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Skip Navigation LinksHome :: Back Issues :: Redefining the bank

July 2000

Redefining the bank





Over a quick lunch between conference panels at Euromoney's Borrowers and Investors Forum, held last month at the London Hilton Hotel, the treasurer of one of the biggest liability managers voiced his growing frustration with the slow pace at which leading banks and investment banks are embracing the internet.
His particular annoyance is over derivatives.
It would be enormously useful for his institution to be able to deal in a transparent swaps market, preferably with some kind of exchange-like margining facility to accommodate lower-rated counterparties, and ideally with automatic execution and efficient processing thrown in.
The treasurer had been doing the rounds of the banks asking how close their online risk management offerings, both proprietary and multi-dealer, might be to providing this. He had not been encouraged. His conclusion is that the hidden agenda of many banks that claim to be pushing the frontiers of e-finance is to obstruct and delay any real change being wrought by the internet. Loud announcements of web-based derivatives platforms with funky-sounding names are common. Ask when they'll be up and running and the quiet answer is this month, next month, sometime, never.
It's a sham. But it can't last.
Today, roughly a year after investment banking woke up to the potential threats and opportunities presented by e-commerce, the banks have created a complex web of investments in all manner of technology companies, start-ups and new business models.
But a lot them are little more than indiscriminate shots at a variety of targets.
This time last year, for example, it was all the rage to be investing in electronic commission networks (ECNs), order-matching systems for trading Nasdaq stocks. They were taking a 30% share in the market away from the traditional brokers, and had their sights on the New York Stock Exchange. Investing in these, so the theory went, was a way to have a stake in a company stealing some of your business, and a seat at the table in case any of them managed to present a real long-term threat to the established exchanges.
Move forward to the start of 2000 and the emphasis shifted to bond distribution. Both cases suggest how the ready availability of technology may finally shatter the resistance to change old, inefficient processes. Once this takes effect, it will fundamentally alter what a bank is and how it does business. Many of the things investment banks do for their clients aren't that difficult or unique.
Trading is a commodity that needs to be serviced by a utility. BondBook, announced in mid-June, is a would-be exchange for the trading of agency, corporate and municipal bonds, jointly set up by Goldman Sachs, Merrill Lynch and Morgan Stanley. It goes a step further than previous systems by making anonymity a central plan. The three banks are handing back one of their biggest advantages to the market: their ability to watch and gather information, and use it for their own purposes. Margins will fall on traditional businesses migrating to the web, and banks must get into new businesses with new revenue streams to replace them.
At the start of 1998 DLJ decided to break into US high-grade bonds. By developing an information system called the FED (financial engineering desktop), this year renamed Global Edge, DLJ was able to give corporates the tools to analyze the minutiae of their own business and funding options, leaving the bankers free to concentrate on strategy. By providing content rather than execution electronically, the bank has managed to offer clients something completely different, and that has earned it a lot of respect, and profitable business.
Inter-dealer brokers are being disintermediated first. Cantor Fitzgerald has created e-speed, an electronic trading platform previously used just by Cantor traders. It was spun out in an IPO last December. Its president, Fred Varacchi, describes it not as an inter-dealer broker but as a "business-to-business vertical electronic marketplace". In April e-speed announced a partnership with Williams and Dynergy for an on-line marketplace to trade energy, commodities and telecommunications. E-speed will run the site and clear the trades.
By contrast, internet consortia run by several banks are not ideal. GFINet, the online subsidiary of inter-dealer broker GFI, which has linked with partners to trade electricity and environmental products, talked to a couple of bank consortia about acting as the neutral partner earlier in the year. One consortium had so many banks participating that it took weeks to get them all into one place for a board meeting.
Investment banks like to take comfort from the fact that even with the demise of trading as a revenue stream, they still have risk management, advisory services, and transaction processing. But they ought to be careful not to get too cocky. Tools such as CFOWeb.com or DLJ's Global Edge can help bypass traditional risk management services.
It is over advisory that the biggest question mark remains. With so much information now available to all players, there is an even greater need for someone to interpret it all.
But it is a brave person who claims that the internet won't substantially change even this business. That's what people said about online trading.






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