Virtually every major bank has put its retail banking services online, and the best can claim some real success in attracting new customers through their Web sites. Now, with the rise of business-to-business marketplaces on the Internet, they are beginning to pour serious resources into determining what financial services these marketplaces will need.

Few banks, however, can match Connecticut's tiny First International Bank for speed of adaptation. It has just over 200 employees, but no branches, ATMs or mutual funds. Instead, it specializes in providing credit to small and medium-sized industrial companies, and that happens to be precisely the kind of focus that matches the industrial orientation of many B2B marketplaces. 

Frank LaMonaca, the bank's chief administrative officer, says First International has formed partnerships with roughly a dozen B2B exchanges over the last several months, under which its system for rapidly processing loans and letters of credit online will be integrated into the exchanges' Web sites. Suppose a company logs onto MachineTools.com and makes a successful bid for a hydraulic press. The supplier may need some working capital to fill the order, or a letter of credit to ensure payment. Likewise, the buyer may seek credit to pay for the press, with the production that follows paying back the loan. 

That's where First International steps in. As a result of working with several U.S. government agencies involved in foreign trade, First International has standardized the loan application and credit review process to the point where taking these processes online was a relatively short step. Typically, the bank offers 14 different credit products online, with the whole suite integrated into the exchanges' Web sites. 

In practice, of course, the vision is a lot further developed than the reality. LaMonaca won't say how many transactions it has closed through these partnerships, nor how much the B2B side of its business is contributing to its bottom line. But looking over its B2B partners, there is reason to expect some substantial activity. 

One of its partners is e-Steel, a B2B marketplace for the steel industry that claims more than 3,000 companies as members. First International's system for providing online finance has already been integrated into the "subscribers-only" section of the e-Steel Web site, which means buyers and sellers now have access to the bank's suite of 14 credit products. 

Another partner is Enermetrix, one of the early movers in the energy industry. Enermetrix, which is partly owned by GE Capital and several utility companies, operates a Web site in which commercial and industrial companies can bid for energy supplies. The exchange recently lured 64 year-old Charles Henry, formerly a top official at the Chicago Board Options Exchange, out of retirement to serve as its president and chief operating officer. 

Still another partner is CheMatch.com, which runs a marketplace for transactions in bulk commodity chemicals. CheMatch members traded more than $85 million in the second quarter, and have traded over $275 million since its launch last year. 

CheMatch is now in the process of 'baking in" First International's page into its Web site, which will allow members to move directly to negotiating the credit part of the transaction without having to go offline or inputting member information all over again. 

Other partners include e-Comtextile.com, ForgeFinder.com, GlobalFoodExchange.com, MachineTools.com, Plasticscommerce.com, Textrade.com, and Railnet-USA.com. 

One of the reasons why First International is an attractive partner to these exchanges is its familiarity with the credit needs of small and medium-sized businesses in Europe, Asia and the emerging markets. 

First International estimates that about 20 to 30 percent of the business on its partner exchanges is generated internationally, and Wall Street analysts estimate that this percentage could hit 40 percent in the next two or three years. LaMonaca stresses that the demand for financing from the emerging markets countries is especially strong, stemming from a new generation of Web-savvy business leaders at small, privately owned companies. 

However, the big limitation is First International's size. The bank will make loans up to $5 million, which is fine for small companies, but falls well short of what the banking industry's dinosaurs can provide.

More significantly, First International's progress to date reveals a basic problem affecting any bank, no matter what size, that seeks to partner with B2B marketplaces. What happens if the customer already has a relationship with some other bank and doesn't want to start a new relationship with First International? If that bank doesn't have a presence on the B2B site, then the transaction probably cannot be completed online. 

This isn't a problem only for First International, of course, it's a problem for all B2B marketplaces that rely on a single bank to be the 'preferred provider" on their Web site. 

Interestingly, two of the more nimble dinosaurs in the banking industry have come up with a solution. It probably won't be ready for another six months at the earliest, but it could become the gateway between the B2B world and a diverse array of financial services providers. 

Integrating Services
The two banks involved in this project, officially called FinancialSettlementMatrix.com, are Welts Fargo and Citigroup. The project also involves three other companies from outside the banking industry, each bringing a crucial type of expertise-i2 Technologies, one of the top providers of B2B platforms, S1 Corp., a company that helps banks move their capabilities to the Web, and Enron Broadband Services, a subsidiary of Enron Corp. 

Each of the two banks brings its own unique capabilities to the consortium. Citigroup operates in 100 countries around the world, and its customer base includes many of the large corporations that have begun forming new ventures to run B2B exchanges. Wells Fargo is a major small business lender and is generally considered one of the most Web savvy banks in the industry. 

"We have customers today that transact on B2B markets," said Ann Cairns, one of three global heads of Citibank's "e-Solutions for e-Business" division. None of these markets have fully embedded financial services right now, but she predicted that it will be only "a matter of months" before B2B exchanges have the capability to settle the financial side of their transactions online. 

Munish Bansal, the vice president responsible for financial services and insurance at i2 (and a former Citibank employee), said his company realized that the financial part of B2B transactions specifically the processing of payments and the provision of credit was being taken offline. "So we started talking with the banks, and discovered that people on the bank side were also thinking about this problem," he said. 

In essence, the consortium wants to provide a platform for multiple banks to offer their services online to B2B marketplaces. Not only will this allow companies more choice in selecting which bank provides the financing, it will also address the basic fact that once these B2B exchanges really get going, no single bank will be big enough to handle the credit needs of the entire network. 

Banks like First International that have already integrated their products into B2B Web sites may be the first to score revenues off the B2B trend, but the FinancialSettlementMatrix.com, if it gets off the ground, probably will prove to be a more effective solution than the single-bank "preferred provider" solution. 

FinancialSettlementMatrix.com isn't just going after the credit function. The secure processing of payments is also a key function, and arguably the backbone of the whole enterprise. Hence Enron's rote in the consortium providing a broadband network with high levels of security to route the transactions. 

Enron also brings the experience of running its own B2B marketplace for energy and other commodities. EnronOnline has completed thousands of transactions since its launch last November, with a gross value of $100 billion, putting it well out in front of most B2B exchanges now in existence. 

Chris Huppert, a vice president in Wells Fargo's wholesale internet solutions group, emphasizes that FinancialSettlementMatrix.com will be an "open marketplace" that won't favor its founding members. Huppert, who has been with Wells since 1996, adds that the venture will take data from the marketplace, create the transaction to support the order, then route the transaction to the designated financial services provider. 

One hoped-for benefit is to automate the credit decision process at the suppliers that use these exchanges, reducing the need to have an in-house staff evaluating credit profiles of the buyers. In a sense, banks will reemerge in the B2B world in their traditional rote as trusted third party providers. B2B marketplaces will expose companies to more buyers and sellers than ever before, some of which will be sight unseen. This will create more uncertainties, Cairns points out, and more opportunity for banks to help manage the risks created by these uncertainties. 

According to Huppert, the consortium began forming last September and aims to have a pilot project with a B2B exchange up and running by the end of the year. The first to get rotting will be payments-check, credit card and automated clearing house (ACH) payments. More complicated services, such as lines of credit and leases, will come later. 

FinancialSettlementMatrix.com will go through a second round of financing in October or November, according to Citigroup's Cairns. That will give other banks a chance to join Citigroup and Wells Fargo as equity partners in the venture. For observers in the B2B world, this will also be an important yardstick for measuring the project's appeal to the banking industry. 

Whether all this will work is hard to say, of course. But clearly, for some banks, this will be a way to get a lot of new customers in the business world. And the banks that don't get involved run the risk of seeing their customers gradually drifting to the ones that do. 

As for Wells Fargo, it's not putting all its eggs into the FinancialSettlementMatrix.com basket. Like First International, the California-based bank has partnerships with several B2B exchanges, which Huppert says the bank will probably reveal in the coming months. 

The bank has roughly 30 people focused solely on B2B exchanges, trying to figure out what services they will need and how Wells Fargo can provide them. The bank also is gradually migrating its menu of products onto the Web, with the latest being a portal for commercial companies, i.e., businesses with more than $10 million in sales. n