BANK TO THE FUTURE
Financial institutions are under increasing pressure to deliver a new world of corporate services to Asia's CFOs.
By Adam Lincoln

Executives at Asia Aluminum might be forgiven for feeling smug - it's been a good year. Acquisitions helped consolidate the company's position as China's largest aluminum extrusion manufacturer, with products used in both heavy construction and interior design. Success at building its customer base overseas meant less reliance on the dizzy domestic construction market in China. And they acquired an R&D company, Prime Hill Technology, which owns patents to a heat exchange technology that enables vehicles to cut down on fuel consumption while providing heating at no extra cost.

And, while the rest of the dot.com world suffered its first serious case of the jitters, the company, recently renamed Global Applied Technology, hit the ground running with the launch of i-metal.com in May. The new venture is an Internet trading platform for China's non-ferrous metals industry, which is clustered around Nanhai, a city located on the Pearl River delta. "It has done this in a very focused way," said analysts at BNP Prime Peregrine in a report that also described the parent company as a "hidden jewel". Impressed by the US$170 million-a-year company's ability to leverage relationships with local government and business players, BNP added: "It's not an aimless wander into the portal world. All aspects have been thought of."

And then some. In its desire to do better than the typical business-to-business (B2B) marketplace, i-metal.com found itself ahead of the curve in a key area: the role that banks in China would play in the on-line trading process. Under an alliance with Haitong Futures Brokerage, i-metal.com now allows its members in China to engage in futures and spot trading on the electronic Shanghai Futures Exchange, buying and selling commodities over the web. The system, which it developed with Industrial & Commercial Bank of China, even outpaces that of the London Metals Exchange, the world's biggest market for metal trading, which still clings to the old-fashioned method of open outcry.

YK Kwong, Hong Kong-based CEO of i-metal.com, would like things to move faster, though. "Going into China, we expected certain services would not exist," Kwong says. Now that he's trying to expand globally, he's running into stumbling blocks. "It's ironic that even in banking centers like Hong Kong or New York there is a lot of talk, but not much available (in terms of banking services being) tightly integrated with e-commerce systems. In my opinion it is going very slowly. We solved a range of (problems) not specific to the metal industry. We were pushing the envelope."

Awakenings

Across Hong Kong harbor, Guy Hamilton is trying to push the envelope too, but he's doing it from the 30th floor of HSBC's landmark headquarters. As the bank's head of commercial e-business for Asia Pacific, he's also doing it from a very different perspective to Kwong and his cohorts in Nanhai. For a start, there's the glare of international market scrutiny to contend with.

HSBC has suffered a reputation as an e-banking laggard but Hamilton, very much the measured British banker, doesn't seem perturbed. Indeed, his appearance is reassuring, if a little out of place - HSBC's e-business headquarters look more like a Silicon Valley start-up than a bastion of the establishment. Spacious and disheveled, his workplace screams unfulfilled potential; this is a business unit in start-up mode. As such, Hamilton, who is quick to point out a sign above the conference table, "No Geek Speak", straddles two worlds, the old economy and the new.

He's not alone. Encouraged by various degrees of success at taking consumer services to the web, and growing acceptance that on-line security is up to the task, banks are turning their attention to opportunities presented by the new economy. Electronic banking services are nothing new, but developments in other parts of the world suggest that Asia's CFOs will, in the next few years, be faced with a raft of offerings. Some will be evolutionary; others promise to turn the relationship between the corporate and banking communities on its head.

"Business-to-business e-commerce raises the bar for banks even more so than business-to-consumer (B2C)," says Roy Ramos, head of global equity research at Goldman Sachs in Hong Kong. As a first step, many banks are making their proprietary dial-up systems, for transaction-based products like cash management and trade services, available on a web platform. Some are finding ways to entrench themselves in B2B e-marketplaces, or are offering electronic bills payment and presentment schemes. Others want to go further, morphing into application service providers (ASPs) who perform a raft of on-line functions on behalf of their customers, such as treasury, accounting and trade-processing work.

It could so easily be a win-win situation. Banks say they can get to know their customers better, and therefore serve them better. With the right services and good integration with back-end systems, CFOs can capitalize on financials updated in real time to achieve that holy grail, the Ôvirtual close'.

Full Frontal Nudity

It all sets up an interesting battle between local banks, with their homeground advantage among smaller corporates and SMEs, versus global players. Can innovative local players like Dao Heng, Bank of East Asia and Overseas Union Bank withstand the challenge from the likes of Standard Chartered and Deutsche Bank? "It is a defensible segment for local banks but they do need to play it smart," says Julian Durant, director of Boston Consulting Group (BCG) in Singapore. "Otherwise, the global banks, starting with their multinational customers, are going to squeeze them out. It's a general competitive trend that will be accelerated by the Internet."

But if market rumblings are right, all banks, regardless of their provenance, face competition from a new breed of finance service provider. These upstarts will exist almost totally on the Internet, or come from non-banking backgrounds, or both. "While banks have an edge given their traditional core competencies, they do not have automatically assured roles as e-commerce enablers," says Ramos. "Regulators can open up the payment settlement infrastructure to non-banks."

The key word here is "can". Until this happens in a significant way, every B2B transaction must entail the participation of at least one bank at least once during the transaction process. Ramos says the question is not whether banks can insert themselves in B2B e-commerce, "but in how central or value-adding" their roles will be. "Success in B2B requires proactiveness and creativity, not just size and scale," he says.

Ron Shevlin, a Boston-based analyst with Forrester Research and author of the report, Atomizing Financial Services, agrees. "The Net will force financial institutions to become highly specialized and interdependent," he says. Indeed, participation in the e-world demands an unprecented level of partnering, at the very least with technology companies, but also former rivals. This may be uncomfortable but they have no choice. "If they attempt to do it themselves they will take too long," BCG's Durant says. "A payment platform or a B2B portal pushed by one local bank is probably doomed to failure. There won't be enough traffic."

Not surprisingly, banks are nervous about the leap of faith required of them - the inconsistency among offerings in what was once essentially a commoditized sector is evidence of that. As one respondent from an unnamed US bank told Forrester: "You used to be able to hide behind experiments with new ideas and partners in limited geographic markets. With the Internet, it's full frontal nudity. Everyone knows what everyone is doing, and people can see when things blow up."

Slow and Steady

CFOs, rightfully, wouldn't want such explosions on their turf. This being the case, Hamilton's minimal concern about the perception of tardiness is understandable. "People bank with HSBC because they trust us to get things right, and that we will deliver in a safe, pragmatic, reliable and secure manner," he says. "We would not wish to jeopardize our brand value by rushing to market with something that was ill-conceived, poorly designed, not thoroughly tested."

HSBC is not without an electronic pedigree: its proprietary Hexagon platform has been around for about 15 years. While Hamilton admits that in some respects it is a dated technology, he points out there is still market demand for it. But the bank knows it is time to move on. In August, it launched a consumer banking service for the Internet, to favorable reviews. A corporate offering will follow, starting in the first half of 2001, and delivered in phases.

"Most businesses do not expect us to come up with a Rolls Royce on day one," Hamilton says, adamant that HSBC's rollout strategy hasn't cost it customers. "What they want is a product that works on day one, and can be upgraded in a progressive and regular manner." The details are closely held, but capabilities should include cash management, treasury and foreign exchange, surrounded by value-adds such as market information. Still, he can see why CFOs might be wary.

"For a business like an airline or shipping company, the efficiency and quality of your operating system has a direct link to your brand value. If you're a large corporate who has invested a lot of time and effort into a legacy operating system, you are not going to play around idly." That said, the pace of technological change sees companies addressing the issue of systems upgrades more frequently than they did five or ten years ago. "Cycles are shorter," Hamilton notes.

Local and Nimble?

Well and good, but Singapore-based DBS Bank has been active in cyberspace for 18 months already. As far as Adam Wong, the bank's head of e-commerce is concerned: "It pays to have first-mover advantage."

DBS's cash management platform, IDEAL Enterprise, is available in two modes: direct dial-up through leased lines, and, since April 1999, over the Internet. Products include custody, trade finance, and local and international payments. The Internet option doesn't demand much in the way of new investment - all a company needs is a web browser and an Internet service provider. The bank employs a thin client approach, which means the software doesn't reside on computers inside the finance departments of its customers. Instead, it is delivered over the Net as needed.

Thin clients have drawbacks in terms of application and functionality, but Wong says this isn't an issue in 95 percent of cases: "Most of our market doesn't need that level of richness." Corporate finance departments interact with the bank across various channels, including networks operated by the Monetary Authority of Singapore, Singapore Network Services and the NETS consortium. But the Internet channel affords the most comprehensive set of products and services - and the customer doesn't have to pay for the network connection. DBS simply applies a monthly charge, which Wong says would be about US$150. Depending on the bank-client relationship, it is usually less than that.

Of course, if a company wants good integration with its back-end systems, they will have to pay for it. How much this costs depends on the kind of financial systems they have in place. "It's a matter of manpower more than anything else," Wong says. If the setup is simple, a company may get by with an additional investment of no more than a thousand dollars. At the top end, those that use SAP software might pay more, because consultants are more expensive. Even so, Wong feels this isn't more than a low five-figure proposition.

So far more than 500 customers, from large corporations to SMEs, have signed up for IDEAL on the Internet. About US$2.3 billion worth of transactions flow through the system each month. "The foreign banks would say they have bigger relationships, and global reach, but if you're talking about the local market, not many can beat us," Wong says. In any case, the system sits well with the bank's regional ambitions. At the time of writing, the bank was awaiting final clearance from the Hong Kong Monetary Authority to launch the service in the SAR. Rollout in the bank's other key overseas market, Thailand, is being planned.

To Market, to Market

Francis Kong, senior vice-president of global transaction services at ABN Amro in Singapore, thinks this is all a bit of a snore. He thinks a lot of banks and their customers are more concerned with market perception than new ways of doing business. He feels that banks must work harder to add value for corporates using the web, because compared to retail banking the benefits are harder to find - the savings to be achieved from transferring transaction-based processes to the web are secondary, not in themselves a compelling reason for change. "What matters are features and functionalities, and new services. Whether or not it's the Internet platform isn't the main issue, to be honest."

Since launching its US$1.7 billion e-commerce strategy last year, ABN Amro has put much of its focus on e-markets. In Asia, the Netherlands-based institution serves as settlement bank for more than 30 such ventures. "This is a market we believe in," Kong says. But, while it pays to get in early, these are not one-on-one relationships. "Nothing in the Internet world is exclusive."

The rationale is straightforward. Kong points to Gartner Group's projection that by 2004, B2B e-commerce will be worth US$1 trillion, and that 58 percent of this will be conducted in e-markets. "This means corporates are going to own e-markets, or at least join them. Chances are they will join multiple markets." At the other end of the scale, HSBC is in talks with on-line marketplaces, but hasn't announced any alliances. "There is obvious merit in a lot of the ideas, but I'm not sure we have seen any clear business cases that are stunningly compelling," Hamilton says.

Part of the problem, according to BCG's Durant: despite all the talk, experiments and consortia, the banking industry is yet to produce a perfect payment and fulfillment system - a disincentive to corporate members that is holding e-markets back. "The first bank that comes up with a good plug and play solution for a payment system will solve a huge problem," he says. Kong obviously thinks ABN Amro is a long way down that path, but concedes many markets don't have time to wait. "We can safely assume that a lot of markets will disappear. We'll see great levels of consolidation."

Citibank is ramping up its participation in the market space too. A couple of years ago it came out with an early Internet offering, CitiCommerce.com, a seller-centric portal that enables customers to distribute product to their channels. Colgate-Palmolive in Thailand was among the early adopters. Now, a more sophisticated service is needed, says Ramu Ramaswami, the bank's e-commerce director for Asia Pacific. "Companies are moving to a multi-seller and multi-buyer environment. We want to be more than a payment or collection bank." On this front an alliance with US-based Commerce One will help.

Ramaswami says Citibank customers can expect several initiatives, beyond the obvious cash collection and payment services. The corporate bank might, for instance, collect low-to-medium value, high-volume payments for clients like insurance companies or utilities. And in a sign of the times there will be co-operative efforts with other banks. A partnership between Citibank, Deutsche Bank and HSBC will produce a portal for the trading of Asian domestic bonds on-line. That service will be launched in Singapore and Hong Kong in the first quarter of 2000.

Future possibilities include running an exchange, or an escrow service, or application support for emerging local corporates or SMEs. "We are not so sure there is a large ASP demand per se," he says. "But if clients want site hosting, or procurement and distribution channel hosting, we'd certainly do that."

The Empire Strikes Back

If bank offerings are curiously erratic, CFOs holding out hope for a new wave of on-line financial service providers should not hold their breath. The cards are heavily stacked against them.

For a start, there are regulatory issues to be resolved, although the evidence of progress is encouraging. Singapore, the Philippines and Hong Kong have passed laws to give electronic transactions the same legal status as paper-based transactions. Those countries also support use of the Internet by establishing certification authorities for digital certificates. Removing a potential sticking point, Singapore has said it won't tax the Internet, as has Hong Kong, while the US has placed a moratorium on the issue for five years.

The picture is less rosy in most other countries, but as Citibank's Ramaswami observes: "Regulators are keen that their countries are not seen as backwards in the Internet world." Indeed, HSBC's Hamilton says he doesn't see significant issues in Asia that the bank doesn't encounter in Europe or North America, even though some countries have said they will not allow foreign banks to offer Internet banking for several months, or even years.

All this delivers to the traditional banks exactly what they need: time. In the absence of new contenders in the corporate Internet banking space, the incumbents are digging in their heels. Many feel their lead will be unassailable."If companies don't have existing relationships with these Net players, it's going to be hard to convince them that by going to the Internet they will suddenly be able to establish them," Durant of BCG says. "We are talking about pretty traditional shops - they are not going to bank with someone they only see on-screen. I also think a bank trying to offer a full range of services from a Net base is going to have a tough time up against a multi-channel model. The financial savings may not be enough to lure a large number of customers."

And the indicators from the US are ominous. Certainly, financial services firms are entering into on-line partnerships to widen their points of distribution. But many participants in the Forrester study expressed disappointment at the results. Forrester spoke to 40 financial institutions with transactional websites to assess their e-business partnership activity. A key conclusion: financial institutions have a hard time reporting positive results from their e-business alliances. But, far from advising the sector to back off, Forrester says the partnering trend will continue; companies will just have to get better at it.

Even when niche providers act as vendors to traditional banks, the going can still be slow. In May, Hong Kong-based iMerchants announced the establishment of Asia Financial Network (AFN), an application service provider focusing on the provision of on-line financial management services. A key offering will be electronic bill presentment and payment (EBPP) services, which electronically consolidate the bills sent to customers by numerous billers and allow these bills to be paid on-line. US-based research company IDC forecasts that the global EBPP market will grow at a compound annual growth rate of 99.7 percent from 1999 to 2004.

AFN says likely corporate users include utility and services companies, as well as financial institutions such as JETCO, which has 51 member banks in Hong Kong. At its launch, iMerchants CEO Leroy Kung pointed out that EBPP services have gained broad acceptance in the US, adding: "AFN aims to be a pioneer of these services in Asia." A multi-bank EBPP service platform was originally mooted for release in mid-2000, but an official rollout date was not available mid-September.

For their part, the banks seem less concerned by new challengers than getting their own acts together. "If we were as active as a dot.com in publishing our progress we would be swallowing up a lot of press," says Citibank's Ramaswami. "A lot of the new services are for single financing transaction deals; banks are more interested in long-term relationships," ABN Amro's Kong says. "We don't view them as threats, we view them as partners," says DBS's Wong. "All threats come with opportunities." While he sees merit in talking to such players to see what they are about, i-metal.com's Kwong isn't convinced either. "My gut feeling is that the banks will end up being the dominant players in that space," he says.

Durant takes a broader view. "In any market affected by the Internet, we tend to see an initial phase where the incumbents are surprised by what is happening," he says. "This gives start-ups and more creative entities an opportunity to gain market share. In the second phase - and in retail banking I think we have already reached that point - the incumbents get their act together. And they still have the most important thing: customer relationships. When the incumbents strike back they almost certainly win."

Adam Lincoln is a senior writer at CFO Asia.