Banking - Bankers must realise what the Web could do for corporate customers

A recent US report shows that the average cost of performing a transaction at a bank branch is $1.06 – while the average cost of a transaction carried out over the Internet is 1 cent. Small wonder then that Philip Middleton, head of banking strategy at KPMG, says: “The growth of Internet and non-bank electronic financial services providers could disintermediate banks almost entirely.” As a result, those banks that can afford to spend the tens of millions of pounds required to develop an online capability have moved into the vanguard. Barclays, for instance, estimates that one in four of its corporate customers has registered for online banking facilities. However, this banking costs revolution is unlikely to have such an immediate effect on corporate customers as it is having on the retail side, because the common services that banks provide for their big ticket customers are just one aspect of a highly competitive business. “Most corporate bankers try to build a relationship around low margin business such as treasury, cash management and payment transaction services on which they make little money, and in some cases operate at a loss,” says Middleton. “The idea is to build a higher value relationship.” And anyway, as Jeremy Sigee, European banking analyst at Salomon Smith Barney, points out, the corporate side of banking has been evolving for some time. “Large and medium-size corporates have been banking electronically for years, albeit in most cases it has been PC-based,” he says. “Multinationals such as Shell can go straight into their bank account, then access and shift data. At the highest level, among say, the top 20 FTSE companies, there are mainframe-to-mainframe solutions between the company and its bank.” The opportunities that the Web brings corporates are generally perceived to be in four areas. There is the creation of marketplaces, whereby providers of commodities, such as a group of airlines, can make available spare seats on a Web site and people can bid for them. There is purchasing activity, where companies can cut the administrative costs of processing purchasing orders and payments. BT has already estimated it can save about £1bn on its £9bn yearly purchasing bill. Here banks are looking to get involved by helping companies to purchase supplies electronically. Thirdly, there is online bill presentment, which can save money for companies by eliminating the need to send out statements and bills to customers. This saves administrative costs for banks as well as companies. Lastly, and perhaps most importantly, companies themselves can offer products and services to other businesses and consumers online, reaching a wider market. Already, European corporates can log on to electronic catalogues and hook up to auction sites where they can place their orders and pay for them online. And this is one area in which the traditional banker’s skills are useful to customers who have begun to take advantage of e-commerce. Indeed, some banks have begun to use the Internet to fund, facilitate and assure trades. “We are running an e-procurement pilot scheme with several NHS trusts that have huge buying requirements for medical goods,” says a Barclays spokeswoman. “We are looking at how we can use the Internet to deliver existing services to corporates, to help customers who want to strip out administrative costs. The Internet can take out a whole forest of paper in areas such as trade documentation and letters of credit. However, there is still a learning curve to be surmounted, and many bankers are wading through custard in their efforts to persuade management of the need to harness the Internet in corporate banking. “It is challenging to do culturally,” says Paul Cantrell, senior technology partner at Andersen Consulting. “The banks want to get involved, and new business models are emerging. But they threaten existing models and this makes it a hard step to take.” Cantrell also argues that, contrary to popular belief, security is not the main issue for corporates conducting bank transactions over the Internet. “People are willing to do quite phenomenal deals over the Net,” he says. “But the fact is that many banks haven’t thought that deeply about the potential of extending Internet services to their corporate customers. This represents a major opportunity for banks to reduce costs, but so far it is mainly a ‘me too’ activity, in that everyone can do it, so everyone has to do it.” Even so, there is no doubt that the Internet will re-shape the European banking market. First division players will recognise the benefits of dealing electronically with their corporate and their retail customers, while those that fail to do so will be at least marginalised. So the Internet will essentially benefit the first-class banks and hasten the demise of those who are less fleet of foot. Jules Stewart is a freelance journalist.