Transaction Banking: No Need to Reinvent the Wheel

"What’s past is prologue" wrote Shakespeare in “The Tempest”. The phrase means that history repeats itself and continually influences the present. Nothing can be truer if we consider what financial institutions (FIs) are doing today with their global transaction services platforms and compare it with what some software and information technology services providers have already done with their B2B platforms through the past 10 years.
There are lessons that FIs can learn from technology providers, although apparently playing in different and completely distant fields.

For their global transaction services (GTS) banks are offering platforms that aim to incorporate cash management, trade finance, payments, basic FX as a one-stop-shop for their corporate clients. I don’t want to name any names because my point is more around the strategic approach banks are missing rather than running a “good” vs. “ugly” beauty contest.

In my frequent meetings with banks I hear almost constantly the same questions:

• What should we offer on our GTS platform?
• What should we give away for free vs. get paid for?
• Should banks have more of a consultative approach with their corporate clients?
• What’s next in technology that can help us?

Instead of reinventing the wheel I always suggest banks to look at what some business-to-business (B2B)  software and information technology companies have done in the past, especially those who entered the market during the “internet boom” and have been capable not only to survive the “dot-com bust” but, rather, do develop new forms of business paradigms.

The one company I have in mind is Ariba (www.ariba.com).
Ariba was founded in 1996 on the idea of using the Internet to enable companies to facilitate and improve B2B procurement processes. Ariba was one of the first business-to-business Internet companies to go public, and since the beginning its stock value continued to climb. With the bursting of the dot-com bubble in 2001 Ariba's stock price fell dramatically. However, instead of playing defense and trying just to “survive”, the company adopted a powerful strategic approach that makes it today the software and services provider of 94 of the Fortune 100 companies.

After the stock price collapsed (does the word “collapse” ring any bell to banks?) Ariba went under a deep “back to basics” reorganization process, which meant to focus on its core capabilities (i.e., develop and deliver software for “buyers”). This draconian move was accompanied with investments in technology and in process-oriented expert human resources to the point that, in 2004, Ariba was able to acquire Freemarkets, a company with an extremely high domain knowledge and expertise in sourcing and supply management.

Lesson from the past: In tough times, while cutting the dead branches invest time to build a vision where technology and experience play a pivotal role.

The Freemarkets acquisition expanded Ariba’s reach from pure software product developer into service provider. With the addition of Freemarkets’ expert buyers located in various offices around the globe, who had strong knowledge of buying behaviors and local market conditions, Ariba could offer its software applications enriched with the capability of taking over (i.e., in-source) procurement events and offering extended supplier research capabilities. Corporate clients were able to get from Ariba both the software applications to automatically run their sourcing processes (i.e., identify supplier; select supplier; negotiate agreement; request purchase order; submit purchase order approval; issue purchase order; manage disputes; track purchase order execution; approve receipt of goods and close purchase order; prepare information and data for invoicing) as well as the assistance and support of experts who could help throughout the entire sourcing process where human contact, experienced skills, and personal relationships are still irreplaceable.

This step allowed Ariba to extend its footprint reaching out the Procurement department with software applications (i.e. the “product”), best practices and procurement outsourcing (i.e., the “service”).
Therefore, Ariba moved from “procurement automation” to “spend management”, in the sense that it handled and controlled a company’s entire spend process.
With the subsequent acquisition of Procuri, Ariba could offer contract management capabilities.
The vision of becoming the “one-stop-shop” for all procurement processes was finally realized and this became its competitive differentiator.

Lesson from the past: If you want to move from selling products to offering solutions (i.e., products + services), you must know what business processes of your client you can (and want to) cover.

In my next blog post I will continue the analysis of how much information financial institutions involved in developing global transaction services on platforms can learn from the past experience of B2B solution providers.
I will focus on: the role of the community; the importance of technology as a powerful source of inspiration and an enabler of any business change; and the possible revenue models to give a business perspective to all this.