E-Settlement: Sealing Deals Online

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December 06, 2000 (9:47 AM EST)

By Chuck Moozakis,

When the Worldwide Outdoor Product Exchange starts up next spring, it will offer a feature missing from most other electronic marketplaces -- transaction settlement.

More than 90 percent of e-marketplaces still require companies to seal deals offline, according to IDC. This inconvenience is costly as well as time-consuming. Letters of credit, for instance, can cost upwards of $1,000 for a $40,000 transaction when secured from a bank. Exchanges offering online settlement packages, however, can include letters of credit for next to nothing.

Such savings are hard for e-marketplaces to ignore. For Worldwide Outdoor Product Exchange, incorporating settlement capabilities is a no-brainer, particularly because the exchange will be geared to retailers and manufacturers that want to do business overseas, said president G. Nathan Clakley. Such capabilities eliminate the manual currency conversion, debiting, and credit authentication steps now necessary to support global trading, Clakley said.

Outdoor Products plans to use one of a new breed of financial apps from Clarus Corp. CLRS). Its settlement application service offers a variety of financing mechanisms, including direct debiting and deferred payments, that let B-to-B exchange participants clear trades through more than 75 banks worldwide.

The app hooks into a company's ERP and accounting systems, linking financial institutions to accounts payable and receivable. A "revenue manager" component creates an electronic audit trail.

But transactions on most online exchanges aren't nearly that sophisticated. "A lot of buying on e-marketplaces is like buying something on eBay," said Yankee Group analyst Lisa Williams. "If you're a lucky buyer, you're in the same position as you would be on an auction site: You still have to figure out how to get the cash to the people selling the goods."

At the same time, sellers must decide how to get those goods to buyers.

Electronic settlements let exchange participants keep tabs on the entire financial process, from product acquisition to bill payment, while supplying additional cash and credit management benefits to both buyers and sellers. "It brings the whole B-to-B process online, and that's where it needs to be," said IDC analyst Aaron McPherson.

Exchanges are exploring different ways to incorporate online settlement. Most will mix products and features from various third parties rather than stitch together their own options, McPherson said.

Outdoor Product's Clakley said he tapped Clarus' settlement apps even though the exchange itself will be based on software from Sterling Commerce and Commerce One. He cited Clarus' support of multiple currencies as a key selection criterion. Other offerings, he added, are either "too expensive or just vaporware."

BuyCastings.com, a year-old exchange serving 250 foundries, is evaluating several settlement software and service providers, said Neil Chaudhry, vice president of business development.

"There's a huge set of logistics, financing, and shipping issues for international," Chaudhry said. "We want to provide not just financial or shopping, but exchange rate forms and customs information," components addressed by vendors and banks supplying settlement. Chaudhry said he's leaning toward bank-backed packages.

Meanwhile, the market is heating up. Besides Clarus, whose hosted settlement apps will be offered at about $5,000 per month, there's PeopleSoft PSFT) -- whose MarketPay app is the choice of France's Answork exchange.

And Hewlett-Packard HWP) is offering online settlement through its B-to-B e-payment app, which debuted last week. The app will be bundled with BroadVision Inc.'s Business Commerce e-procurement and marketplace management package.

There's also TradeCard, whose settlement services are now used by about 100 businesses. Next year it will extend its partnership with MasterCard International to let customers use the credit card to buy more expensive goods on Net markets.

Many companies use MasterCard's electronic purchasing card, but it's not practical for big-ticket purchases because of the sliding fee that MasterCard tacks onto each transaction. Under the revised partnership with TradeCard, MasterCard will charge customers a flat fee instead, said Mike Klausner, TradeCard's vice president of marketing.

"Before, if you wanted to buy something for $50,000, you wouldn't do it," said Klausner, adding that the average transaction funneled through TradeCard is just $225.

Other major settlement initiatives set to launch include FinancialSettlementMatrix.com, which is backed by Wells Fargo, Chase Manhattan, and vendors i2 Technologies, Enron Broadband Services, and 1 Corp. The consortium will furnish public and private exchanges with services ranging from letters of credit to automated clearinghouse capabilities, said president Bill Reeves.