The Internet is not really that new. It is, in some senses, a back-to-the-future technology that replicates electronically the haggling once conducted face-to-face in a physical marketplace.

Given the limitations of face-to-face interactions, the bargaining found in physical marketplaces was gradually co-opted by the modern corporation, a principal motive force of which is to collect and make proprietary those informational flows that promote an advantage in the haggling process.

Now with PCs and the universal protocols that connect them, the corporation's role as information monopolist is becoming obsolete. One manifestation is the emergence of electronic procurement exchanges - Web sites where buyers and sellers in the same or different industries can communicate, share ideas, advertise, bid, conduct transactions, and coordinate fulfillment. These exchanges will enable information flows and product exchanges to move horizontally - from those who need a product directly to those that supply it - rather than first vertically, up a corporate hierarchy.

The resulting savings will take two basic forms: Intermediate inputs will become a lot cheaper, and the process costs of buying and selling these inputs will decline dramatically. For example, the much-discussed average corporate paper purchase order now costs about $120 to execute; soon the price of its electronic successor could tumble to as little as $10.

Little wonder, then, that e-procurement exchanges are proliferating almost wildly, already encompassing about $3 trillion of the estimated $10 trillion to $12 trillion in business-to-business purchases.

Great as are the savings that the e-exchange movement promises, its overall impact on the economy could prove even more far-reaching. E-exchanges will dispossess middlemen. Among the casualties will be financial middlemen: those who prosper by financing the excess inventories that must now be held because the "right" people in the "right" jobs do not as yet have the "right" information with which to secure instantaneous access to needed inputs.

Any curbing of search or transaction costs has profound redistributional consequences. Yet it is possible to blunt the impact of these changes. The procurement system is evolving from the old decentralized approaches, through the centralized methods introduced by the modern corporation, only to approximate again a decentralized modus operandi made possible by TCP/IP. By the same token, financial middlemen can traverse a similar course - from traditional intermediation, through some transitional disintermediation, to a more creative reintermediation.

The threats to banks posed by e-procurement range from loss of transactions and fees to rising credit-default levels.

Let's examine three potential trouble spots:

  • Many suppliers of intermediate goods whose franchise is local and depends on imperfect information could lose business, becoming thereby riskier customers of the banks that now serve them.
  • As noted, working capital needs will fall, crimping demand for inventory loans.
  • The letter-of-credit business will decline since all participants in e-exchanges will be certified upon admittance to these exchanges, obviating the need for repetitive guarantees of individual transactions.

The pain can be assuaged by new business opportunities for banks that are both skilled and nimble enough to be recognized as preferred financial providers to emerging exchanges. These opportunities are chiefly:Many banks will undertake to warrant and certify exchange members - an activity that should mitigate but not entirely offset the loss of letter-of-credit revenues. That is, the revenues derived from this activity should be lower than those obtainable on letters of credit because the availability of more information reduces bank risks and thus feasible prices; by the same token, this availability reduces costs - both functional and credit. So the gross may be a lot lower, but the net, while lower, should drop less than proportionally.
The second opportunity, arguably the more profitable, is to use the bank's preferred-provider position to process the accumulated transaction data.

At its most mechanical, this would be an exercise in integrating buyer and seller business systems. For example, once a transaction is made, the bank would not only create a funds transfer but also adjust the ledger accounts of buyer and seller in order to minimize any accounting oversight.

On a more creative level, it would probe the data to uncover, say, the need for financial hedge instruments and would either offer to initiate hedges or eliminate existing ones that the purchasing data indicated were redundant.

In either example, the bank will be striving to enmesh itself so firmly in the workflow process of a customer that it cannot be easily shoved aside.

The e-procurement exchanges will likely accelerate industry concentration as large preferred-provider banks displace some of the smaller institutions that today offer local businessmen the one-off letters of credit that will no longer be needed.

Thus, organizations will get bigger, but the growth of interoperability will tend to de-weight them, perhaps even partially dissolving them into nodes of empowered employees. Ironically, although organizational size will increase, organizational influence could recede. Once again the fruit of Internet advance will prove bittersweet. But on balance, the sweetness should predominate.

Mr. Reichbach is a partner in the New York office of Deloitte Consulting.

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