E-COMMERCE SPECIAL

The rise and rise of e-commerce

Is your firm involved in the e-commerce arena? If not, there could be serious implications for the strength of your business. John Maloney of KPMG Consulting goes behind the hype and looks at how major companies have benefited from investing in their e-commerce side, and why all businesses should do the same

n the past year the US NASDAQ composite 500 posted almost 70% gains. Almost all of that growth is accounted for by technology stocks, particularly the so-called dot coms. In this period of feverish activity it is sobering to note that the rise in dot com shares has been so great that it has masked an almost equally sustained bear run in nontechnology stocks. Nearly 300 out of the 500 stocks in the NASDAQ composite 500 were down by 20% or more during the year. Despite the recent corrections at the end of last year in both the US and the UK, there seems little waning in the appetites of both private and institutional investors for almost any dot com shares. In the race to create global ebrands, the best-publicised winners have been in the retail sector. The penetration of internet shopping into general retail delivery has not so far been profound although the impact on business-tobusiness commerce is increasingly significant. In the long term there is likely to be sustained penetration of online shopping into many areas of the retail sector. In a recent survey by KPMG of 357 European companies with turnovers of $300 million or more, it was found that over three-quarters had launched a new product, or promoted an existing one, using e-commerce technologies. European companies annual internet sales currently stand at US$288 billion and they expect them to rise to US$2004.4 billion by the year 2002.

Nevertheless, we will probably continue to see the lions share of general retail business in ten years time continuing to flow through high streets.

What of the financial sector?

In the financial sector, on the other hand, a revolution is happening. The simple reason for this is that financial products and services are perfectly suited to a digital environment. As Charles Schwab, founder and chairman of the Charles Schwab Corporation has said in Cyber Rules: The internet has revolutionised the way people and companies communicate. Its growth has been explosive because it gives us tremendous access to information that makes our lives simpler to manage. This in turn has had a revolutionary impact on business. Think of almost any part of the financial sector at this moment in time and you will find that ways of doing things have either already been challenged or that a challenge is around the corner. In retail broking, companies like E*Trade, Charles Schwab, Stocktrade and a host of others are slashing the costs of trading to the small investor. Their appeal, however, does not merely rely on lower transaction charges. The value of these services to small investors is that they offer real-time access to market information and rich analysis in the form of stock reports, links to information services and a wide variety of account management features. In any case the effect on the broking industry is becoming profound. According to

Shares magazine, 20% of all UK retail trades are to be transacted online by the first quarter of 2000, repeating a pattern already seen in the US. An ever-growing list of innovative financial information services is being offered over the web. Access to IPO share information traditionally the preserve of insiders and favoured clients of stockbrokers is being democratised by information providers such as www.issuesdirect.com and www.epo.com, which have started to offer timely information on upcoming IPOs. This is leading some firms to consider taking their first issues directly to the internet trading market rather than going through the traditional (safe but expensive) placement route. Three floats have already been completed and fully subscribed through Issues Direct, and more are likely to follow. Retail banking and insurance are also being shaken up by a rash of startups including First-e, Egg and many others. For several years people in both the retail and wholesale parts of the industry have dismissed the internet, citing limitations in PC penetration in the UK and many other supposed barriers. In the past six months, however, that attitude has changed and there is a growing realisation throughout the industry that a major change is occurring and the place where it is happening is in the hands of the financial services consumer. As a banking customer, even three years ago my choice of venue for a

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transaction was either at a bricks and mortar branch or perhaps over the phone. Now my choice of venue has soared to work PC, home PC, mobile laptop (using my wireless modem), and very shortly I will be able to do business on my mobile phone and the TV. These new media are capable of achieving the Holy Grail of retail banking the creation of a personalised relationship with each and every customer. The case for a revolution in the retail financial sector is overwhelming. The new digital media offer customers access to the kinds of financial services which used to be accessible only to banking insiders, and the costs of providing these services are a small fraction of the costs of existing transaction routes. In this new world where am I going for my financial services? Only rarely is it to my old retail bank. I can read a stock report, buy shares, arrange a loan, weigh up insurance quotes and myriad other services, and I may be doing this from as many as 20 different sources (out of hundreds that already exist). As in most business revolutions, the innovation is largely coming from new entrants, with start-ups vying with the new banking entrants, such as the converted building societies. The old retail banks have been slow to react,

The innovation is largely coming from new entrants, with start-ups vying with the new banking entrants
having the most investment in older systems. While the retail industry has gone beyond the point where there is any doubt about the revolution, there are still many in the wholesale sector who see this as a consumer-only phenomenon. This is despite the fact that e-trading is rapidly becoming a major force driving the bull market in technology stocks in the US. The power of the new internet technologies to integrate transactions throughout a value chain is already beginning to blur the lines between retail and wholesale, bank and investment house, market maker and stockbroker. Within ten years many of these institutional forms will have been wiped away or radically re-engineered to be replaced by a menagerie of new institutions including financial service application providers, e-traders, online private banking providers, marketing specialists and investment auction houses. The list is as endless as the thoughts and ideas of entrepreneurs.

The importance of innovation

If you are a part of the existing financial sector infrastructure, is it time to start looking for that retirement home in the Costa Brava or is there hope of keeping up with the e-entrepreneurs? A look at the history of technology introduction is not encouraging. With every wave of new technology the tendency of the large and established firms to react too late is so much of a truism that it may seem inevitable. Some years ago IBM saw clearly that the PC revolution was coming, but found itself unable to react quickly enough to prevent its 80% stranglehold on the early PC market being decimated by newcomers. Similarly, the British motorcycle industry, once mighty, was laid low by the cheap and reliable Japanese cycles which were initially sneered at as a joke. In both cases the existing infrastructures and entrenched ways of doing things made it difficult for the established firms to react to the new business paradigm. Examples do exist, however, of companies that have fought back in the face of change. Carmakers in Europe and the US took decades to react effectively to the Far East threat, but when they did they began to match or even outperform the newcomers. They survived by learning the methods employed in Japan and creating better ones. In many cases they found it impossible to reform their old factories and so they built new ones. They also employed new workers who were not wedded to the old divisions of labour which prevented innovation on the factory floor. The key to this fight back was the realisation that survival meant being

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prepared to cut off an arm or even a leg of the old company in order to survive. It also meant being prepared to grow a quite different appendage if necessary, and allowing this new tentacle to become part of the force which destroys the old. A decade ago, Midland Bank (now part of HSBC) took the bold step of creating First Direct, offering telephone banking to new customers irrespective of whether in doing so it would be taking away at least some existing business from the parent bank. Being prepared to take the risk of cannibalising its own business gave Midland an important foothold in one of the most profitable and growing sectors of the banking industry. Existing financial sector firms must therefore think radically if they are to have a business in ten years time. Creation of an e-business arm, analogous to a telephone banking arm, may not be enough. The best of the financial sector innovators are aiming to give their customers access to all the information that the best analyst in their firm is given right now. To do this, Bill Gates advocates the creation of a Digital Nervous System for the firm, which is not only used to integrate activities within the firm but provides the means for it to offer service quickly and cheaply direct to the customer. In doing this, concepts that have existed in banking for centuries will need to be rethought. Concepts such as settlements, operations, payment cutoffs and many others are not necessarily required if you flow every transaction through your systems in real time without a human chain of processes associated. As Bill Gates states in Business @ the Speed of Thought, banks should build a great interface for customers to see data over the internet, then use the same interface to see data internally. The new interface becomes the bank, inside and out. The chief executive of todays financial institution must be prepared to cut loose the institutions new e-business to destroy the existing business if that is

possible. If the instituions do not do it themselves then someone else will. Despite a bewildering list of emerging start ups in the industry, a number of established retail and wholesale companies are gaining ground in the internet space by creating autonomous business which can compete and innovate effectively. Businesses like Prudentials Egg, and the Halifaxs independent internet operation Greenfield are showing the way for others to follow. They are greenfield operations (ie, set up from scratch), which will cannibalise not only the competition but also their own existing businesses. The global market leaders of tomorrow will inevitably be a mix of new entrants and existing businesses, all of whom share the willingness to throw away the old ways and consider afresh how to give customers benefits they dont yet know they need.

What does the future hold?

What will the new financial services industry look like in ten years time on a global scale? There will undoubtedly be a place for bricks and mortar in retail banking if only to provide for the ongoing need for cash or e-cash outlets.

Being prepared to take the risk of cannibalising its own business gave Midland an important foothold
The pace of branch closure is likely to accelerate and the role of the general retailers as providers of cash services will grow. There will be many more financial institutions with diverse roles to play in generating virtual transactions and services. The investing and retail banking sectors are going to become increasingly blurred as e-traders look for ways to provide their growing customer base with additional services, and internet and traditional banking retailers begin to offer trading accounts and information services as a standard part of the current account package. In the markets the ability of the reg-

ulators to control the market is going to be severely tested as hot money floods from day traders in suburban homes across the world into stocks on the basis of wild speculation and rumour on timescales of minutes rather than hours or days. This power of internet traders to affect prices is already being seen as the first prosecutions are being made in the US for internet-based manipulation of prices. The volatility of markets will increase as the cost of transactions falls and the dampening effect of market makers and intermediaries is rapidly eliminated. The impact on liquidity will be a cause for concern as central banks and market makers will find it increasingly difficult to track the whole market and distinguish between volatility and major market movements. The internet is going to be the catalyst for a wide-ranging revolution in the financial sector. Digital TV and digital mobile telephones will further add to this impact. The future for the consumer is a rich mix of media and an equally rich variety of service offerings. There will be many ways to survive in the new industry but few of these will resemble the existing model. The new key issues for the financial sector will be old ones branding and customer satisfaction. The technology is offering the ability to give customers value which was impossible only three years ago. The winners in this new environment will be those that can move fast to satisfy customers and can successfully capture and maintain brand recognition. It is time for chief executives to earn their bonuses and start changing their business before someone does it for them. s John Maloney is a senior manager at KPMG Consulting, helping companies with the creation and implementation of e-commerce strategies.

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