With their myriad responsibilities, corporate treasurers and chief financial officers often struggle keeping up with advances in securities trading technology. That's where Integral Development Corp. comes in.
The Palo Alto, CA-based seller of capital markets software has launched CFOWeb.com, an online portal that provides capital market products to treasurers and fund managers. The Web site creates a "virtual exchange" for non-exchange traded products, says Harpal Sandhu, chief executive officer of Integral. Available services include direct online trading of swaps, caps and floors, foreign exchange, and cash instruments. In addition, CFOWeb offers portfolio analysis and management services, and a message board area where members can chat and receive advice from each other and featured experts.
CFOWeb's distinguishing feature, however, is that it operates like an electronic auction, whereby corporate customers shop online for services provided by CFOWeb-approved financial institutions. Users must first apply for credit with a given bank. If given the green light members go to the site, select the providers they wish to deal with during a particular transaction and then tell these banks what it is they want. The banks receive requests as XML messages and then come back with their prices presented as a list from which users can choose the most appealing offer. The idea is that, by targeting a pool of institutions, treasurers will get competitive prices, as opposed to the traditional method where they dealt with only one bank.
"The model of a co-mingled community Web site, or hub, is great," says Robert Iati, senior research analyst for securities and capital markets at TowerGroup of Needham, MA. "This is the way the securities industry will operate in the near future."
Dan Lattimore, director of e-strategies at Mainspring, a research firm in Cambridge, MA, says that although the e-auction makes sense, he's not so sure corporate banking customers and financial institutions will go for this kind of trading. "It all depends on what a CFO needs at a particular time. If you're price-driven, then the auction might work. But I question how aggressive the banks will be on bidding for business here."
One thing CFOWeb has going for it is that it's a breeze to use, requiring no software. All clients need is an Internet connection with high-encryption security. "That's one of the ways we've gotten so many customers," Sandhu says, noting that the service already has some 2,300 members. At press time, CFOWeb had five financial services institutions on its provider roster: Bank of America, AIG International, ABN Amro, Standard Chartered Bank and BNP Paribas. A sixth participating bank has been signed but not yet announced.
Financial providers, on the other hand, can opt to use internal software that offers a higher degree of automation for executing trades. Called CFOWeb.com Connect, the software is integrated with a bank's Web site and receives electronic messages from the network. Without the software, traders simply type their banks' prices into the CFOWeb system and complete deals by phone.
How long it takes to complete a transaction varies according to whether or not a bank uses staff to price the products or uses the automated system, Sandhu explains. Online processing takes two to five seconds.
Sandhu argues that becoming a provider on CFOWeb benefits financial institutions because it gives them access to a new, cost-effective distribution channel. "Capital markets products have tight margins anyway, so it starts to become costly, and banks sometimes won't conduct such trades unless the customer is big," he says.
Also, CFOWeb automates and streamlines banks' trading and financial management functions, and reduces the likelihood of clerical errors. Additionally, providers can take advantage of the site's data analysis tool, which provides access to a database of behavior patterns among different market segments. "(CFOWeb.com) offers a much more focussed allocation of resources, both capital and people (for banks)," Sandhu says.
Bank of America, Charlotte, NC, is the latest bank to join CFOWeb. "We looked at Integral's software for some time," says Pam West, senior vice president of ecommerce. "We liked what we saw, and when they came up with the value proposition of CFOWeb.com, it looked like something we wanted to do ourselves." Rather than lavishing time and money to develop a comparable service in-house, BofA decided to team up with the portal. According to West, this approach offers a safe way to learn about the market and gauge BofA's own future course in this area.
CFOWeb's biggest draw for BofA is its ability to simplify and speed what is otherwise a complicated kind of transaction. "This is something that allows clients to open a template, send out requests to several banks and finish the transaction on the phone (and eventually, online)," says Saurabh Narain, head of ecommerce for derivatives at the bank. He adds that BofA will start out using CFOWeb's browser only. "We won't use CFOWeb.com Connect until we see good enough volume on the browser."
Bank of America will also use the partnership as a point of departure in developing its own virtual capital markets exchange, which will be accessible over its Web site. The bank's e-auction, under development now, will be a souped up version of CFOWeb, with more available financial advice, information and analytics, and immediate access for BofA clients to their checking accounts, West says.
Like West, Mainspring's Lattimore views CFOWeb.com as a low-risk way for banks to learn about something new. "This is a worthwhile experiment for banks since they can pull out of it at any time." Conversely, a service like CFOWeb poses a threat to the way business is currently done, he notes.
On this score, Iati views CFOs and corporate treasurers as "investors who don't get much technology aimed toward them. The reason they use banks and brokerages is for analytics. This service allows treasurers to ignore their banks and brokers in order to trade with a number of banks. What banks and brokers give for a fee, CFOWeb.com offers for free," he says.
Well, most of the service is free. Members are offered basic functions at no charge. For what CFOWeb calls "premium services," there is an undisclosed fee. That said, "I am not (sure) about how much money CFOWeb can make," Iati wonders.
Providers have to fork over a bit more cash to participate in CFOWeb. Per transaction fees range from $5 to $150, "depending on the complexity of the transaction and how much work our computers have to do," Sandhu says. There is also a "nominal subscription fee" to join the network. Providers can pre-purchase lots of transactions in $30,000 units. "It's like paying for cell phone service. You get a certain number of minutes for a minimum charge and then must pay thereafter," Sandhu notes. Although he won't specify the price of CFOWeb.com Connect, he says it ranges in the "thousands of dollars."
Iati doesn't think what the company is charging the providers is enough. CFO Web's best potential for revenue, he believes, is from advertising on the site and by selling the premium services. "The few thousand dollars here and there isn't enough to make CFOWeb a fortune," he contends. But CFOWeb's Sandhu sticks by his company's price structure. "We'll make our money on fees, value added services and, on the non-trading side, advertising," he counters.
CFOWeb launched in beta last fall amid much fanfare, but has been slow to introduce a full range of services. "Their PR machine was going full speed in November and December, but I think they got a little ahead of themselves," Iati says. Some functions on the site, but not all, are out of beta. Sandhu says the company hasn't been able to hook all its banks up to its Connect engine yet. "But we're working very aggressively to do so," he's quick to add. At this point, users can load their portfolios, look at their risk, perform research, view market data and perform model transactions, which doesn't allow for trade confirmation.
"This (rollout delay) is causing a little doubt among their providers," Iati claims. "But this doesn't reflect on the company's ability to deliver the service. It's great technology."
Lattimore sees CFOWeb's first-to-market emphasis as a competitive advantage. "They were the first in this space to bring together resources important to dealers in a central location. They've been successful in signing up a few thousand corporations." As for CFOWeb's service delays, "Even if there's a glimmer of a problem, it makes sense for them to hold off and get it fixed. If it fails, they'll only succeed in alienating their customers," Lattimore says.
Experts agree CFOWeb's promise lies in its value to corporate treasurers as a low-cost alternative to their traditional means of trading in the capital markets. For now, the service is more appropriate for simple transactions. "CFOWeb is best suited for commodity products like foreign exchange and plain-vanilla swaps," Lattimore explains. "For more structured products, CFOs want to deal with a human being who will be accountable if something goes wrong."