Credit card companies charge into e-business sector
A growing number of giant credit card companies and new specialty payment firms are jockeying to provide online payment systems for business e-commerce transactions.
Online business marketplaces are sprouting daily, but financial transactions for most of these exchanges are still tethered to traditional and inefficient offline payment methods.
Credit card companies like American Express, Visa and MasterCard--which have benefited from the booming use of credit cards by consumers for online purchases--see a profit windfall in bringing e-business transactions up to Internet speed.
"The next stage is definitely the transaction phase of the whole process," said J.C. Simbana, an analyst at American Frontier, a Denver-based brokerage firm.
Matching invoices and payments is considered a tedious drain for most businesses, both online and offline. Leaving behind entrenched, labor-intensive payment systems in favor of cutting-edge, real-time online methods is likely to result in big savings--and less paperwork--for buyers, sellers and financing companies, analysts said.
The list of companies hoping to nail the prize is swelling almost daily as firms jostle to carve a niche in the business-to-business (B2B) market, which leading research firms peg at between $2.7 trillion and $7.3 trillion by 2004, compared with about $131 billion in 1999.
That's attracted interested from payment system makers. Earlier this month, American Express formed an alliance with Ariba, a company that makes software that helps create online marketplaces, to improve payment systems.
"There are lots of discussions of billions and trillions (of dollars) in the sector, but today the transactions are mostly unrealized," said Ed Gilligan, president of American Express Corporate Services. "But that doesn't invalidate the B2B vision, especially if the weak links are dealt with now."
Visa and MasterCard also have relationships with Ariba and its rival, Commerce One. The credit card companies said they are confronting the issue of payment terms for business e-commerce purchases and are testing ways to make their payment systems more accessible to online business use.
"Today's pricing would prohibit larger-ticket transactions," said Marci Verdin, vice president of purchasing cards at Visa. "We are building flexibility into the system to be able to offer different payment terms on different types of goods and services.
"It all came to a head (earlier this month) at an Ariba users group, where American Express, MasterCard and Visa said that the front end has been streamlined--now let's work on the payment methods," Verdin added.
Hardly intimidated by the heavyweights, several start-ups and established technology companies also are elbowing into the market. Some companies, such as i-Escrow, eCash, CyberSource and OpenMarket, are trying to convert their know-how in the retail world to the exploding business exchange sector.
Others, such as InPurchase, which recently launched with venture capital funding from Sequoia Capital and Accel Partners, are building payment systems designed specifically for the business-to-business market.
InPurchase said it already is in talks with Ariba and Commerce One to integrate its payment system into those companies' software, and eCash said it is hoping to meet with those business software makers to incorporate its technology.
"Ninety percent of transactions on B2B market exchanges are completed offline using paper checks and invoices," said Sundeep Jain, InPurchase's chief executive. "That is the fundamental problem: They are completed offline in a manual-labor-intensive way and not in real time."
Analysts said these leading marketplace builders will not play favorites to any payment firms, instead offering clients at exchanges as many payment options as possible. Most of these payment methods will be integrated into their software, with clients choosing their preferred payment method.
There also will be an elimination period akin to the one beginning to surface in the consumer retail sector, leaving a few competitors to duke it out, analysts predicted.
Although the software may differ slightly, the financial and technology companies plowing into the business e-commerce sector are likely to offer products that are essentially identical when it comes to service.
Many start-ups are hoping to carve a niche for themselves by offering targeted services. i-Escrow plans to use its strength by maintaining the anonymity of both the buyers and sellers and by holding funds in an escrow until the buyer is fully satisfied with the supplier's shipment.
eCash hopes to attract users with its low transaction fees. "In our B2B model, we don't take a percentage of each transaction--we set up a fixed fee," said Drew Hyatt, eCash chief executive, who noted that the fee is normally $1 or $2 per transaction.
"If your average sale is $100,000 and your margins are very slim, do you really want a credit card to charge 1 or 2 percent of the total?"
Although the stock prices of some business-to-business firms, such as Ariba, Commerce One and VerticalNet, make it seem as though e-business has hit its stride, analysts expect it will take at least another eight to 12 months for business e-commerce marketplaces to flourish.
"Right now it's a work in progress," said Kama Krishna, an analyst at brokerage firm Sands Brothers. "So far, it has been nearly all formulation, with 98 percent of the implementation still ahead."