The rising tide of Internet sales does not begin to tell the story of how electronic commerce might unfold as a business opportunity for banks.

Retailers held the spotlight in the recent Christmas season, their on- line volume doubling or tripling to somewhere between $2 billion and $5 billion, market researchers report.

Banks have not been growing nearly so fast in selling on-line services to their own retail customers. And the processing of Internet payments like those tallied over the holidays is turning out to be a small slice of the electronic business available to the banking industry.

The coming year will be critical if banks are to stake out the new- business positions they covet, which could include security or privacy- enhancing roles in addition to payment services and other virtual analogs of what they do in the physical world.

It is already becoming clear that profitability hopes are most likely and quickly to be found in serving business customers, rather than consumers. The trend is evident in banks' success over the past year in delivering corporate cash management services over the Internet.

The current rage of electronic bill presentment and payment services, which many institutions began with a consumer focus, is increasingly viewed from a corporate perspective, with an eye toward retaining and enhancing banks' relationships with utilities and other billers.

"Where real electronic commerce is going to happen is in business-to- business transactions," said David C. Stewart, vice president of Global Concepts Inc., a Norcross, Ga.-based research firm. "In commercial payment applications, there are so many more opportunities for value-added services and revenues."

The initial emphasis on consumer dimensions of e-commerce-which in Mr. Stewart's definition includes Internet-based payments, security, banking, and bill payment and presentment-may have been an unavoidable part of the ramping-up process.

"Frankly, banks have to start with getting routine (consumer) transactions in place," said Bill Doyle, director of money and technology strategies at Forrester Research Inc., Cambridge, Mass. "Any bank that doesn't have that is at serious risk of losing some important customer segments."

Spiraling predictions of consumer activity on the Internet rightly attracted bankers' attention. Forrester estimates more than 50 million U.S. households will be on-line by 2003, up from 29 million in 1998. That is a huge pool of candidates for Internet banking and shopping; to date, consumers have shown a pronounced preference for the latter.

Forrester projects sales over the Internet will reach at least $1.8 trillion by 2003, and could go as high as $3.2 trillion. In the U.S. alone, Forrester predicts such sales will reach $1.4 trillion by 2003.

Such expectations brought institutions such as First Union Corp. to the forefront of the Internet-based transaction movement, and its experiences as a Cyberbank-a word it trademarked-run the gamut.

For two and a half years, First Union has used electronic commerce software from Open Market Inc. of Burlington, Mass., to handle on-line merchants' credit card sales, collecting fees for its service.

The business has grown from year to year but not as fast as the Charlotte, N.C., banking company expected. It "moved more slowly than everyone predicted, but we're not displeased," said Parker Foley, vice president of electronic commerce.

By contrast, First Union's experiment with micropayments fizzled. Seeing little if any acceptance by consumers of a payment mechanism that would allow them to purchase bits and pieces of Web-based products such as documents or music for cents or fractions of cents, First Union ended a pilot with Cybercash Inc. of Reston, Va., and has no current plans to try the idea again.

Micropayments, an idea that met with considerable enthusiasm among Internet engineers and pioneers, suffered a further setback in 1998 with the bankruptcy of Digicash Inc.-after the eight-year-old company had gotten a generous seeding of venture capital and moved its headquarters from Amsterdam to Silicon Valley.

Micropayments are "not ready for the marketplace," Mr. Foley said.

Nor are many other consumer-oriented Internet services ready for banks, despite the attention paid to them by retailers and the popular press.

"On the consumer side, the banking industry has never been able to achieve the volumes that have been touted" for on-line banking and bill payment, said Carl J. Rush, vice president and corporate director of electronic commerce at National City Bank, Cleveland. With "quantum levels of growth" nowhere in sight, he said, "the costs are far outweighing the benefits at this stage of the game."

More intriguing and potentially lucrative are business-oriented services related to cash management, payments, billing, and security.

"Leading providers of cash management services can truly differentiate themselves on the Internet and turn commoditized products into profitable ones," Mr. Rush said.

That possibility helps to explain why many large banks introduced Internet-based cash management services last year, a trend seen continuing.

Information reporting on the Internet is expected to be offered by 65% of banks in 1999, up from 18% in 1998 and 5% in 1997, according to Ernst & Young surveys. Fifty-two percent of banks are expected to assist corporations in initiating transactions over the Internet, up from 13% in 1998 and 3% in 1997.

Killen & Associates Inc. estimates the Internet will let banks quadruple their cash management revenues, to $80 billion by 2004. It would open up the market to 40 million to 50 million small- to medium-sized business and commercial customers who otherwise could not be served economically, said the Palo Alto, Calif., research firm.

The significant relationships banks have maintained with large corporate customers are proving fertile ground for Internet development. First Union and PNC Bank Corp. of Pittsburgh appear to be on the leading edge of refining the bill payment and presentment concept for the corporate market.

Both are claiming to be first with the ability to deliver bills, payable to a particular corporation, on the Internet. Recipients-the payers-would authorize the payments in the form of automated clearing house debits from their accounts. The banks would make sure the payments were executed and handle associated remittance information.

PNC's Inxchange service, two years in the making, is being tested by Xerox Corp. in its dealings with trading partners.

First Union's "total solution," announced in November, will be piloted this quarter with some of the bank's commercial loan customers, said Mark J. Havlik, vice president and manager, electronic commerce team.

First Union is targeting companies like utilities and phone companies and plans to deliver bills on their behalf to both consumers and businesses. It would present bills to consumers tapping into its own Cyberbanking site or via sites run by bill-publishing consolidators like Transpoint and Checkfree.

Businesses' bills might be gotten through First Union's Internet-based cash management service or at the business' Web sites.

"Total solution encompasses the entire customer base of the biller," Mr. Havlik said. He acknowledged that presenting business-to-business bills gives First Union greater opportunity to provide additional services. "There is more interaction between two business parties. You can exchange things like purchase orders and shipping notices, not just payments."

Presentment services to corporate customers put PNC and First Union in the role of "value-added intermediaries," said Daniel J. Pavlick, senior vice president and director of electronic commerce at PNC. "We're helping our customers to deal with their customers," he said.

Mr. Rush of National City, which has not yet staked out a bill presentment position, said he also sees "a better business case for bill presentment in the business-to-business world. The bank becomes the intermediary as opposed to Checkfree becoming the intermediary."

PNC plans to put itself in the middle of "communities of interest," such as buyers and sellers of automotive or steel products, and act as a "trusted intermediary" facilitating relationships among the participants, Mr. Pavlick said.

A prototypical Internet-based community of interest, the Automotive Network Exchange, or ANX, got moving last year with ambitions of cutting billions of dollars from auto industry costs associated with invoicing, document transmissions, payment orders, and other communications.

Banks were only at the periphery of that industry-driven advance on the concept of electronic data interchange. ANX did hire Digital Signature Trust Co., a subsidiary of Zions First National Bank of Salt Lake City, to manage the digital certificates that authenticate members of the network.

Digital certification-an application of data encryption technology-could be a key to ensuring a role for banks in electronic commerce akin to what they do as "trusted parties" in guaranteeing written signatures or letter- of-credit provisions.

The American Bankers Association formed ABAecom, a for-profit subsidiary, for just that purpose, getting technology support from Digital Signature Trust and Xcert International, an up-and-coming vendor of public key encryption infrastructures, or PKIs.

Scott Lowry, president of Digital Signature Trust, speaks optimistically about 1999 being "the year of the cert." At GTE Corp.'s Cybertrust unit, another competitor in the field offering certification outsourcing services to banks and others, a motto for 1999 is "the year of the PKI."

Also along these lines, the banking subsidiaries of BankAmerica Corp., Bankers Trust Corp., Citigroup, and Chase Manhattan Corp., along with four European counterparts (including Bankers Trust acquirer Deutsche Bank) formed a joint venture in the fall to provide certificate-based trust services.

"Banks are very uniquely positioned to do this," said Jay Simmons, senior vice president of Certco, a New York City-based spinoff from Bankers Trust that helped form the group of eight, known unofficially as the global trust enterprise.

Working as a group, the banks can ensure that the digital credentials get the broadest possible recognition, Mr. Simmons said. This serves to lubricate the transaction process, as buyers and sellers do not have to wonder about each other's validity or authenticity.

"If a buyer and a seller on the Internet are each dealing with a bank, they authenticate themselves to each other," Mr. Simmons said.

He added that the global trust enterprise hopes to have thousands of banks participating. An initial pilot is to be launched this quarter.

As with the bill presentment initiatives of PNC and First Union, the security venture will focus first on business customers. Large corporations would be able to establish secure electronic links with thousands of smaller trading partners and customers, and, as in ANX, eliminate the costly shuttling back and forth of catalogues, purchase orders, invoices, and receipts.

"These banks allow virtually any paper transaction in the world to be authenticated," Mr. Simmons said.

For banks, prioritizing the myriad electronic commerce projects that present themselves will surely be a juggling act. Mr. Stewart of Global Concepts said the best route to long-term profits is probably through security services, and with ventures like the global trust enterprise, banks are moving into "a leadership position."

In Internet payments, "banks stand to reap profits ... to the extent they focus on the commercial side," Mr. Stewart said.

On the potentially more treacherous consumer side, Mr. Stewart puts Internet banking "at the bottom of the totem pole" in terms of money-making potential, citing increasing competition from brokerages for consumer assets.

"It is important for banks to be on-line, but they may not be able to compete as well as they would like with the brokerages," he said.

"Banks have been ambitious in terms of understanding and learning about" bill presentment, he added, "but woefully lax in terms of leading the market." Instead, nonbanks like Checkfree and Transpoint have taken charge.

"Banks have not been as aggressive as they need to be with respect to maintaining ownership and control of the payment system," Mr. Stewart said.

But in a change from previous technology generations, suggesting a new sense of purpose and more likelihood of tangible results, these issues are getting attention at the highest levels of banking organizations.

"A significant development in the last 12 months was that electronic commerce became an integral part of business-unit planning," said Mr. Rush. "It's not this thing sitting off in the corner."

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