There are about 500 business-to-business marketplaces that let companies buy and sell goods online, but until now payments needed to be executed separately, either by check or wire transfer.
A new service from Wells Fargo & Co. changes that. WellsXchange is a suite of payment options that lets companies that participate in electronic marketplaces obtain financing and settle transactions over the Internet in real time.
Three electronic marketplaces AgEx, an agricultural products exchange; GemConnect, a jewelry exchange; and MeetChina, which provides a window for businesses to trade with China are using WellsXchange.
E-marketplaces are creating opportunities for companies to improve their procurement and sales processes, but they also create credit and settlement risks for buyers and sellers that financial service companies are well suited to solve, said Steve Ellis, executive vice president of Wells Fargos wholesale Internet solutions group.
In addition to payment processing, WellsXchange, which was unveiled last week, offers access to letters of credit, escrow services, and documentary collection, where the banking company acts as an agent for U.S. exporters by transferring shipping documents to an overseas bank and collecting payment.
Wells is the first bank to have products up and running for online payments and financing for marketplaces, said Avivah Litan, research director at GartnerGroup of Stamford, Conn. Banks have made announcements, but they, on the whole, havent signed up customers and implemented them yet.
But Ms. Litan questioned whether public exchanges will indeed prosper. The jury is out if transactions are even going to take place in a big way on these marketplaces.
A good majority of online transactions about 75% happen on private exchanges between known trading partners rather than on public exchanges, she said. Once a business finds a supplier, it would rather do business directly with the supplier on a private exchange than go through a public marketplace that charges for transactions, she said.
Most transactions that go through public marketplaces are conducted by companies trolling for new trading partners, or those that cannot afford to set up their own private exchange, Ms. Litan said.
Tim Clark, a senior analyst with Jupiter Research in Los Altos, Calif., said spot trading over public marketplaces will thrive, particularly among Fortune 500 companies. Banks will have a big part to play in managing the risk of trading between entities that do not know one another, he said.
Mr. Ellis predicted that more than a hundred marketplaces will begin trading online next year.
In August, Wells Fargo and Citigroup Inc. teamed up with three technology firms to create a joint venture, FinancialSettlementMatrix.com, to facilitate payments at Internet business-to-business marketplaces.
FSM.com received equity investments from the two banking companies and three tech firms: Enron Broadband Services of Houston, i2 Technologies Inc. of Dallas, and S1 Corp. of Atlanta. Businesses that bank with Wells Fargo through FSM.com will actually be using WellsXchange.
The joint venture is an effort to pull together the numerous payment mechanisms and ancillary services being developed in a piecemeal fashion by dozens of banks and technology firms, and to establish, where it is advantageous, common standards. Besides payments processing, the venture will offer escrow, letters of credit, receivables, and foreign exchange.
Mr. Ellis said Wells Fargo and Citigroup are going to bring their own payment and financing solutions that they want to bear on this marketplace, but we really need to have standards around a couple of things like messaging formats, authentication, and data validation.
We need to have a common infrastructure, just like you need roads in the interstate transportation system in the U.S., he said. You need to be able to connect, and you need clear and simple rules that everyone understands.
Ann Cairns, head of global e-solutions at Citigroups e-Business unit, said one of the advantages of FSM.com for banks is they dont have to invest as much as if they were building the infrastructure for themselves.
Also, a multibank organization like FSM.com will offer large marketplaces a variety of banking options, she said.
Citigroup has a handful of live marketplaces up and running overseas, in places like Eastern Europe and Latin America, and is building the infrastructure for ChemConnect, a U.S. marketplace for the chemical industry, Ms. Cairns said.
Marketplaces will change how companies trade, she said. Goods markets could see a lot more spot trading. Unfamiliar trading partners will now make payments online. Financial institutions will manage the risk through e-escrow services, electronic letters of credit, and insurance products.
FSM.com will also benefit companies trading across borders, she said. A U.S. company could buy directly from unfamiliar companies abroad and potentially get a better price and access to products it could not have otherwise.
But as a type of bank consortium, FSM.com faces the same obstacles that have hindered other such groups. Integrion Financial Network, which was started five years ago to promote Internet banking and eventually drew more than a dozen banks, folded last year after failing to cope with the organizational challenges of operating with separate bank members.
A similar project to FSM.com on the consumer side is Spectrum LLC, a consortium for electronic bill payment and presentment. The Union, N.J.-based group, which was founded almost four years ago, has taken knocks for its tardiness in bringing its platform to market.
John Perry, chairman and CEO of Spectrum, said J.P. Morgan Chase & Co., First Union Corp., and Wells Fargo, which formed the consortium in October 1999, will be operating on its platform by June.
Mr. Ellis said a pilot test of FSM.com had been slated for the fourth quarter but took a little longer to develop than intended. The platform is now completed, a management team is in place, and FSM.com will be rolled out in the second quarter, he said.