Bankers are right to be concerned that the Internet could be a mixed blessing.

They may gain revenue advantages on the retail side by charging for such services as electronic bill payment and presentment and may improve cross- selling performance.

But what about the commercial side of the bank? There the effects of the Internet could be grim.

Cash managers are already trying to figure what to do about potential revenue decreases as the processing of paper bills declines and third parties attract customers to competing services. Fears are mounting that the Internet is the first step on a downward spiral in commercial banking that begins with losses in cash management and lockbox services and ends with banks dropping out of the payments loop.

This doomsday scenario casts many banks as forced into such low-margin services as settlement and frozen out of any profit from future services.

The advance of electronic banking seems inevitable. The fate of commercial banking could depend on actions taken-or ignored-in coming months.

Research suggests there will be widespread market acceptance of electronic bill presentment and payment. According to industry estimates, consumers now can gain access to about eight million bills on-line each month. By 2002 this would grow to 2.2 billion. By that time, electronic bill payments would make up 19% of all bills paid.

This trend is worth examining, since it will affect at least five areas of commercial banking.

Customer relations. The early success of nonbank-owned, third-party bill providers could result in their building direct relationships with merchant billers. This would effectively disintermediate the banks, reducing their hopes of cross- and up-selling customers to more profitable commercial banking products.

Remittance information. Money and information travel together. Firms that process payments electronically will not only be paid for their services but also be positioned to mine consumer data and consequently offer clients new products and services.

Lockbox services.

How rapidly will revenues disappear for collecting and processing payment and remittance information on behalf of billers? In the near term, probably not much will happen.

Demand for electronic payments is still low, and investments in existing systems remain high. Billers have invested substantial time and money on legacy systems for receivables and payables. Similarly, banks have invested heavily in paper check processing systems and technology. For both, the costs of quitting paper processing would be considerable. However, over the longer term, the shift from paper to electronic billing will have a significant impact.

Float revenue. Who among customer groups, from small consumers to large businesses, will make payments before the due date once remittances are electronically dispatched and immediately posted? Neither banks nor billers will retain the float, only customers.

Payments systems. As electronic bill payment and presentment takes hold, banks will find themselves pushed out of the payments loop, left to handle settlements with low margins and ill-equipped to offer newer and potentially more profitable services.

So what's the solution? Be aggressive.

Banks must not wait for the avalanche of electronic commerce to sweep them to the sidelines. Rather, they should begin now to tear down old and ineffective organizational structures and replace them with new ways of doing business that add value to their electronic payment streams.

Developing a me-too Web site won't work. Banks must create electronic financial communities in which customers congregate to present and pay bills while satisfying other financial and informational needs.

By bringing consumers and vendors together at one site, financial institutions can leverage the trust clients have in them and act as the intermediary to ensure billers get paid and consumers get goods and services. One group attracts another.

The more electronic bill presentment and payment providers locate at the bank site, the more customers will pay bills on-line via that site. Instead of losing customers, aggressive banks could acquire new ones eager to try other promotions and offerings.

Bank management should use the electronic era as a catalyst to unite retail and commercial operations so they work in tandem to build value for the whole bank.

The ability to collaborate will decide how much each side gains or loses from Internet billing.

Moving from paper to electronic money has the potential to drain revenue from cash management, yet it does not preclude banks from generating revenue from other sources. Banks must redefine their role in the payments system and find new ways to create value for their customers.

Creating value is about crafting and delivering customized products and services and building a relationship with the customer.

Integrated electronic offerings offer a new channel for banks to create value, and potentially mitigate revenue losses in paper processing. As cyberspace becomes the mainstream, the time is at hand to deepen relationships with business clients and formulate compelling cyber- offerings. Mr. Norman is a partner and leader of the global financial retailing prac tice at PricewaterhouseCoopers in New York, and Mr. Lerner is a consultant in the same practice.

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