Hitting the Wall

Online marketplaces and consortia may have been a part of the e-business craze, but the financial services that make many of those e-market transactions possible have been hit with much more reluctance.


[From iSource Business, September 2001] Reality is the granite wall separating theory from practice a thick, granite wall topped with prison-grade concertina wire and encircled by a pack of surly guard dogs. No matter how good or bad an idea might be, there comes a time when it must cross the reality wall and attempt to make it in the morass that is the real world. Reflect back on the first post-college paycheck you received and the stark terror you felt when you saw the slab the government had taken out of it. Then, think of the even starker terror you felt when you fully realized the chasm between the pittance on your pay stub and the total sum of your bills. I still have scars from the face plant I did on that wall, lo those many years ago.

The same can be said for all things related to or based on the Internet, marketplaces notwithstanding, which also recently hit the Wall of Reality with a sickening thud. But, at last, we're buzz-free, and down to actually wringing money out of the Internet (and, rest assured, there is quite a lot of money that has yet to be wrung).

Public marketplaces, private exchanges and consortia are continuing to grow in relevance and utility. Reality, however, continues to rear its ugly head, particularly in the form of financial services. Buying and selling on exchanges is a great concept, but what about the infrastructure that performs such vital functions as actually exchanging funds and dealing with payment terms? Or the deals that take place before, during, and even after the deals? There's a lot of underlying infrastructure that has to be in place and in a state of constant improvement for this e-commerce to function.

Friendly Terms

Part of the problem is that private exchanges and public marketplaces aren't taking a "pressbox view" of things. Rather than offering a complete solution, it's a piecemeal approach. Which isn't surprising, given the complexity level surrounding online commerce. John Hagerty, director of financial services at AMR Research, describes the prevailing attitude as a spot approach. "[Exchanges and marketplaces are] saying, 'Got a problem? I've got a product for you.'" Of course, the problem with spot approaches is that they only provide spot answers.

Hagerty goes on to explain that exchanges were burned by the initial lack of interest in financial services on the part of purchasers. Roughly a year ago, exchanges were interested in offering financial services, but customers resisted changing the way they did business. It's one thing to switch from paper to electronic catalogs, but it's another thing entirely to change the way money is handled. "Therefore, exchanges backed off [such services], to a certain extent, and are not as aggressively looking for financial services as part of their offering." Hagerty goes on to say that some banks are moving into that void, particularly Citibank, Wells Fargo, J.P. Morgan Chase & Co., and FleetBoston Financial.

Hagerty sees the future as a new wave of e-payments. "If you talk to most internal finance groups, what they're going to tell you is that their biggest problem is trying to predict when they're going to get paid and, when they are paid, what the payment's for." As an example of this new wave, he refers to TradeCard, a company that acts as a payment vehicle for foreign trade, specifically with Asia. Such companies automate the way other companies obtain letters of credit, through connections TradeCard has with banks.

Other initiatives that are being created to handle financial services include Orbian, a joint venture between Citibank and SAP, which Hagerty refers to as a trade credit system. Orbian will allow a buyer to agree to pay within a certain time period, and the seller can choose to take the money at a discount.

In addition, there is an offering from Clarion, presently geared for the North American market, that automates the payment process and furnishes remittance information. Hagerty explains that handling such information is no small matter. "That is still a problem right now. Companies get money and don't know what it's there for."

Easy There, Big Fella

Cort Jacoby, senior analyst at Deloitte Consulting, says the problems faced by the Covisint- or Transora-level consortia juggernauts are different, especially when mixed with the cross-border nature of their business. "It's becoming more and more important for those guys to offer a broader array of services, and that would include things like custom clearance." In other words, they have to be able to actually enable those high-flying borderless business concepts by matching buyers and sellers, as well as going through back-end transaction processes and such systems as custom clearances, financial settlement and currency hedging. "In order for [consortia] to really get traction, they need to be developing this broader array of services from the financial standpoint. It isn't just about integrating with the back-end ERP [enterprise resource planning] or legacy system, but also about making the overall transactions and time-consuming efforts reduced," Jacoby explains.

Ham, Eggs and Integration

Whether a public marketplace, private exchange or industry consortium, these entities all have one thing in common: the necessity of financial services integration with back-end ERP systems. Jacoby says the problem is a classic catch-22: In order for buyers and suppliers to make the commitment to integration, they want to see the possible volume and value proposition with which they might be dealing. But without that commitment, the volume and value propositions aren't possible. If we had some ham, we could have some ham and eggs, if we had some eggs.

While it might seem that companies can accomplish this integration using SAP or Baan or another enabler, Jacoby points out that it's not quite that simple. That reality wall again. "There are so many different layers of legacy systems, of different ways of processing a transaction into a company, that the rules of engagement and the challenges become very significant." Jacoby's solution? Companies have to realize that "it's not a path to profitability in 24 months, but it's more or less a path to profitability in 48 months."

So it's possible, and even mandatory, to cross that reality wall, but realize that it's a long-term project and a simple Batman fling of a grappling hook won't cut it. However, there will come a day when obtaining financing, in all its forms, will be as second-nature as logging onto the corporate server in the morning.

A Financial Bridge

In a development that should hearten anyone for whom managing even household bills is harder than stacking eels, one company is taking steps to make the reality wall a little easier to conquer. Pure Markets is a San Francisco-based company that serves as an all-purpose bridge between buyers and financial institutions, dealing with everything from setting up the initial financing to reminding buyers of contract end-dates.

Pure Markets' CEO Jay Fudemberg explains that his company helps both borrowers and lenders manage the entire lifecycle of a transaction, using Web-based tools, along with advisory services. Which is a condensed way of saying that his company handles financing for everything from corporate aircraft to construction equipment to railcars to IT equipment.

One-stop Shopping

Here's how it all works: Company X submits a request for proposal (RFP) through Pure Markets, which is then distributed among some 250 funding sources that have already specified what types of deals in which they're interested. These sources can specify their interest in terms of geographic areas, type of equipment being purchased, transaction size, or a number of other categories. This cuts down on the complexity borrowers face, since a financial institution that only finances heavy equipment isn't going to be interested in financing a server farm.

Financial companies that are interested in extending credit to Company X then respond with what they're willing to offer, including what type of financing (Fudemberg can rattle off everything from operating lease to synthetic lease to straight loan), what terms they're offering, interest rate and more. Other variables include buyout options, termination options, return provisions and purchase options at the end of term for leases. Pure Markets' analytical engine then generates a chart that helps borrowers decide which lender best suits their needs.

Another service Pure Markets offers is the increased visibility throughout the financial process, including automatic notification and the ability for employees to easily monitor the status of finance issues. Fudemberg explains that the notification is especially useful for some companies that lease equipment. "You may want to return the equipment at the end of term, for example, but many people forget about it. They keep paying their rental payments." In other words, the backhoes, IT servers or whatever was leased has been returned, but because of a paperwork glitch, checks are still being cut. And if you don't believe that can happen, you haven't dealt with bureaucracy much.

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