these opportunities. This article canvasses some of these issues.  

What is B2B e-commerce? 

Business to business e-commerce is one of the new dimensions that electronic technology combined with the Internet offers to many industries, including banking and financial services. 

B2B does not have a clear definition, reflecting all the unknowns of the fledgling internet and the e-commerce environment. This creates a lot of discomfort for businesses that are locked into more traditional ways of doing business and banks will need to help many of their business customers in coming to terms with this.  

There are also no hard and fast rules about B2B because it depends on how technology allows it to develop. However, a number of clear dimensions to the concept have already emerged in the market and should provide banks with new business opportunities. 

Whilst in one sense B2B can be described as the trading relationship that business has with its suppliers and its buyers, for banks it can broadly include the following:  

• A bank's own business in buying products and services from its suppliers. By procuring online, the bank reaps potential cost, quality and efficiency improvements. Michael Aaron of IBM says this can be the most important step that a bank makes in developing its B2B business, because the bank is testing its own implementation ability. 
• A bank selling its products and services online environment to its small business and institutional customers online. This will potentially increase the bank's ability to provide intermediation and other services to its customers. A recent example is the National Australia Bank's decision to invest in a company to sell Internet infrastructure services to its small business customers. 
• Creating sponsored e-procurement sites and e-market places that are hosted by the bank, where buyers and sellers are brought together. The bank can use its brand, trust and other resources to establish and benefit from an e-market place. A number of banks have joined in the race to establish e-procurement facilities. Westpac recently announced that it is joining in a venture with Intelysis to offer small business customers to trade with the bank and each other, ANZ has launched www.anzbiz.com and the Commonwealth Bank has also announced Cyberlynx Procurement Services. 

The B2B e-commerce market is being influenced by a range of drivers and issues. 

The ANZ Bank's General Manager for business e-commerce, Mike Irvine, says one critical factor is the plummeting cost of information stemming from technology. "That is, the cost to collect it, process, analyse and distribute it," he says. "In every business, information is a big component of total cost. This is making it possible for businesses to get quantum leaps in improvements in terms of costs and service delivery they can offer." 

But while lower information costs is one factor, the broader 'network economy' lies very much at the heart of the push of B2B. IBM's General Manager Financial Services, Christine Bartlett refers to the five rules of the network economy: These are that:  

• Power is changing hands from suppliers to buyers and markets are becoming more customer based. Buyers, particularly through the Internet, have the ability to quickly and easily compare prices for a whole range of products and services. 
• Assets are being revalued. More valuable assets are being generated from information and data. The key assets of financial institutions are their 'knowledge workers' and customer data. The latter is one of its most saleable assets. 
• Value chains are disaggregating and reaggregating. The crux of this issue, which is not new but is rapidly growing in importance, is looking at what a bank is 'best' at in the value chain in terms of products, processes, context and its infrastructure. This may mean offering other 'third party products', which will increasingly become a more compelling option for many banks, who want to provide their customers a total offering which is best in breed and adds the most value; in addition, outsourcing is now more seriously considered to that part of a bank's infrastructure that does not offer the most value eg IT. 
• Barriers to entry dissolve. Shrinking barriers to entry are leading to new - and in many cases unknown - competitors entering traditional markets. Direct competitors, with little or no bricks and mortar costs, are a growing threat to the big banks as they cherry pick customers and product opportunities. A clear example is ING Direct which claims to have gained more than 50,000 customers and $1 billion in deposits - within 12 months, without branches and with only one product! There is little doubt that we will see more of this style of competition from yet unknown entrants. 
• Brands and relationships are being contested. The value of brands and customer loyalty are becoming critical to the online environment. Increasingly, banks will try to influence customers and potential customers based on the value of a brand and loyalty programmes. 

"The next chapter in the e business revolution involves the transformation of entire markets and the redefinition of industries. We will see the rise of a new class of entities - e-marketplaces - that will help online buyers and sellers find each other, attack the inefficiencies of traditional markets, and carve out for themselves important roles in the e-business economy."  

Louis V. Gerstner Jr.Chairman of the Board and Chief Executive Officer, IBM Corporation 

In its simplest form, e-market places are where buyers and sellers can trade online. To date, this has been through trading networks in which the focus has been on reducing purchasing costs. But according to IBM, the more sophisticated B2B market places will go beyond simplistic trading networks. A collaborative environment linking multiple trading networks, individual buyers, suppliers and service supplies will quickly emerge. 

In a recent report on B2B, Morgan Stanley Dean Witter said: 

"e-markets create the opportunity for buyers, producers and sellers to create an integrated, collaborative chain of commerce by tightly linking all partners in the demand and supply chain to improve process transparency and get the right products to the right place at the right time."  

The well respected Gartner Group predicts that worldwide online trade will reach $7 trillion by 2004, with approximately 40% of transactions flowing through e-marketplaces. 

IBM predicts that the core of these new e-marketplaces will be collaborative information which will allow trading partners to integrate, synchronize and optimize the flow of materials, finished goods and services. This will enable participating companies to anticipate and intelligently plan for changing market conditions. This evolution will introduce unprecedented levels of market transparency that will highlight both the strong and the weak competitors in an industry. As they evolve, e-marketplaces will add new capabilities such as integrated financial services, logistics and data mining transaction information. Ultimately, they will enable companies to join in dynamic partnerships, using the Internet to link key business processes.  

We have already started to see many different types of e-market places evolve to date and although there is not enough room to go into a lot of detail, they can be broadly categorised into the following: 

> Vertical portals - these aim to attract a target audience via content focused on a vertical audience and which is industry specific. 

>Aggregators - where thousands of products can be aggregated to one site and offered for sale. 

>Auctions - where many products are offered on the basis of best lowest price. 

>Exchanges - these focus on fewer products, but with fluctuating prices. 

Role of Banks in B2B  

The development of e-market places gives rise to a number of very important roles for banks in terms of not only their own businesses per se, but also their customers' business.  

According to Mike Irvine of ANZ, B2B has changed the role of market intermediaries. For instance physical PC distributors are having a hard time, but new information based intermediaries such as US-based freemarkets.com, are rapidly developing.  

The boundaries used to be nice and clean, but as information can be captured electronically and used much more effectively, this has lead to a blurring of the boundaries of a bank's intermediary roles.  

What adds to a bank's potential e-commerce role is the fact that it is a 'trusted party'. This becomes so much more important given the faceless nature of the Internet In addition, banks have a track record of being one of the best confidants of information and are highly respected for their timely execution of instructions and fair dealing between parties.  

Direct Role 

There are many potential direct roles for banks, the first being where banks start the process by using electronic means to do business with their own suppliers. The second is where banks sell their products and services to their business and institutional customers online and the third is where the bank uses its resources and a combination of brand and trust, to create bank hosted e-market places to bring buyers and sellers together. In some of these direct roles, there are a number of actual and potential intermediary roles which will in fact help to underpin the functionality of many e-marketplaces and procurement sites.  

Intermediary Role of Banks 

Critical to the B2B markets are many functions that banks provide. Some of these include the following:  

> Authentication of parties where the bank can provide the means to provide and authenticate the identification of a trading partner - there are now major initiatives being made by banks worldwide to do this eg Identrus.  

> Payment and settlement services. Clearly this is a critical function for trading online where the bank facilitates and settles payments required for a transaction; the development of electronic bill payment mechanisms will further enhance this. The risk for Australian banks failing to further develop this and other Internet payments mechanisms, according to Christine Bartlett from IBM, is that non bank third parties will provide alternate online payment mechanisms. She points to the US where this has already started to happen and is a real threat to bank payment systems.  

> Credit risk assessment and management. Where the bank will take on the credit risk and alleviate the concern of a trading party as to whether or not it will get paid. This is really an extension of the trade finance concept. Michael Aaron of IBM goes further and says that trade finance as a model can embrace not only the credit aspect of B2B but can also be extended to other functions such as identification, guarantee of payment/liquidity, provision of risk management services and products. Aaron believes that there is an excellent opportunity for banks to lift the trade finance model and apply it to other e-market place trades. This would mean additional fee income to the bank.  

> Guarantees where a bank uses this traditional facility for a party to give certainty to payment.  

> Risk and Hedging facilities where a bank can provide an array of both currency and other hedging facilities to customers in a real time and online environment. There are many other potential opportunities that banks have in this environment. Some of them could be very significant and many of the banks moves to establish either major e-commerce divisions or in the case of the National, establishing a defacto separate business known as O2-e, is a reflection of this.  

Michael Aaron from IBM says other opportunities include not only creating the infrastructure services for e market places, but enhancing electronic bill payment via B Pay which the banks must develop so as to further facilitate online trading. Another is online merchant enablement, in which the bank uses a partner like IBM or Telstra (but under the bank's own brand) to do the infrastructure work such as the creation of catalogues and virtual private networks. Banks can also run very specific portals for small medium size businesses and bring them together in their own market places.  

Benefits from B2B 

These roles will over time take on a greater importance in the B2B market. For banks, the key to the participation in these markets is to create greater business through increasing the value that it can bring to customers and improve the relationship that the bank has with its customers so that the customer can trade more easily online and collect revenue online. Banks are already harnessing their ideas about this. Ross Peoples from CBA says their small to medium sized enterprise (SME) customers are looking for direction from the bank in this new market and access to the technology which the bank wants to give them. Mike Liley of the National Australia Bank goes further and says that the process of managing the SME relationship is aimed at being taken from a physical relationship and replaced by a virtual relationship. One of the ideas is to capture the CFO role in a virtual sense and provide web enabled services so that customers' businesses can be run on the Internet. This process for the National will begin in Australia and then be extended offshore.  

The second benefit is to increase revenue of the bank based on fees that can be generated through enhanced intermediary facilities that the bank can offer; thirdly, to create new business product volumes as the concept of B2B develops and envelops many businesses.  

Watch the Pitfalls 

The momentum of B2B is building. Banks have made moves to take the first step with their own procurement and there have been announcements to host and create e-procurement sites.  

As we have seen with the Internet, there can be a lot of hype, which can overtake rational judgement. The further development of B2B e-commerce needs up front and continuing investment. It needs to be based on sound business models and with thought given to creating the right infrastructure for e-procurement sites.  

As IBM warns, the enduring value of marketplaces must go beyond merely squeezing suppliers on price to reducing costs and assets for all participants. What's needed are sophisticated B2B e-marketplaces which go beyond simplistic trading networks to provide a collaborative environment linking multiple trading networks, individual buyers, suppliers and service providers.