On paper it looks great, like so many other New Economy ventures. We're talking about the exciting new portals through which giant banks are creating alliances to deliver foreign exchange services (see page 55). Here we have titans lining up, taking sides and dreaming of a killer app that will dominate the $1.5 trillion-a-day forex business. It's mind-boggling: Citigroup, Chase Manhattan, Deutsche Bank and more than two dozen others on one side (Atriax), and on the other, HSBC, J.P. Morgan, Goldman Sachs, Credit Suisse First Boston, UBS, Morgan Stanley Dean Witter and Bank of America, plus a handful of others (FXalliance).
True, we're in a new world, and what has come before may have no relevance to what we're facing. But the history of consortia, especially bank consortia, is not good. Few have worked.
From that perspective, the outlook for huge success for these forex portals, is poor. Yes, theoretically it makes sense to offer a Web site through which corporations and others can do one-stop foreign exchange transactions. And yes, greater transparency in pricing is always welcome, at least by customers. Indeed, a study by Greenwich Associates shows that some 84% of firms surveyed said they'd prefer a multi-bank system to a single-bank system. But it also found that two out of every five smaller accounts currently trading on-line indicate they would prefer single-bank systems.
Perhaps the most successful multibank forex trading system is the Electronic Broking Service Partnership, which was established in 1990 by 13 banks, including such giants as Citibank, Chase Manhattan and UBS. Currently, it has about 800 participating banks, with an average daily volume of some $80 billion. EBS seems to be doing fine, but is confined primarily to handling spot transactions. Some say it hasn't expanded into more complicated businesses because the partners can't agree. And why, if EBS has been so successful, are some of its key players starting something new?
Like EBS, some of the start-ups may be successful at run-of-the-mill transactions, on which profit margins are silicon-wafer thin. But the more complicated and more lucrative transactions will continue to require person-to-person communications. More important, these transactions usually require some degree of credit-granting, and often complex credit-granting, which cannot be left to even the most brilliant software programs.
Aside from the specifics of foreign exchange, joint venture banking, although tried many times, has seldom worked. During the 1960s and 1970s, for example, Chase Manhattan, in contrast to Citibank, expanded internationally by taking minority interests in banks around the world. The idea was to form a chain of allied banks, each with substantial clout in its own marketplace. That experiment proved a failure. Today, Chase has relatively little overseas, while much of Citigroup's strength comes from its hundreds of overseas branches and controlled subsidiaries.
Again, we're in a new world, and it's extremely difficult to see what will work and what won't. But betting on joint ventures is truly a long shot.