By Alan Radding
Disintermediation — being bypassed — was a concept bouncing around the financial services industry before the Internet popularized it. Banks in particular lived in dire fear of disintermediation. With the rise of the Internet, disintermediation became a very real possibility. Financial services, in the final analysis, amount to little more than moving bits between databases. Make an investment, pay a bill, settle a transaction — all you are doing is moving bits between databases. Anyone with an infrastructure that can efficiently move bits between databases can provide financial services.
"Disintermediation is always a concern," says Dave Potterton, research director, Meridien Research, Newton, MA, a research firm specializing in the financial services industry. Fortunately for the conventional financial services industry, the new players, however great their ability to move bits, lacked a key ingredient: trust. "The financial services firms still have the trust of the customer, even if they are coming late to the Internet game," he says.
In fact, the Internet has not led to the unraveling of the conventional financial services industry. On-line–only banks are languishing. On-line investment firms are struggling with a falloff in trading volumes. New financial services concepts such as account aggregation and electronic bill presentation and payment have yet to gain traction.
But things are poised to change. Leading consulting firms, once key technology partners for financial services companies, are jumping into the financial services industry as equity players, not just hired guns, and they are introducing a variety of new on-line services.
"We're not new to the financial services industry. We did our first equity play five years ago, but it certainly is a bigger percentage of our business now," says Stephen Racioppo, partner, financial services industry practice at Accenture. The increase in activity as an equity player coincides with a shift in the company's vision: "We are going to be more of a market maker than a service provider," he explains.
Accenture's ventures cut a wide swath across the financial services industry. For example, inreon (insurance meets reinsurance on-line), an independent reinsurance exchange, was formed as a partnership of Accenture and two leading reinsurance firms, Munich Re and Swiss Re. Fully operational, inreon provides insurance companies, brokers, and professional reinsurers with transaction capabilities for standardized reinsurance covers, according to an Accenture announcement. Risks are traded within predefined processes and pre-agreed-upon time frames. Taking advantage of the Internet, inreon provides market participants with immediate access to current and new business partners, and offers participants a reliable, transparent, fast, and cost-effective way to transfer risk.
Where Accenture took the idea for inreon to established market leaders and assumed a background role, it decided to do WebSTP completely on its own. "We will bring in other investors, but we will continue to have a prominent role," insists Racioppo. Accenture went ahead with WebSTP by itself, he adds, because time to market was critical.
Straight through processing (STP) is a critical component of T+1, a government-mandated initiative to settle trades within one day, explains Potterton. STP facilitates the order flow from the trade through final settlement without human intervention.
WebSTP provides financial industry participants with a single automated point of entry for pretrade, trade, and posttrade activities through an Internet portal. It will also link customer relationship management and enterprise resource management with real-time portfolio management capabilities. WebSTP's primary purpose is to help asset managers and other financial markets players reduce the costs and risks currently associated with the end-to-end process of securities trading as they scramble to meet T+1 requirements.
Another Accenture financial services initiative, S1, takes the form of an alliance, Racioppo explains. Here Accenture made an equity investment, but its main interest is in leveraging S1 as a services marketing channel. "This was an opportunity to make an equity investment and also do services for S1," he says.
S1 is an established global provider of software products and services for the banking, brokerage, and insurance industries. Through its Open eFinance Architecture, S1 offers a broad set of applications that can be implemented in-house or hosted in an S1 data center. The company boasts about 900 customers worldwide. As an equity investment, S1, in a preliminary report, announced 4th quarter revenues of $60 million, which represents a substantial net loss.
Finally, Accenture invested in Sharepeople, a UK-based on-line brokerage. "We didn't start this. We just made an investment for the financial opportunity it presents," says Racioppo. Sharepeople allows UK resident investors to trade in over 12,000 UK and international securities, in real time, while accessing comprehensive company data, news, and research; brokers' forecasts; and price charts. Sharepeople does not offer much in the way of consulting engagement opportunities; Accenture is in it strictly for the investment return.
One of the more innovative and complex ventures is Boston Consulting Group's equity position in iFormation Group, a combination venture capital firm and new business incubator. Its first major project is eONE Global, an on-line payments processor.
iFormation Group, New York, represents a partnership formed by The Boston Consulting Group, Inc. (BCG); General Atlantic Partners, LLC; and The Goldman Sachs Group. Tapping the global reach and complementary resources and expertise of BCG, General Atlantic, and Goldman Sachs, iFormation's mission is to be the preferred partner of global 2000 companies as they seek to leverage their off-line capabilities as on-line businesses.
"These are not just investments. They are joint ventures. We bring operating capabilities, recruitment, deal-making skills, and more," says David Pecaut, a former BCG executive, and now president of iFormation. These are many of the same things Pecaut was doing at BCG when he was building its e-business practice. iFormation will target established players with the goal of helping them to spin off on-line ventures that leverage their brick-and-mortar strengths. Although BCG will be a preferred consulting partner and has already gotten engagements through iFormation, it will not necessarily be the only consulting services provider.
Atlanta-based First Data Corp., a leading payment services provider, is iFormation's first venture client. As an established financial services player, First Data already handles payment processing for more than two million merchant locations, 1,400 card issuers, and millions of consumers using virtually any form of payment: credit card, debit card, stored-value card, or check at the point-of-sale, over the Internet, or by money wire.
eONE Global, First Data's $600 million venture (cash and services) with iFormation, will develop emerging
technologies as well as find new applications that expand the functionality and flexibility of First Data's existing payment products, according to the company. eONE Global will build and run a payments infrastructure for the business-to-business, business-to-consumer, business-to-government, and person-to-person marketplaces. It also will create new payment services for wireless and multi-applications smart devices; handle stored-value and digital cash payments; and provide for credit application and evaluation.
The venture is hitting one of the sweet spots of the financial services industry. "Payment processing will be needed to facilitate all types of e-commerce," says Potterton, and no dominant player has emerged. The potential market for eONE Global is huge: Forrester Research, Cambridge, MA, projects that business-to-business sales over the Net will hit $2.7 trillion in 2004. And, by 2006, federal, state, and local governments will collect over $602 billion via the Internet, a market virtually untapped today.
iFormation is counting on a win every time. Unlike traditional VC firms, which support dozens of companies and hope a couple hit it big, "we can only do five to eight deals a year with the kind of dedicated focus we have," says Pecaut. "We expect 10 out of 10 to work."
Deloitte Consulting also is active in financial services. Recently, the company joined a group investing $53 million in Financial Technologies International (FTI), an established provider of real-time business information used by leading international banks, brokers, investment managers, mutual funds, insurance companies, investment banks, depositories, and Web-based trading firms.
For Deloitte, the FTI investment represents "a key element in our ability to deliver industry solutions addressing strategic processing," says Jack Witlin, Deloitte's financial services practice director. Deloitte also will benefit as FTI's preferred implementation consulting services firm.
Although the opportunities ahead in the financial services arena appear great, the industry "is not for the faint of heart. You have to place the right bets," warns Witlin. Even without recession emerging as a real possibility, not all financial services bets are going to be winners.
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