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Box 2.2. New online banking and financial services delivery channels for large companies

Multinational companies and large banks are both seeking to capitalise on the opportunities provided by the growth in e-business by developing their corporate internet banking business. The desire to provide one-stop, lower-cost solutions for international corporate clients is a major factor driving these developments, as is the perceived demand for such services. Anecdotal evidence suggests that there are over 500 fully functioning internet sites providing international (wholesale) banking services of various kinds to the corporate sector. These activities mainly focus on the markets of the United States, Canada, western Europe and Australia.

Compared to retail banking, the development of internet wholesale banking has been relatively slow. This is largely due to the complexity of the business. Typically, banks have dealt with the needs of their larger corporate customers by directing business through relationship managers. These managers deal with the specific wholesale needs of individual clients, including:

commercial lending;

cash management services;

trade and foreign exchange services; investment management and trust services; and payments processing.

While international banking has traditionally had the most electronic links to its customers, this has been mainly on a product-by-product basis.

With the growth of e-business, traditional corporate relationships outside the banking industry are changing radically. Value chains are being re-configured, trading communities (e-marketplaces) are being created and numerous purchasing and other internet portals are being established. New business-to-business (B2B) relationships are forcing global banks to consider ways of changing their wholesale banking operations so as to embrace many of these developments. It also means that international corporate clients now expect global banks to offer multiproduct, web-based platforms. For example, a confidential survey by Greenwich Associates of 8,000 US middle-market corporations found that only 21 per cent purchased wholesale banking products online. The reasons cited for the limited use of such services related to concerns about website functionality, security and internet service provider (ISP) reliability. The same survey, however, noted that over two-thirds of the companies said they would use wholesale internet banking services if 'they provided the benefits they felt that the internet could provide'. These benefits relate to safe electronic bill presentment/payment, an integrated source for com-

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pany-related information and remote access via wireless devices.

A major strategic challenge for banks is to develop wholesale internet services which will allow corporate users to obtain information and initiate seamless transactions for multiple products and services. Large banks also need to continue to develop their web offerings if they are to become the main portals for corporate banking services. As B2B e- commerce grows, clients will increasingly seek a broad array of services (such as wireless access, transaction processing, various customised services, information products and multibank access). Banks will need to provide these if they are to be successful in the webbased wholesale banking business.

An important issue for the development of web-based banking services for international firms is how these should be positioned in the new e-marketplaces. Developing the appropriate portal strategy is critical in this respect. As online markets expand, reaching and retaining wholesale clients continues to pose new challenges. In particular, the creation of new e-marketplaces allows non-bank intermediaries to position themselves along the value chain that exists between a bank and its corporate customer. Corporate banking portals allow companies to evaluate the prices of various wholesale banking services, thereby distancing traditional banks from their clients. The major risk banks face is that developments in B2B e-commerce could result in their acting as mainly payments processors while other companies pick up the higher-value business.

Aware of the opportunities and threats afforded by the new environment many large banks are hastening the development of wholesale internet banking portals. The advantages associated with developing a proprietary internet portal dedicated to wholesale banking include:

•more effective communication with clients;

•reduced risk of competitors accessing the bank's client base;

•greater revenues from cross-selling and customised solutions;

•internet access and content that can be managed, tailored and packaged for different client segments; and

•the opportunity to develop client relationships and loyalty.

However, it is by no means certain which type of wholesale internet banking strategy will be successful. Consequently, banks have adopted a variety of approaches to develop their online corporate banking services for their larger clients.

Various banks have created their own e-market-places by forming bilateral links with their international corporate clients or by joining marketplaces where important corporate relationships are dominant. The services on offer relate mainly to payment processing. Some have also positioned themselves in new e-markets, providing treasuryservices or niche operations.

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Others have grouped together to reap the benefits of market power and provide broader wholesale banking services across their various product ranges. For example, through the service provider lntraLinks.com, Chase Manhattan, other banks and third parties negotiate and establish terms for large syndicated loans. lntraLinks.com now claims to account for around 90 per cent of the syndicated loan information services market.

Various banks have also developed client connectivity sites that allow the bank to position their offerings within a larger context of services that may be attractive to clients.

Despite the recent activity in establishing an online presence, the number of internet portals devoted to international corporate banking still remains relatively small and the range of services on offer fairly limited. However, some analysts forecast significant growth in the number and range of wholesale portals.

One area of online wholesale banking which has registered major growth in recent years has been that of foreign exchange. Banks have been quick to set up foreign exchange trading platforms because of the threat posed by others in setting up dealing facilities. With approximately 88 per cent of foreign exchange trading currently being processed manually (compared to 67 per cent of equity trades), the opportunities afforded by the automation of foreign exchange trading appear substantial. Foreign exchange is the single largest wholesale market, with around 1.5 trillion dollars' worth of foreign exchange traded daily.

The automation of foreign exchange trading allows for a reduction in transaction costs and provides banks with access to a broader client base. The standard procedure for currency trading begins with a corporate treasurer calling a trader at a bank and being quoted a price based on the size of the deal and other relationship considerations. The treasurer may then contact a few other banks to source the best deal. When an order is placed, the trader documents the features of the deal and inputs the relevant details to undertake the foreign exchange trade on behalf of the corporate client. This system, however, is flawed as:

•only relatively large companies qualify for such trading relationships, with a large number of still large firms denied similar access to the foreign exchange market;

•prices are not transparent, in that they are not immediately obvious to the buyer and may have a large spread, depending on the range of banks approached; and manual processes limit the number of deals traders can handle and may result in delays in

transaction processing.

Given these limitations, banks and other companies have sought to develop foreign exchange internet portals that are geared towards creating more efficient and transparent mechanisms for companies undertaking foreign exchange trades. The new mechanisms

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provide quotes from a number of institutions where prices tend towards a consensus, thus reassuring corporate treasurers and other users that the rates they are being offered are close to the rates that global banks charge each other. Greater transparency should help to attract more corporate customers. In addition, automated sites can process multiple, parallel trades from existing customers, as well as new business from smaller companies which have not hitherto had access to such services. Table 2.7 lists the major foreign exchange trading sites that are currently operational.

The foreign exchange trading sites fall into three main categories:

•sites that allow companies to trade only with participating banks with which they have existing relationships (e.g., FXall);

•multi bank sites that allow companies to trade with any bank providing foreign exchange services (Currenex); and non-bank trading sites owned by foreign exchange trading firms (such as Cognotec).

Many analysts believe that online foreign exchange sites are likely to gain the lion's share of the market in the near future. Such systems are expected to streamline the trading process by allowing international firms access to a range of dealers through a single point of entry. In addition, the liquidity and market leadership provided by the sites with major bank backing are likely to be the most successful as these will provide greater price transparency, lower spreads and faster order execution than is currently available offline or through sites provided by single global banks. In addition to the development of foreign exchange trading sites, various other internet sites have sought to introduce services for the trading of other international related products and services. Most of these have been developed by non-banks and seek to provide more price-transparent and efficient markets through a variety of capital and money market instruments. While global banks appear to be focusing on developing their online foreign exchange and payment services, new operators appear to have stolen the lead in developing sites relating to fixed income, derivatives and commercial paper trading. The rapid introduction of such services is a reflection of the anticipated demand for online wholesale trading. Table 2.8 lists some of the sites that aim to meet this expected growth in demand for online trading services.