After rapid-fire online negotiations are completed and the time comes to actually pay for B2B e-commerce transactions, many deals get bogged down in credit headaches. Credit cards quickly become infeasible for most transactions at the five-figure level. What's more, there are no dominant automated standards to ensure payment is made and services are rendered at the appropriate time.
"It's the part of e-commerce that everyone has assumed has been there, but really hasn't," says John Hagerty, vice president at AMR Research. "The question comes down to ‘How do I guarantee commerce?'"
The typical answer to that question involves traditional offline terms and finance arrangements, which can slow online transactions to a snail's pace. But now the money may finally be catching up to the deals. With the right rapid credit decision technology, Hagerty believes financial services firms have a tremendous opportunity to step in, assume the credit risk and immediately pay the vendor a discounted percentage of the deal price. In essence, he says, that is how credit card networks operate, with banks and card clearinghouses taking a few percentage points from retailers--but placing funds in their merchant accounts overnight--while dealing with collection from the customer at a later date.
Dedham, Mass.-based eCredit.com is one of the leaders in the electronic credit decision field. The company licenses its technology to direct marketers (Gateway is one) and e-marketplaces, which, because of the nature of e-business, find themselves in a unique credit predicament. Because online marketplaces significantly lower the barriers to exposing a large group of sellers to a buyer (and vice versa), and also cut the time it takes to launch a relationship, the chances that any given pair of buyers and sellers will have a shared credit history is fairly low.
Of course, the "net 30" contract is a time-honored way of doing business, but Hagerty believes that's more a sign of necessity than preference. "Companies are extremely reluctant to grant credit to people they don't know," he says.
Since shopping an electronic marketplace implies a certain amount of ambivalence toward an established relationship, risk becomes an important concern. eCredit addresses this risk. Participating eCredit lenders define a risk profile (the types of credit risk and rates they are interested in servicing), and when a purchase is made through a partner site, eCredit lenders are offered the chance to finance the transaction. While not a bidding system (the banks are offered the business one at a time, in a rotating queue), eCredit's system can help a bank evaluate the deal not just on risk and return, but the financial status of the buyer and the long-term value of the asset being financed.
According to eCredit.com Director of Marketing strategy Kelly Cundiff, the system is not only important to buyers and sellers, but to the marketplaces it serves, as well. The rapid financing decision that eCredit facilitates may not be available if the buyer and seller decide to take future transactions off the marketplace in a bid to avoid the marketplace's commission fees. In some cases, the vendor may actually receive a fee from the lender for assistance in originating the loan, and in any event their receivables overhead is reduced.
More complex arrangements are possible through Escrow.com of Santa Ana, Calif., which offers brokering services for virtually any deal size and method of payment. "We're not just about holding the money," says Russell Stern, president and CEO.
Buyers, sellers and marketplaces can build a legal escrow agreement online through the company's TransactionPoint technology through either a Web interface or XML integration. Once the products, terms and price have been defined and the escrow agreement mutually confirmed, Escrow.com takes over, managing payment, shipping, inspection and all of the confirmation and clearance steps in between. The service launched in August, and the company has more than 250 affiliate and integration agreements for the new year, including Ariba.
The promise of e-commerce has a hollow ring to it if contracts and payments are passed via slow-boat channels. At the same time, there is a real need for services to buffer the risk inherent in the kinds of snap purchasing decisions B2B marketplaces hope to enable. The financial sector can solve both problems at once, but only with the right initiative and a willingness to penetrate deep into e-commerce. "It's a sleeping giant," says Hagerty.