“Wow! I never knew the bank was doing all this on the internet,” was a comment made frequently during the past three months as euromoney.com reviewed the best internet services for wholesale finance. But it was not our researchers who were impressed. It was the bankers trying to show us their websites who were revealing their surprise.
Confused? They certainly are. Most banks are struggling to develop a coherent, consistent e-commerce strategy. Take this remark from one exasperated senior manager at a European bank: “Banks are spending millions and millions on their e-strategy, but they can’t answer the simple question ‘what are you actually doing?’. They will just reply ‘we are spending millions and millions on it’. Some German and Swiss banks may have spent a billion euros on this but they don’t have a product and they have no idea where the money is going.”
In some cases, these millions and millions have produced a few useful websites – the best of which are featured in our inaugural internet awards (see page x). But those firms that were hoping to scoop our overall award for best internet wholesale bank will be disappointed. Having sat through demos of almost 100 sites and talked strategy with more e-commerce executives than we care to remember, our conclusion is simple: no bank comes anywhere near to deserving it this year.
Banks that feel the need to claim constantly that they “get the net” invariably do not get it at all and are mistaking style for substance. The internet threatens existing businesses but success in e-commerce still requires the same basics of good business sense – strong management, good communication, high-quality products across the full range of markets they serve, a strong brand, integration with the back office and a clear strategy. Banks must get these right before they have any chance of leading the market in internet services.
None has put all these building blocks in place. Indeed none has come close. Banks’ approach to offering services over the net often bears no resemblance to how they have achieved market-leading positions in the old economy. In the offline world, for example, would banks let their venture capital group commit their fixed-income services to a third-party supplier without first discussing it with the head of fixed income? Would they let their IT department boss around the business managers? They do in e-commerce. Here are their top 20 failings.
Staff and strategy
Sensing the importance of the internet to their firms’ futures, senior bankers may be tempted to make power bids to run internet initiatives when they lack any qualifications to do so.
Wrong person as head of e-commerce For a role that cuts across the full range of their business lines and operations, some banks have taken a remarkably casual approach to selecting their heads of e-commerce. Plucking any old trader or salesperson from the floor and giving him an office and a fancy job title is hardly a recipe for success. In a number of cases, we found the e-commerce number two talked more sense than his boss. Conflict is inevitable. Take this comment from a former senior executive at one of the world’s larger investment banks: “I have nothing against [name withheld]. He’s a really nice guy but as head of e-commerce he simply doesn’t know what he’s doing.”
Too many e-cooks spoiling the broth Seeing their own fiefdoms under threat, middle managers are reinventing themselves as e-commerce executives. But as more and more managers flock to the internet, banks must be careful to ensure it is clear who is responsible for what. The more people you meet from certain banks the more you wonder where one manager’s duties stop and the next one’s start. Look out for buck-passing when things go wrong.
Complicated reporting lines Nicolas Rohatyn is head of LabMorgan. He reports directly to Douglas Warner, JP Morgan’s chairman. This is a deliberate ploy and is supposed to send a powerful message to all the bank’s staff about the importance of the e-commerce function. Whatever else competitors might have to say about LabMorgan (and some of them have plenty) how many can say they have such a simple, clear reporting structure for their head of e-commerce? Many heads of e-commerce seem to spend their time bogged down in endless committee meetings.
The e-function adds nothing to what the product heads are already doing In some banks the business product heads are required to drive their own internet initiatives and call on the e-commerce group when they need it. It sounds sensible. Who knows their own business and markets better than the line managers? But what role does that leave for the e-commerce guys? Press them on the issue a little more and you will discover that they “provide, er, know-how and technology”. Know-how, apparently, means the bank’s previous experience in working with other banks in a consortium project (useful, presumably, if the product heads have never spoken with another bank before). Technology refers mainly to dealing with the bank’s own IT department. For e-commerce activities to flourish banks must ensure their e-commerce team is more than a mere go-between.
Failure to understand that the web is not the only channel… Being able to access research and prices online is a boon for investors. Issuers like the possibility of reaching new investors by using an online new-issue site. But neither client wants to use only the web to access all of its banking needs. And take-up of new online services has been slower than expected, showing that old habits die hard among end-users. Some banks risk being carried away by their own internet hype and should avoid winding down their telephone sales and support teams. Those banks that earlier this year took orders for new bond issues over the telephone and asked investors to resubmit those orders over the web have already learnt this lesson the hard way – any investor on the receiving end of such treatment tends to cancel its order and hang up.
…and disagreement over migrating clients to web services In two successive meetings with a European bank, a stark contrast emerged over two senior managers’ plans for moving customers from telephone to web-only execution for one of its most commoditized products. Said the first: “About 25% of our customers have moved to the web product but we certainly don’t want to force the others to take it up if they don’t want it. We will offer them whichever channel they want. When you talk to our guy who heads up client relationships, he’ll tell you more.”
The second manager, the one in charge of those relationships said: “Obviously we are aiming to move them all online as fast as we can and we’ll give them more than a little push wherever necessary.”
They have no idea what their rivals are doing During site demos bankers would frequently claim: “We are the only bank that offers this service on the internet.” At the end of the meeting they would ask us: “So what are our competitors offering?”
Banks’ ignorance heightens their sense of paranoia. One senior equities manager at Merrill Lynch told us earlier this year that he would not be surprised if banks started employing hackers to have a look at rival sites. Other bankers say they persuade their clients to show them competitors’ sites, or they poach staff who bring their passwords with them. It sounds like a review of basic security is necessary.
Communication
Banks are not communicating their e-strategy to their own staff… It was bad enough to hear some bankers say they did not know what their firm was doing on the internet. Worse was when six bankers were needed to show us how one site worked. Nobody seemed to have the full picture.
An even bigger challenge awaits, however. Banks will solve many of their problems in New York and London next year but getting all their other offices up to speed and working off the same platform will take even longer. By the time senior managers get round to trying to communicate with branches in other time zones their bank’s e-strategy will probably have changed anyway.
But some things, of course, should be kept quiet, such as one bank dubbing part of its fixed-income internet strategy “death of a salesman.com”.
…but they do make claims they cannot substantiate to outsiders If you are going to do any marketing for your internet services, get the basics right. One bank we interviewed claimed to be an internet leader in a particular market but in the next sentence admitted its site was still in its testing phase.
Functionality
Banks have no idea what makes their internet offering unique Ask a bank: “Why should an investor trade online with you rather than with one of your competitors?” The answer is often: “Well I suppose they can’t use one bank for everything.” Enough said.
They think a link to the homepage of the Tokyo Stock Exchange website is cutting-edge technology A gruelling one-and-a-half hours sitting through a demo of Citibank’s disappointing custody site was made bearable only by a moment of light relief: the bank’s belief that offering its site’s users a link to https://www.tse.or.jp. was an impressive feature. If you are reading this on our internet site euromoney.com why not click the link to see if we can match the internet prowess of one of the world’s largest and most respected banks.
A new online custody offering from Citi is on the way.
Banks’ IT departments try to rule the roost There is nothing wrong in ensuring your IT department is an integral part of your internet strategy. One thing to watch, however, is the IT department suddenly believing it is a world leader in website design. Take this comment from a user of one of Morgan Stanley’s websites: “Practically I like this site, technically I don’t. It’s not very convivial. You get the feeling it’s been developed by the IT department and not by users. It’s not very user-friendly.”
Know your clients, and give them some service Most bank sites are built with investors in mind. Issuers and corporate treasurers are underserved at the moment. JP Morgan’s Corporate Treasury Portal is a rare and impressive counter-example. All banks aiming to get ahead in wholesale finance should be prepared to learn from the leading firms in the retail market such as Charles Schwab – from which many wholesale banks are now recruiting – BankInter of Spain and MeritaNordbanken. See our award for Best Internet Retail Bank.
Bonds good, shares bad Development of equity sites is lagging way behind that of fixed-income sites. Banks blame regulatory problems but analysts’ egos are also getting in the way of speedy development of user-friendly sites. Do investors really want to read the latest 500-page report online? If you wrote it, you will probably insist that they do and that it must appear only in unabridged form on your equity site. Your colleagues will tell you that investors do not even read the hard copy version.
Consortium sites
When banks join together to form new companies that run new sites to offer commingled prices or research, or both, the chances of something going wrong can only increase.
They set up a venture whose name already exists In December last year Goldman Sachs, Salomon Smith Barney and Morgan Stanley Dean Witter announced their intention to form what their press release called “Bond Hub, an Internet portal built by Communicator Inc. to give institutional investors commingled, seamless access to the dealers’ bond market information”. By March this year three these firms and three more (JP Morgan, Merrill Lynch and Lehman) announced the creation of Securities.Hub which would “greatly expand the scope and reach of the highly successful ‘Bond.Hub’ portal”.
Notice the dot that appeared between Bond and Hub in the second press release, replacing the space that had been there in the first one? It was not an error. They discovered that BondHub (without the dot and without a space between the words) is an unrelated Seattle firm that was incorporated in September last year. According to its website, www.bondhub.com, BondHub is “establishing an Internet marketplace for database delivery of bond information and committed offerings to reduce the need for multiple intermediaries. BondHub’s community of broker/dealer partners specializing in municipals, corporates, agencies, Treasuries, and mortgage-backed securities want to reach more market participants and communicate more effectively. BondHub will increase these market professional’s trading efficiency by supporting targeted, transaction-focused communications and innovative electronic trade processing.”
The service is not live yet, unlike Bond.Hub’s which attracted an impressive 6,500 registrants in its first nine months, but Thomas Evankovich, BondHub’s founder and chairman, is not resorting to legal proceedings against those big six banks. “We get a tonne of hits and calls to the site,” he says. “In the beginning it was comical, now it is frustrating but we’re not going to crucify them for driving customers to us. We’ve benefited from the error.” JP Morgan had even distributed corporate gifts that displayed the urls of some of the sites it had invested in, but had erroneously included www.bondhub.com.
Banks’ venture capital arms have a life of their own The legal counsel of a UK bank says he is not referring to his own firm when he relates the following tale: the private equity division of a bank agreed to invest in a new consortium that planned to launch an online service. It seemed such a good idea until the venture capitalists found that one of the bank’s business groups had already signed up to a rival consortium. Both consortia had non-compete, non-disclosure clauses in their commercial contracts.
This legal counsel says he stops the same problem occurring at his bank by acting as the central repository for all internet contracts the bank signs.
Banks cannot distinguish between a venture capital investment and a strategic investment Heads of e-commerce at some banks do not expect their investments in consortia sites to offer them a significant financial return. They say they have joined these consortia for strategic business reasons, not venture capital reasons. Many of the new sites are a commingled extension of the banks’ existing online business operations and so if any money is made from these ventures it will be through greater transaction volume and collecting data on business flows. Other banks, however, expect these investments to bring them high returns. They cannot both be right and banks from these two opposing camps that participate in the same venture are unlikely to do so harmoniously.
Worse, perhaps, is when the head of e-commerce cannot decide whether an investment should be made by his group or by the bank’s venture capital group. “In the end we decided that [a certain fixed-income site] site was not strategic,” says a source at a European bank, relating one such incident, “and so our VC boys would normally put the money in. For various reasons they did not and so the e-commerce group stumped up the cash instead.” Either the e-commerce group has a clearly-defined role as a venture capitalist or it does not. There cannot be a halfway house here.
Should the e-commerce group run the bank’s venture capital investing in e-finance sites as well as its own strategic investments? In the short term this should make for quicker decisions but could later result in less accountability. Every venture capital investment that fails to produce the right return can be easily relabelled as strategic.
Some banks are clinging to their single-dealer sites while paying lip service to commingled sites Top investors do not want to have open three different browsers to get competing prices – small wonder that TradeWeb is doing so well in the US government bond market. “Single-dealer sites, with very few exceptions, are a temporary phenomenon and the trend in the market, I think, will be to move away from them,” says Andreas Raffel, managing director and co-head of European e-commerce at Morgan Stanley Dean Witter in London.
However, some other banks think that commingled sites are just a tax on the business they would otherwise have won anyway and so are reluctant participants. They will need to rethink their strategy if they want to play any type of role in commoditized markets in three years’ time.
Banks do not know which consortia they are in TheMarkets.com is a new service scheduled to be live before the year-end that will offer commingled equity research and data from seven leading investment banks including Goldman Sachs. Launched on September 12 this year, it is a step in the right direction for online equity markets. However, when we called Goldman Sachs corporate communications in London to find out more the initial response was: “TheMarkets.com, what’s that?”
Some consortia sites could become just talking shops “Yesterday I was in a five-hour meeting about TheMarkets.com,” says one European banker, “and today there is another meeting, which has been going on for three hours. I sent someone else to it.”
Another source who was involved in setting up the site remarks: “Considering how many people were involved, it was a miracle they got to the launch at all.”
Other sources from TheMarkets.com give us the impression that they are so ambitious that the long meetings will not drag on much longer. Finding a chief executive will help.
All consortia sites run the risk of never getting anything decided if each bank tries to act in its own interests. If your consortium is short on decisions and long on hot air, you should invite Deutsche Bank to join. It is not short of cash to invest and is more than willing to move things along. Says Ian Rosen, head of eGM business development at Deutsche Bank in London: “We are invited to join many of the consortia. Why? Because we will take a lead in making it happen. You need someone who is going to drive the process forward.”
Hope on the horizon
The wheat will be sorted from the chaff in wholesale internet finance over the next 12 months as banks begin to get their act together. If they fail to make sufficient progress they could find themselves disintermediated if the success of non-bank sites such as cpmarket.com is anything to go by. A number of banks show signs of making it into the top tier by the end of next year.
Morgan Stanley is rarely mentioned by its main rivals as being a leading internet player. Bankers who have left the firm recently complain that its culture is slow to accept change. The bank’s low-key approach, however, belies the success it has been enjoying. Many of its own sites were winners or leading contenders in our internet awards and it is well positioned in a number of the consortia sites.
It has also carved out a profitable niche in advising corporate clients on setting up business-to-business exchanges in their own industries. This may bring new ideas from other industries but also positions the bank as a preferred supplier of its own online banking services to these new sites.
UBS Warburg was one of the first to offer high-quality services online that investors are willing to use. Its commercial paper site, for example, has been live since April 1998. It is also one of the better communicators both inside and outside the firm. It offers an e-learning service for staff who want to get up to speed on the basics of the internet which has been so successful it has been offered to clients as well. The bank was also one of the few to tout its online fixed-income services at the start of the year. DebtWeb was sensibly promoted publicly to good effect without the usual accompanying hyperbole.
Along with UBS Warburg, Deutsche Bank is the only other European firm in the running. Being a relatively new investment bank it has less legacy baggage to haul around than its rivals and although its prices in commoditized markets are extremely aggressive it knows price alone will not win the war of the web. Says Martin Loat, Deutsche Bank’s head of e-commerce: “Electronic trading is more than just execution. You have to offer your clients a multi-channel approach, which includes voice, and add more to their business than just giving them a price. This includes everything from proper research and analytics, targeted specifically to the client, to fast and efficient execution. It means an integrated back office whose function is not only our settlement but which is also targeted outward to ensure the clients’ settlement is straightforward. If we are still one of the biggest players in two years’ time then it will primarily be because we offer a better customer experience today.”
Other banks dismiss LabMorgan as “just a venture capitalist” or “a load of hype”. They argue that the venture has taken too many senior executives away from JP Morgan’s existing businesses and has left them exposed. “It has left them exposed to a flow of new businesses and business ideas,” retorts Nicolas Rohatyn, head of LabMorgan.
And, like a few of the other better e-commerce groups, LabMorgan adds to this all the back-up necessary to turn an idea into a new business quickly.
Overhyped or not, in terms of branding and sending a strong message about the bank’s commitment to e-commerce no other firm has been as prominent this year as JP Morgan. The bank has also developed an impressive suite of online risk management services. How LabMorgan will fare after its parent’s merger with Chase is another matter. Nicolas Rohatyn is set to become co-head of the new e-commerce group with Chase.com’s Denis O’Leary. Is this a desirable arrangement and will it last? He has been co-head of a business group before and as long as each co-head’s role is clearly defined there should never be a problem.
If the new merged bank gets it right, and gets it right quickly, it could emerge as a strong provider of the widest range of wholesale services.
Merrill Lynch senior managers have talked a lot of sense this year about their firm’s wholesale web strategy and the bank was a contender in a number of our awards. It appears that even if the bank was late to the internet party for its retail broking arm, the wholesale group is not making the same error.
The bank all the others fear is Goldman Sachs. Do not expect anything other than an increasingly aggressive and polished move from this firm.
But if you want to place a bet on a firm that is a guaranteed winner in wholesale finance’s move to the internet, do not bet on a bank at all. Bet on a firm providing internet-related services to the banks – Compaq, Hewlett-Packard, Microsoft, or Sun Microsystems, for example. No matter who wins the war, the arms dealers will always make money.
