Banks and exchanges to settle past differences

Settlement in e-marketplaces is still taking place offline. ABN Amro seeks the online alternative.
ABN Amro sees the writing on the wall when it comes to the role of banks in business to business (B2B) e-commerce. "Banking is necessary, but banks are not," quotes Francis Kong, senior vice president, cash management and securities at ABN Amro, Singapore, of Bill Gates.

There are direct conflicts between what B2B exchanges want from banks and what most banks want to offer. E-markets want guaranteed settlement, and the flexibility to work with a number of banks, so that each vendor need not build multiple relationships with each new e-market it joins.

"Some e-marketplaces want their members to open an account with the one bank - wishful thinking for us," says Kong. Banks on the other hand want to minimize the risk they take on when handling transactions and deal with customers on a point-to-point relationship basis.áá

Speaking at a recent conference in Singapore, Kong sought to reconcile the two needs and assert the role of banks in the "new economy".

"Settlement will be one of the key differentiating factors between e-markets," says Kong. "Today, 99% of settlement is done offline. If the e-market is able to provide online payment and settlement services, this would create stickiness."

What can banks offer?

ABN Amro sees banks handling domestic and cross-border settlement, multilateral netting and enterprise cash flow consolidation, and providing a global network of branches. The bank saysáit now hasásettlement tools to support e-marketplace business models; examples include Identrus, Bolero and online credit rating services.

A community based settlement model is something ABN Amro is proposing to the marketplaces. Members of the e-marketplace are given a "revolving" line of credit based on the type of industry and marketplace, the volume of trade andáa member's credit rating. Transactions can be guaranteed according to the credit rating, the level of credit insurance utilized, or on a portfolio basis. The status of a trade is tracked electronically, and when completed, and payment is made, the member's credit line is restored to its limit to finance further transactions. Other risk mitigation tools are standby letters of credit, and escrow with interest compensation.

The complete structure of the settlement model that ABN Amro proposes is as follows: The e-marketplace should be more than a website, it should be a community of services, such as procurement and logistics. Transactions that take place within the community should utilize the revolving credit facilities, or other risk mitigation tools that ensure payment with guarantee. A bank-neutral account structure, and a legal framework, coupled with an automated interface for front office to back office processing, completes the picture.

As for future bank trends, Kong says to watch out for partnerships between banks and internet service providers, banks and telecommunication companies, and banks with major software companies.

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