Banks Have What It Takes for E-Commerce

By Denny Carreker

"Large banks well-equipped for the Internet are expected to be strong performers in 2000," said Sandra J. Flannigan, a Merrill Lynch analyst, in the Dec. 29 issue of American Banker.

The prediction is not surprising. Wall Street will reward companies, in this case banks, for leveraging Internet opportunities.

But another story in the same issue, "Banks Get Respect, Not Business, in Web Billing," said that "companies that send their bills over the Internet or plan to do so are favorably disposed to using banks, but banks are not getting much of the action."

Why did the companies think banks should play a greater role? They said banks are more trusted, better able to reconcile accounts, already have existing business relationships, have proven competence in this area, and are the most favored gateways for electronic billing.

But the story concluded, "Despite their favorable image, banks continue to trail technology companies in helping companies send electronic bills."

Even though Wall Street promises to reward banks for their Internet prowess and customers attest to their preference for banks, the banks are not getting Internet business.

What is missing from this picture?

As the Internet economy has evolved, many banks have directed their attention on-line, mainly by delivering established banking products on-line. But it appears they are overlooking the truly immense opportunity.

Among all the companies vying for dominance in the Internet economy, banks are fully positioned to be what companies engaged in e-commerce need more than anything else: engines for making e-commerce work.

Banks already are engines for commerce. But because they have been hindered by paper payments, they have not yet developed and merchandised the value they bring to Internet processes and their customers have not intuitively recognized it.

Some observers say every transaction ultimately goes through the banking engine, since banks control the settlement of funds. But that's a narrow view. Owning the settlement function is an extraordinary competitive advantage for banks. But in the Internet economy, looking at banks and seeing payments processors is like looking at Warren Buffet and seeing day-trader.

What is really driving e-commerce today from the supply side? Two years ago it was pretty much just being there: "Do you have a flashy Web site? Is it getting the eyeballs? Are you sure it won't crash?"

Last year it got a little earthier: "How many warehouses do you need? How many pickers? How well-trained? How fast and cheap can you deliver? Are you answering e-mail fast enough?"

This year the issues are even thornier. Providers and customers are leery of Internet security. Customers are looking for trustworthy entities to deal with. Providers are looking for ways to ascertain customers' abilities and intentions to pay.

As volumes mount, problems mount. More payments, more fraud, more pricing constraints, more service levels, more exceptions, more returns, more wrong orders, missed orders, duplicate orders, more research, more customer service interactions.

More, in short, of all the things banks do well. That is what e-commerce is coming to.

Yet there is little talk of leveraging these core competencies by banks. Few are looking at opportunities through the new, sometimes surprising lens of the Internet.

When you consider how e-commerce executives view some growing e-commerce issues, the bank/e-commerce gap reveals itself:

Fraud mitigation. Dot-com companies are famously bedeviled by legitimate concerns about fraud exposure. On-line security is a worry, an expense, and a barrier. E-commerce sites are counting up the cost of fraud as they develop fraud mitigation systems. Are they getting the best protection available? Hardly. The data is often weeks old and lacking key information such as behavior patterns that indicate fraud potential.

Beleaguered e-commerce security executives would find better data, such as the ability to pay and negative payment information, from banks, which by necessity have developed the best and biggest fraud detection apparatus in the world. The same banks also happen to have some of the best and biggest consumer data warehouses. Why would companies want to build their own, if they had good access to payment guarantees from a trusted source that could both assess and minimize the risk of fraud?

Archiving. In the physical world, it made sense that companies created and maintained their own transaction and payment archives, even though it was rarely a core competence. Today, with universal access to Web-based delivery, redundant archives are obsolete and costly.

Banks, obligated by law to archive and retrieve payment information, have logically developed a core competence in archiving. As e-commerce matures, creating a predictably huge demand for archiving transaction information, why would banks not logically add transaction archiving to their e-services?

Risk assessment. Perhaps the most traditional competence of banking has been the ability to assess, allocate, and price risk at the individual level. Banks are experts in assessing risk, including the risk of not getting paid, allocating risk to the right parties, sharing risk for a fee, and minimizing risk. As e-commerce distances providers from their physical markets, collapses the risk assessment window, and alters relationships, companies who once were comfortable with their own risk-assessment processes are less so. Once again, a bank core competence that e-commerce companies must either replicate or access.

Research and adjustments. An over-traveled colleague of mine bought an e-ticket but didn't take the trip. Months later, he happened to notice the charge on his statement and called the travel agency to get them to unwind it. They couldn't, as he had booked it himself. He made one futile call to the airline and then called his credit card bank and went back to work. Where else can you count on accurate data, clean archives, trained staff, and conscientious attention to doing the right thing? My colleague found real value in knowing the bank would handle it. If he was ready to eat the ticket rather than hassle with the airline, you can be sure he would happily have given the bank a cut of the refund.

E-commerce companies are getting to know this part of the business - not because they want to, but because they have to. E-commerce companies are daunted by the exploding demand for technology and people who know how to handle problems, manage exceptions, unwind transactions, reverse payments, re-balance the books, and communicate the resolution to the customer.

Instead of looking at their world-class core competencies as their ticket to e-commerce differentiation, banks are looking for ways to offload them. Ironically, the early e-commerce players are struggling to manage what is already a core competence for banks. Many technology companies would give anything to have the assured role of settlement that banks alone already have.

E-commerce is still fledgling. Forrester Research and others are predicting business-to-business electronic commerce will reach $1.3 trillion by 2003.

As volume booms, each and every company will have to make choices:

Build or outsource? How likely is it that every company will elect to develop superior capabilities in each of these competencies?

Outsource to a technology company? There is no shortage of technology companies competing for the privilege of automating these functions. They may not have the experience or the expertise in these functions, but their promise of a technology solution is seductive.

Let the bank do it? Today, it sounds like that option occurs faster and more often to the corporate customers than it does to the banks. Never before has that prime asset of banks - the public's trust - stood the industry in such good stead. Companies want banks to have a larger role. They are in effect asking them for help in maximizing the e-commerce opportunity.

If banks want to leverage the Internet, this last option should surface first. Banks would also do well to consider how they might leverage their individual capabilities through new multibank "shared services" entities.

In summary, the e-commerce engine will be fueled by essential services from companies that are trusted, know customers' paying habits and capabilities, operate the payment processing and settlement infrastructure, have expertise and experience in exception and transaction management, and lead the way in combating fraud. Despite waves of companies forever altered or spawned by the Internet, that describes only banks.

As Wall Street pointedly directs banks to look to the Internet, the best banks will take the broad view, not just what the Internet offers banks, but what banks already have for the Internet.

Mr. Carreker is chief executive officer of Carreker-Antinori, a Dallas-based provider of payment system software and services.

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