Project on Project on Internet Banking - Report of RBI Working Group
Internet Banking - a New Medium Part: II

Business to Business (B2B)

As opposed to B2C e-commerce, in B2B domain, the parties to a deal are at different points of the product supply chain. Typically, in a B2B type domain, a company, its suppliers, dealers and bankers to all the parties are networked to finalize and settle all aspects of a deal, online. Perhaps, only the goods in different stages of processing physically move from the supplier to the dealer. This scenario can be extended to include the shipper, providers of different ancillary services, IT service provider and the payment system gateway, etc., depending on the degree of sophistication of the available systems.

Another important feature of a B2B domain, as distinct from B2C, is that business information / data is integrated to the back office systems of parties to a deal and the state of straight through processing (STP) or near STP is achieved. This is a very significant aspect of B2B model of e-commerce, which results in improved profits through lowering cost and reducing inventories.

For example, in a B2B environment, typically, the back office system of a company controls inventory requirement with reference to the order book position updated regularly on the basis of orders received from dealers through Internet. At the optimum level of inventory it raises a purchase order with the supplier, whose system in turn, processes the order and confirms supply. Buyer company’s system issues debit instructions on its bank account for payment to the supplier. The buyer’s bank credits seller’s bank with the cost of sale though a payment gateway or through RTGS system. Similar series of transaction processes are also initiated between the company and its dealers and their respective banks. Once e-commerce relationship is established between the firms, the transactions of the type shown above can be processed with minimal human intervention and on 24 hours a day and 7 day a week basis.

New business models are emerging in B2B domain. There are portals which offer a meeting ground to buyers and sellers of different products in supply chain, more like a buyer-seller meet in international business. This has enabled relatively smaller companies to enter the global market. Banks in the portal offer financial services for deals settled through the portal.

Technology and networking are important constituents of a B2B type of business domain. Earlier, only large firms could have access to such technology and they used private networks with interface to each other for information flow and transaction processing. A major concern used to be compatibility of EDI platforms across different B2B partners. Internet with WWW and other standard technology have offered opportunity to relatively smaller and medium sized firms to integrate their operations in B2B model and take advantage of the benefits it offers. It has also led to standardization of software platforms.

Other new forms of business models in B2B domain are Application Service Providers (ASP) and Service Integrators. ASPs offer application software online to e-commerce companies who pay for the same according to the use without owning it. Often entire back office processing is taken care of by ASPs and other service integrators. However, the utility of such service providers will to a large extent depend on the business strategy of the e-venture.

The concerns of B2B e-commerce are similar to those of B2C, discussed earlier. The security issues are more pronounced because of high value transfers taking place through the net. So also are the issues relating to privacy of information, law, tax repudiation etc. The other issues of importance to a B2B firm are the choice of appropriate technology, the issue of build or outsource, maintenance and training of personnel, etc., since they involve large investments and are critical to success.

Several studies have attempted to assess the relative importance of B2B and B2C business domains. There is wide difference in estimates of volume of business transacted over Internet and its components under B2C and B2B. However, most studies agree that volume of transactions in B2B domain far exceeds that in B2C. This is expected result. There is also a growing opinion that the future of e-business lies in B2B domain, as compared to B2C. This has several reasons some of which are already discussed earlier, like low penetration of PCs to households, low bandwidth availability etc., in a large part of the world. The success of B2C ventures depends to a large extent on the shopping habits of people in different parts of the world. A survey sponsored jointly by Confederation of Indian Industries and Infrastructure Leasing and Financial Services on e-commerce in India in 1999 made the following observations. 62% of PC owners and 75% of PC non-owners but who have access to Internet would not buy through the net, as they were not sure of the product offered. The same study estimated the size of B2B business in India by the year 2001 to be varying between Rs. 250 billion to Rs. 500 billion. In a recent study done by Arthur Anderson, it has been estimated that 84% of total e-business revenue is generated from B2B segment and the growth prospects in this segment are substantial. It has estimated the revenues to be anywhere between US $ 2.7 trillion to over US $ 7 trillion within the next three years (2003).

Internet Banking is a product of e-commerce in the field of banking and financial services. In what can be described as B2C domain for banking industry, Internet Banking offers different online services like balance enquiry, requests for cheque books, recording stop-payment instructions, balance transfer instructions, account opening and other forms of traditional banking services. Mostly, these are traditional services offered through Internet as a new delivery channel. Banks are also offering payment services on behalf of their customers who shop in different e-shops, e-malls etc. Further, different banks have different levels of such services offered, starting from level-1 where only information is disseminated through Internet to level-3 where online transactions are put through. These aspects have been dealt with in brief in the introductory chapter (title page) and again detailed products and services are discussed in subsequent articles. Hence, in the following paragraphs I-banking concerns in B2B domain are discussed.

Considering the volume of business e-commerce, particularly in B2B domain, has been generating, it is natural that banking would position itself in an intermediary role in settling the transactions and offering other trade related services. This is true both in respect of B2C and B2B domains. Besides, the traditional role of financial intermediary and settlement agents, banks have also exploited new opportunities offered by Internet in the fields of integrated service providers, payment gateway services, etc. However, the process is still evolving and banks are repositioning themselves based on new emerging e-commerce business models.

In B2B scenario, a new form of e-commerce market place is emerging where various players in the production and distribution chain are positioning themselves and are achieving a kind of integration in business information flow and processing (STP or near STP) leading to efficiencies in the entire supply chain and across industries. Banks are positioning themselves in such a market in order to be a part of the financial settlements arising out of transactions of this market and providing wholesale financial services. This needs integration of business information flow not only across the players in the supply chain, but with the banks as well.

With the integration of business information flow and higher degree of transparency, the banks and other financial services institutions have lost some of the information advantage they used to enjoy and factor in to pricing of their products. However, such institutions have the advantage of long standing relationships, goodwill and brand, which are important sources of assurance in a virtual market. Banks are in fact, converting this goodwill into a business component in e-commerce scenario in providing settlement and other financial services. Some banks have also moved to providing digital certificates for transactions through e-markets

Banks’ strategies in B2B market are responses to different business models emerging in e-commerce. A recent study by Arthur Andersen shows that banks and financial service institutions generally adopt one of three business models to respond to e-business challenges. In the first place, they treat it as an extension of existing business without any significant changes other than procedural and what technology demands. The second strategy takes the same approach as the first but introduces structural changes to the underlying business. In the third approach banks launch e-business platform as a different business from the existing core business and as a different brand of product. There is no definite answer as to which approach is appropriate. Perhaps it depends on the type of market the bank is operating, its existing competencies and the legal and regulatory environment. It is, however, sure that e-banking is evolving beyond the traditional limits of banking and many new products / services are likely to emerge as e-commerce matures