The two inevitables, death and taxes, were joined by a third in 1998: e-commerce. Last year, you couldnt turn around without bumping into projections from Forrester Research gurus that showed growth curves for online sales, with business-to-business transactions leading the way, that looked like the sheer north face of rock-climbing mecca Half Dome.
Suddenly, both buyers and sellers were able to go global with the click of a mouse, and the markets they worked in were expected to improve efficiency. Sellers rushed to convert their Web sites to take orders. Buyers wrote six-figure checks for the latest e-procurement packages from such vendors as Ariba, Clarus, Commerce One, and ProcureNet. Third parties scrambled to introduce new industry-specific many-to-many marketplaces. Doing business online was better than sliced bread, better than indoor plumbing, maybe even better than pizza delivery.
But the catch was that e-commerce had no settlement feature. The autobahn ended when the buyer and seller shook hands electronically, returning them to the dirt road of paper invoices and mailed checks. Yes, settlement could be made with a corporate purchasing card, which was quick, convenient and reliable, but p-card transactions socked the seller with a fee worth about 2 percent of the transaction, which was hard to swallow in e-markets where a healthy profit margin might not run much higher than that.
Where was the settlement engine everyone needed? Developing this technology was a tall order. Such a system had to satisfy a complex universe of corporate buyers and sellers who didnt know and had no reason to trust one another. In some markets, the payment system had to maintain buyer and seller anonymity by means of a three-way settlement process with an agent in the middle that bought from the seller and sold to the buyer. At the same time, many buyers with strong balance sheets clung to the notion that they deserved open-account treatment with standard credit terms. Providing credit to unknown buyers who expected to close online transactions instantly was dicey. How can a company perform a reliable credit check in a fraction of a second?
Obviously, its better for sales to give the first-time buyer credit approval at the point of sale than to tell him to go get a line of credit and come back when he has one, says Aaron McPherson, research manager at International Data Corp. of Framingham, Mass. That prospect wont come back.
The ideal solution, says Craig A. Jeffery, senior vice president and practice leader for e-finance and automation at Wachovia Treasury Consulting in Atlanta, Ga., would be automated and would require little effort on the part of the buyer and the seller. It would be flexible, providing a variety of options to accommodate the circumstances of the deal. It would allow for flexible pricing to support the sales effort. And it would be frictionless, involving only systems that are fully integrated.
Paying for such a system creates another quandary for developers of settlement technology. Financial institutions want to be cut in so that they can sell trade financing. But sellers wanted to protect their already thin profit margins from the fees levied by third parties.
Despite such obstacles, the need was great and the opportunity boundless for settlement technology. Or so it seemed at the time. Some of the biggest players in the financial arena forked over hefty research and development budgets. The race was on.
Settlement solutions are just now starting to appear in the marketplace, at a time when the e-commerce activity they were designed to expedite seems to be sputtering, especially in the many-to-many online marketplace sector. Weve seen a strong return to reality in 2001 after the unreasonable expectations of the previous three years, says Steve Ellis, executive vice president of the wholesale Internet solutions group at Wells Fargo & Co. in San Francisco. The economics are uncertain. The technological hurdles are higher than we once thought, and there is resistance to change.
Still, potential vendors are forging ahead. A lot of aggressive product development is taking place, says Randi Purchia, research director of financial services at AMR Research in Boston. Its being driven partly by big financial institutions that see broad relationship possibilities in receivables financing and maybe even a commercial paper play here or a new derivative instrument there.
The biggest stumbling block to automated settlement, Purchia says, is dispute resolution. Some systems handle this issue better than others do. Nobody yet can take the process as far as it needs to go, but some, such as Aucxis and eCredible, have gone further than anything weve seen before, she says.
At least a dozen credible, if not exactly proven, settlement alternatives are now clamoring for recognition and a piece of the action. Three that bear watching are eCredible, Tradenable, and Actrade Financial Technologies.
Youve Got Credit
Blessed with a promising pedigree, eCredible started working on a settlement process for online commerce in late 1999. Based in Amsterdam with an office in Denver, Colo., the company now operates as a subsidiary of credit insurer NCM, itself a unit of reinsurance giant Swiss Re. Both IBM and McKinsey & Co. are considered founders of eCredible, and McKinsey holds a small equity stake in the venture, according to Jurgen Leijdekker, eCredibles U.S. managing director.
To fashion an automated solution, eCredible built interfaces that link its software to sellers front-end systems, Leijdekker says, detailing the process thus: When a new buyer shows up at a Web site and registers, that information flows straight to us so that we can do the credit scoring and signal the seller whether it is clear to do business with that buyer. As soon as the seller receives a payment, we know and increase that buyers available credit. If the buyer doesnt pay by the due date, we begin the dunning process. If the buyer still hasnt paid by 60 days after the due date, we automatically buy that receivable. There are no claims to file. If we approved the credit, we will always buy the receivable. But not at the full price, he adds. Contracts usually call for the seller to take a 10 percent to 15 percent haircut if the buyer hasnt paid, Leijdekker says.
Credit approvals through eCredible involve a three-part process. First, eCredible does a split-second scan of the national registry of the buyers home country to establish that the company exists and is solvent. If a buyer clears that low hurdle, eCredible approves a temporary five-figure credit line to get the sale started. The initial transaction proceeds while eCredible searches databasesNCMs, Swiss Res and a variety of other specialized databasesto which it has built electronic links. Data points are collected and scored, often within minutes, and the initial credit limit is usually then increased, Leijdekker explains.
Subsequent transactions are easy. If the buyer has available credit, the order is approved. The buyer pays nothing. The seller pays eCredible a certain number of basis points on each transaction. The fee is based on transaction size, industry, geography, payment terms, and the buyers creditworthinessessentially, on the risk eCredible calculates that it is taking.
Using the eCredible package, sellers can outsource the credit and collection process, as well as transfer most of the credit risk. Leijdekker admits that he often pitches the product to CFOs as a way to downsize their credit departments, while assuring credit managers that it will free them from busywork to concentrate on strategic issues.
ECredible has been doing live transactions in Europe since June 2000 and now has three live customers in the United States, with two more in the pipeline. The service is up and running, but the jury is still out on whether it will become popular.
EarthKing Inc., provider of an online marketplace for construction and mining equipment and a subsidiary of Terex Corp. of Westport, Conn., is about to launch a joint venture with Equipment Sales & Service to create a little sister, e-ConstructionParts.com. ECredible will handle credit and collection for the parts exchange. It will qualify buyers immediately and advance them a line of credit. Acting as a virtual distributor, e-ConstructionParts.com will then extend standard 30-day terms to the buyers and ship the parts. Collection will be handled by eCredible, however. If payment is not received by e-ConstructionParts.com within 60 days, eCredible will buy the receivable at a discount. Our total exposure will be that 10 percent to 20 percent discount, says Patrick Carroll, EarthKings vice president for business development and general manager of capital equipment.
ECredible is also working with Winery Exchange Inc., a Novato, Calif., provider of technology to the wine industry, on an online grape auction space. Would-be buyers can apply to eCredible online in advance for a line of credit. When the auction occurs, buyers will be able to use their line of credit to bid on grapes, and the transaction will settle at harvest time, says Peter Byck, president and chief executive officer of Winery Exchange. ECredible will pay the seller when the grapes are shipped, take ownership of the receivable at that time, and collect from the buyer according to the terms of the contract. For this service, Winery Exchange will pay eCredible a percentage of each transaction.
One potential rival to eCredible is New York-based Avantrust, which pools the resources of AIG and Dun & Bradstreet to offer instant online credit checks and scoring for e-marketplaces. Sellers still make the credit decisions; they can opt to retain the risk or buy AIG trade credit insurance to cover their entire portfolio. Financial partners can provide online invoice presentment and payment services, as well as trade financing, says Nancy Callahan, Avantrusts director of business development. At press time, the product suite was launched and ready to go, but Avantrust was still in negotiations to sign up its first customer.
The Escrow Model
Tradenable of Redwood Shores, Calif., started as a settlement engine for B2C and consumer-to-consumer online transactions; eBay is one of its biggest customers. Now the company is expanding into B2B marketplaces. Handling more than 500,000 transactions a year, Tradenable has a solid track record. It provides online settlement and guarantees payment to the seller, clearing away trust concerns. Tradenable also promises complete automation on both the front-end and back-end accounting application of transactions, says John Kelley, an internal consultant at the company.
But Tradenable isnt for everyone. Under the companys escrow model, the buyer pays first, often by paper check. Only after good funds are safely on deposit in the escrow account does the seller ship. The buyer gets to inspect and confirm that it received what was ordered. Then Tradenable releases the funds to the seller. Clearly, this system wastes float. The buyer loses the funds early, and the seller still gets them late, while the escrow agent is forbidden by law, at least in California, to earn interest on the funds, which goes to the bank, Kelley says.
The Tradenable system works best when the seller is small, unknown, and ready to plop money on the table at the time a deal is struck. Strong buyers balk at giving up so much float.
Its not a good fit for an established supply chain, Kelley says. But it works well with anonymous auctions for things like inventory liquidations. More than 1,400 businesses, mostly small, have signed up for an escrow-based B2B e-settlement option Tradenable calls e-Guild, he adds.
An Outsourcing Solution
Actrade, in Somerset, N.J., is a 14-year-old publicly traded firm that has added an e to offline trade acceptance drafts (TADs) to create a solution for both online and offline transactions it calls e-TADs. What Actrade offers is essentially a third-party outsourcing solution in which it assumes responsibility for approving credit and collecting receivables, along with the risk of bad debt.
The seller gets immediate payment. He has no credit risk and has no collection and administrative issues to deal with, says Alex Stonkus, Actrades president and CEO. The buyer gets up to six months to pay. We fund every transaction ourselves, using our capital and $90 million in bank lines that we collateralize with the e-TADs. This rather traditional trade financing service retrofitted itself for the online world when it introduced e-TADs in August 2000 and then discontinued its offline trade acceptance drafts in June 2001, moving all its TAD business to the electronic platform.
Using Actrades system, a qualified buyer can log on to an electronic marketplace, fill a shopping cart, and indicate at checkout that it wants to pay with e-TADs. If Actrade accepts the credit, the deal is settled online in real time without leaving the marketplace, and the seller gets paid within 24 hours, Stonkus says. Buyers, who must reside in Canada or the United States, have to apply for the credit and be preapproved before they can buy, a process that typically takes three to five days, he adds.
The seller pays Actrade by selling its receivable at a discount, which is based on the prime interest rate but adjusted to reflect the credit quality of the buyer. In exchange for receiving extended payment terms, the buyer shares in the fee, Stonkus says. Actrade uses credit insurance to help manage its credit risk.
Clarus, a software company in Suwanee, Ga., liked the Actrade model well enough to add it to the suite of settlement options it offers through the Clarus Settlement service. Actrade is successful and profitable, not so much because its technology is a knockout as because it understands the economics of trade financing and why a buyer may need flexible financing, Purchia says. They can provide what most settlement solutions still are searching for: a way to give the seller immediate funds and provide flexible credit to the buyer, she adds.
Credit cards pretty much solved the problem for small transactions, Stonkus continues, but the race is on to find something that will work as well for large transactions. Actrade reports that business is growing briskly, but its market share remains minuscule.
Whoever comes up with the preferred solution for settling large-dollar transactions over the Internet will find that street paved with gold, Stonkus says.
The gold may have to be shared, however. A lot of good ideas are cropping up, says Kenneth McGraime, senior vice president and regional manager of the global trade banking division at State Street Bank & Trust Co. in Boston. Keep in mind that there wont be one solution for electronic settlement. There will be many partial solutions that can be configured as needed to work together.
|Some Key Players|
|Aceva Technologies||www.aceva.com||Links sellers to select banks for credit outsourcing.|
|Actrade Financial Technologies Ltd.||actrade.com||Pays sellers up front and collects later from buyers.|
|Aucxis Corp.||www.aucxis.com||Supplies flexible, collateralized credit to buyers at online auctions.|
|Avantrust Inc.||www.avantrust.com||Provides an e-marketplace settlement package from AIG and Dun & Bradstreet.|
|Bolero International Ltd.||www.bolero.net||Is introducing electronic equivalents to trade letters of credit for online settlement.|
|Clareon Corp.||www.clareon.com||Effects payment by ACH, linking money and remittance data.|
|Clarus||www.claruscorp.com||Provides a suite of payment options.|
|eCredible N.V.||www.ecredible.com||Does instant credit approvals online to support spontaneous transactions, and buys receivables 60 days past due.|
|eCredit.com Inc.||www.ecredit.com||Scores credit for instant, online decisions, and transfers trade credit and risk from seller to financial institutions.|
|FinancialSettlement-Matrix.com Inc.||www.financial-settlementmatrix.com||Offers an ambitious suite of settlement products and services developed by a glitzy consortium of banks and tech firms.|
|TradeCard Inc.||www.tradecard.com||Uses credit insurance to guarantee payment for online trading among registered participants.|
|Tradenable Inc.||www.tradenable.com||Is building an electronic, online letter of credit capability.|
|Xign Corp.||www.xign.com||Focuses on electronic payments.|