E-FINANCE AND SMALL AND MEDIUM SIZE ENTERPRISES(SMEs)

IN DEVELOPING AND TRANSITION ECONOMIES

 

Background paper

 

UNCTAD Expert Meeting

 “Improving Competitiveness Of SMEs In Developing Countries: Role Of Finance Including E-Finance To Enhance Enterprise Development”,  Geneva, October 24, 2001

 

Charles Goldfinger and Jean-Christophe Perrin*

 

1.    Introduction. 12

2.    The rollecoaster ride of E-finance. 3

2.1. Understanding e-finance: elements of definition. 3

Internet technologies 3

E-finance scope. 3

2.2. E-finance overview.. 4

Financial markets 54

Internet banking. 7

Internet payments 89

Electronic trade finance systems 1112

Credit information and management systems 1314

2.3. E-finance in developing countries. 1517

Internet banking. 1517

E-trade finance. 1618

2.4. Lessons from e-finance experience. 1619

E-finance: it is only the beginning. 1619

Four common misconceptions 1719

Looking at the leapfrogging argument 1720

E-finance impact 1821

3.    E-finance for SMEs. 1922

3.1. E-SMEs experiences in developed countries. 1922

Public sector initiatives 1922

Private initiatives 2023

3.2. E-SMEs experience in developing countries. 2225

Overview of selected experiences 2225

E-marketplaces development 2326

Private equity mobilisation. 2428

Micro-finance initiatives 2529

4.    Prospects and challenges for e-finance for SMEs. 2630

4.1. Prospects and key success factors. 2630

Promising first steps 2630

Adapting global technology to local requirements 2630

Government support and commitment 2630

4.2. Challenges. 2731

Digital opportunity or digital divide ?. 2731

The changing role of international development organizations 2832

Evolution of global e-finance platforms 2934

Technological integration. 3034

Balanced regulatory framework. 3035

5.    References. 3236

 

1.    Introduction

 

This background paper intends to provide a conceptual framework for discussion of the potential contribution of E-finance to facilitate the development of SMEs in developing countries. The paper has the following objectives:

-          to provide the elements of definition of e-finance and identify critical vectors of its development

-          to review the global experience of e-finance and to draw preliminary conclusions from this experience

-          to analyze e-finance initiatives, aiming specifically to support SMEs developement, both in the developed in the developing countries

-           to examine prospects for greater use of e-finance to promote SMEs development and to discuss challenges arising from such a use.

 

This paper is based on an extensive review of the existing documentation on the different aspects of the subject matter. Such documentation is extremely heterogeneous and fragmentary. We are particularly missing data on the attitudes of users of e-finance services. A large share of the documentation is provided by e-finance suppliers themselves, who seek to promote their initiatives. Moreover, many of these are still in the pilot stage. It is therefore extremely difficult to obtain reliable data on their actual use and impact . Not surprisingly, the weakness of data is particularly pronounced for the e-finance in the developing countries. As a result any conclusions drawn from the review can only be tentative and indicative, rather than definite and clear-cut. This problem is aggravated by the speed and amplitude of change of e-finance itself. Views held as conventional wisdom only few months ago are now considered as deeply erroneous. Rise of some e-finance initiatives has been spectacular, but so was their fall. As the exception to the rule of tentative conclusions, we can firmly state the need for a systematic gathering and analysis of data on e-finance and e-commerce experience in developing countries.


2.    The rollecoaster ride of E-finance

2.1.    Understanding e-finance: elements of definition

E-finance can be defined simply as the use of Internet technologies in financial services. 

Internet technologies

The notion of Internet technologies encompasses several dimensions.

Telecommunication protocol

“Internet Protocol (IP)” is a set of data transmission standards that could be applied to links between computers. These standards can be used on public data networks, open to any computer,  as well on private networks, with restricted access. Public data networks are often referred to as the Internet (a network of networks), while private data networks  are called intranets. The core advantage of IP is its ability to smoothly and almost seamlessly interconnect all kinds of networks and computers, regardless of their origin and location. 

User interface

Internet protocol has been created in the late 1960s but for a long time, its use was restricted to the academic community. This situation has changed dramatically in the early 1990s, with two innovations. The first one was the HTTP protocol, allowing links not only among computers but also among elements of content distributed across various networks. The second one was the Internet browser, a graphic user interface offering any user, whether computer-literate or not, an easy retrieval and display of information available over an IP network. A common elements of two innovations was the HTML, a standard for information presentation. HTML, HTTP and the browser are the core elements of the worldwide web (WWW), the best-known form of Internet use, and which has provided the foundation for electronic commerce.

Information architecture

Creating applications, which rely on data and programs, distributed among computers within heterogeneous networks and which could be accessed from any terminal using an Internet browser, requires a new information architecture, a new approach to system and application design. Such systems needs to be flexible, open and scalable, capable of accommodating rapid change and huge variations in access and traffic.

A key ingredient of the Internet information architecture is XML, a markup language for documents containing structured information. XML was created so that richly structured documents could be used over the networks, thus complementing the HTML page description language. The new language facilitates the integration of complex data from various sources and automation of inquiries, data retrieval and transactions.

E-finance scope

E-finance is seen as synonymous with on-line broking and  banking, execution of retail securities and banking transactions using Internet technologies.  While those two segments are the most visible demonstrations of e-finance and their growth has been impressive, with tens of millions users in 20001 (see Graph 1), Internet technologies have now penetrated all aspects of financial services industry, both retail and wholesale, back-office and front office, information and transaction. In the remainder of this section, we shall provide a summary overview of their impact on the areas, which appear most relevant in the context of SMEs:

-          Financial markets

-          Internet banking

-          Internet payments

-          Electronic trade finance

-          Credit information and management


Graph 1

Growth in online US brokerage and banking accounts

 

2.2. 
E-finance overview

Financial markets

Retail markets: Securities

Impact of the Internet on financial markets has been somewhat paradoxical. E-finance is often deemed synonymous with on-line securities brokerage, which has been the fastest-growing segment of e-finance. In the US but also in Germany and in Sweden, Internet-based trades represent 20% of the total. Internet brokers such as Charles Schwab and E-trade became a major market players. Yet, the large stock exchanges, whether in the US or in Europe, have so far limited their use of  Internet technologies to price dissemination and  have been slow, if not openly reticent, to introduce Internet into their core trading and clearing & settlement systems.  This reticence has allowed the development of alternative trading systems such as Electronic Communication Networks (ECN), which are used by on-line investors to execute their orders. While ECNs have attracted a high degree of attention, their activity has been limited to stocks listed on NASDAQ and only few of them, Island for instance, were based on Internet technologies. In Europe, attempts to launch ECNs aiming at on-line investors were notably unsuccessful. For instance, Jiway, a joint venture between OM exchange and Morgan Stanley, managed to attract only few thousands orders per month from on-line brokers and its future is uncertain.

Interprofessional markets: bonds and foreign exchange

On the other hand, Internet technologies have made major inroads in the wholesale markets, for financial professionals,. Several  Internet-based interprofessional markets have been launched over the last few years and rapidly gained significant market share.

 

In the bond trading markets, on-line trading is growing at an annual growth of 51% (see Graph 2). Between 1998 and late, the number of e-bond trading platforms in Europe and the USA increased from 11 to close to 80. Most analysts agree that this number is too high and a consolidation is unavoidable.  According to Celent, "Most electronic bond systems are still struggling to find the right formula for attracting liquidity.” In 2001, five e-bond platforms closed down their operations. On the other hand,  some leaders are already emerging, in particular TradeWeb and E-speed (see Graph 3.).

 

An interesting aspect of the platform proliferation is their diversity,  both in terms of their ownership and instrument coverage. Thus, TradeWeb, launched in 1998, is a consortium owned by 16 of the world’s leading bond dealers (including CSFB, Salomon Smith Barney, Merrill Lynch, Goldman Sachs and Morgan Stanley). First on-line market to be launched remains the largest, with an average daily trading volume of USD35 billion in a variety of bonds such as Treasury, Agency,Euro-Sovereign and TBA-MBS.

On the other hand, the second largest system, eSpeed is a majority-owned (and publicly listed) subsidiary of the largest interdealer broker in US government bonds, Cantor Fitzgerald.

On-line platforms covers the whole range of fixed income instruments: US treasuries, corporates,  mortgage-backed, asset-backed, Municipal, Money Market, Repos,  European, sovereigns.

Graph 2

Online bond trading growth

source: Celent

Graph 3

Leading on-line bond trading platforms

source: Celent

 

The table 1 below shows the diversity of systems used for e-bond trading.

Table 1

E-bond trading platforms

System Type

1997

1998

1999

2000

2001

Auction

1

3

10

14

14

Cross-Matching

2

6

8

22

21

Inter-Dealer

1

0

5

10

16

Multi-Dealer

0

4

3

9

11

Single-Dealer

7

12

13

17

17

Other

0

2

1

0

0

Total

11

27

40

72

79

 

Source: The Bond Market Association

 

This diversity of approaches and instrument coverage underscores the flexibility of Internet technologies. At the same time,  this very flexibility and resulting proliferation of various platforms makes it unlikely that a single integration market will emerge. Existing fragmentation is likely to persist. In the bond markets, large-scale use of Internet has not entailed any significant changes in the market organization so far.

Foreign Exchange

Foreign currency trading has been the stronghold of global banks such as Citibank, ABN Amro, Deutsche Bank, Barclays, or JP Morgan Chase. Those banks launched in 1994 an electronic trading system, EBS, which since have captured the lion’s share of interbank spot trading.

While EBS has been instrumental in converting the FX market to the near fully electronic state, it is using a proprietary technology and its access is restricted to large banks. This created an opportunity for Internet-based initiatives, whose goal was to allow customers (companies, institutional investors) to trade  FX on line. Two such initiatives were FX Connect, launched by State Street Bank in 1996 and Currenex, funded by Royal Dutch Shell and Silicon Valley venture capitalists and which begun operations in 1999.

So far, the trading activity of these initiatives has been limited: Currenex trades about USD 1 billion per day. Nevertheless, several analysts anticipate a rapid growth Tower Group, for instance predicts that companies and institutional investors will do up to 75% of their FX trades online by the end of 2003.

These anticipations led major FX players to react by launching their own Internet-based ventures. Probably the most significant of those is Atriax, launched in 2001, whose shareholders include not only the principal global FX players but also Reuters, the main supplier of FX pricing data. Other trading ventures, such as Warren (N.J.)-based GAIN Capital, are targeting smaller companies, hedge funds, and wealthy private investors.

According to a Celent report on on-line trading, published in December 2000, “The changes taking place in the foreign exchange market and advances in Internet-based marketplace technologies have converged to create a new breed of foreign exchange trading. This new phase will forever change the foreign exchange market and will eventually lead to a truly transparent, liquid market.” Celent projects that by 2003, over half of FX trading would have moved to the Internet.

Table 2.

Major foreign exchange initiatives

Name

Date started

Customers

Key investors

CURRENEX

1999

Large companies, public agencies

Royal Dutch Shell, venture funds

FX CONNECT

1996

Institutional investors

State Street

FXALL

2001

Companies, investors

14 banks, including BofA, CSFB, UBS

ATRIAX

2001

Companies, investors

Citibank, Deutsche Bank, JP Morgan Chase, Reuters

 

Graph 4

source: Celent

Internet banking

The growth of Internet banking has been less spectacular that that of on-line broking but has nevertheless been strong and sustained. According to Jupiter Media, Internet traffic to all US banks grew 77.6 percent between July 2000 and July 2001, compared with overall World Wide Web traffic of 19.8 percent the same period. Datamonitor forecasts that between 2000 and 2003 the number of online bank accounts in Europe will grow annually by 34%.  The number of online accounts would increase from 14.3 million in 2000 to 34.2 million in 2003. The penetration of the Internet user population would rise from 9.7%  in 2000 to 13.4% in 2003.

Internet banking operations represent currently between 5% and 10% of the total transactions volume both in the USA and in Europe. This is less than the share of Internet securities trading, estimated at between 20 and 25% of the total, but more than on-line book purchasing, less than 3% of the total, or the overall on-line commerce ( less than 2% of the total). Internet bank leaders can legitimately claim several millions on-line users. In France, the number of online banking accounts is growing at 75% per year and is forecast to reach 10 million by 2003.

Internet banking has a bright future: all banks, including those who remained cautious in the past,  intend to offer access to its products and services via the Internet, which is seen as a major distribution and communication channel.

 

Graph 5

Growth of online banking in Europe

source: Datamonitor

Dramatic change of perception

However, beyond the steady growth, there has been a significant change in the underlying dynamics of Internet banking. The conventional wisdom of the late 1990s was that the Internet banking would destroy the traditional business model of retail banking and usher powerful newcomers from the outside of the banking industry. The best and the quickest way to succeed was to launch a pure play Internet banking venture,  thoroughly insulated from the traditional banking systems and approaches.

As one looks at the current (as of  late 2001) status of  Internet banking, this conventional wisdom proved to have been completely wrong. The traditional retail banking model has most certainly not been destroyed and no newcomer was able to penetrate durably and on a large scale the banking sector. Some of these newcomers, who had raised considerable funds, had to dramatically scale down their ambitions. Few of them may still succeed (for instance Egg in the UK) but in general pure-play e-bank approach appears as a long and hard slog, which will require considerable time and resources to succeed. Its promoters often have deep pockets but it less clear whether they will have the patience to persevere.

Click and mortar: dominant model

To potential new entrants, Internet banking appears today not as an open, easy to enter domain but as an almost impregnable fortress. Barriers to entry remain high because they are grounded in customer attitudes and the very nature of banking services and products. Thus the incumbents, the existing banks with a strong customer base, have a major competitive advantage over newcomers. However, to realize this advantage is not an obvious undertaking. The key is a technological sophistication, which allows a bank to understand the potential of Internet technologies and to integrate them  into a coherent business strategy.

The prevailing view today is that Internet banking can only succeed if it is thoroughly integrated within the existing banking infrastructure, which should combine click and mortar. Under this view, Internet is considered as another distribution channel, complementing physical branches, phone banking and ATM networks.

The dominance of the click and mortar model can be explained by its success on the ground. Two undisputed champions of Internet banking, Wells Fargo in the United States and Nordea in Scandinavia have adopted this model from the very beginning of their foray. Wells Fargo has the highest absolute number of online customers, more than 3 millions in April 2001 (of the total of 24 million). Nordea, on the other hand, can claim the highest percentage of on-line customers, which at 2.3 million represent over 20% of the total.

Both banks claim substantial direct and indirect benefits from Internet banking.  Nordea increased a number of its transactions in Finland by a third, while cutting 5 000 jobs, eliminating half of its branches (from 800 to 400).

Two banks approach share common elements in their strategy.

-          Both are leaders in their traditional markets and thus can capitalise on a sizeable customer base. Furthermore, this customer base is technologically sophisticated.  California and Scandinavia have extremely high rates of Internet use.

-          Both have tightly integrated Internet in their operations and their existing infrastructure. Wells Fargo wants to “virtualize the bank”, offering through Internet all products and services found in other channels

-          Both are technologically advanced  and started early in Internet deployment. Wells Fargo started online services in 1989 and was the first major US bank to launch an Internet service in 1995

While the competitive advantage of a large and sophisticated customer base and of an early start are not easy to replicate by other banks, the tight integration approach can become part and parcel of the Internet strategy of a other financial institutions.

 

Internet payments

Progress in the area of payment mechanisms over the Internet has been far from harmonious. Most attempts to introduce innovate mechanisms have failed, as did endeavors to introduce new standards. Yet, these initial setbacks have not discouraged innovations and new entrants. More importantly, the existing core payment networks, in particular SWIFT, have begun to formulate and implement a strategy of migration to the Internet.

Retail payments: Road kills and hard slogs

A close relationship between e-commerce and e-payment systems has been assumed as a matter of course. Many specialists believed that there could be not thriving e-commerce without robust, secure and standardized e-payment infrastructure and saw e-payments as a killer application.

Yet, the actual e-payment experience proved very different. While electronic commerce, in both business-to-consumer (B2C) and business-to-business (B2B) segments, has been growing more rapidly than the initial market forecasts, the development of Internet-based payment systems has been disappointing. Despite considerable media coverage and excitement among the digerati, practically all the systems have run into difficulties, sometimes fatally. Digicash, a highly visible promoter of e-cash, which moved from Amsterdam to the promised land of Silicon Valley in April 1997, acquired substantial funding and prestigious investors was liquidated in September 1998. The early market leader, Cybercash, is struggling, has changed its strategy and top management several times and in early 2001 delisted itself from NASDAQ. In France, Cyber-comm, backed by all the French banks and which sought to combine Internet and smart card technologies, was wound down in early 2001. Micro-payments, which was considered in the mid 1990s as a strong candidate for a killer application, a preferred mechanism for transactions for intangible goods (information, on-line entertainment…), has so far failed to take off.

 

Broad standardization initiatives have made little progress. JEPI (Joint Electronic Payment Initiative), despite strong support from CommerceNet and WorldWideWeb, was abandoned due to the lack of interest of business participants in this initiative. Another broad-based initiative, SET (Secure Electronic Transactions) supported by the credit card giants, Visa and MasterCard, as well as such IT heavyweights as IBM and Microsoft, and which sought to combine standard Internet encryption methods (SSL) and Public Key Infrastructure (PKI), had to face significant problems of market acceptance by merchants, end customers and banks themselves. So, far there has been no universal or speedy adoption of the standard and Visa began to de-emphasize in favor of an alternative approach, 3D.

Despite numerous attempts aimed at offering innovative alternatives, credit and debit cards and their existing payment network and procedures, are currently the main payment instrument for B2C transactions, used in over 95% of purchases.

Card-based payments are not a panacea for e-commerce transactions. The current commission and interchange payments structure is deemed quite expensive by most e-tailers. Even the supposed beneficiaries of this situation, banks and payment networks, do not particularly like it, to the extent that any scheme where card is not physically present, increases the risk of fraud and conflicts. Thus, the card networks point out that Internet transactions represent a disproportionate percentage of charge-backs and fraud. In any case, card-based payments are not particularly well suited for either small-value (micropayments) or large-value (B2B) payments.

 

The main problem with the first generation of Internet payment initiatives is that they have not focused enough on their customers’ behavior and attitude. As a result, most of these systems appeared as solutions in search of a problem, combining considerable technological sophistication with a degree of marketing and business naivety. They suffer from technological overkill. New solutions also fell into the circularity trap: merchants will not offer e-payment schemes if few consumers use it, and consumers will not use e-payment if few merchants accept it.

 

Yet, despite the dismal track record of first wave of B2C e-payment schemes, the development of Internet-based payment has not slowed down but actually broadened in scope. B2C payments continue to attract new entrants, be they cyber-entrepreneurs, backed by venture capital or well-known IT providers such as Microsoft or Yahoo. The range of proposed solutions is growing wider and currently include:

-          Virtual points - providers: e-centives.com, mypoints.com

-          Person-to-person payments: PayPal, BillPoint, PayDirect, eCount.com,

-          Virtual escrow: i-Escrow Inc., escrow.com, tradesafe.com

-          Digital wallets: Yahoo Inc., Microsoft (Passport)

-          Virtual credit cards: American Express, AIB, NextCard

-          Electronic bill-payment and presentment: e-route, billserv.com, CheckFree (Transpoint)

 

Among new solutions, Paypal is of particular interest, to the extent that it uses Internet technologies to respond to a emerging market requirement of a person-to-person payment. This requirement arises for instance in the context of on-line auctions, where buyers and sellers need a sure, secure and cost-effective payment mechanism to settle their transaction. Thus, Paypal benefited from a close association with the leading cyber-auction operator, E-Bay (25% of E-Bay payments go through Paypal). A system such as Paypal can capitalize on viral marketing, as each user of Paypal encourages his friends and business acquaintances to open an account.

Paypal has been spectacularly successful. Created in early 2000, it claimed over 5 million users by early 2001 and more than 10 million in September with some 130,000 transactions, valued at USD 10 million, per day. The payment architecture of Paypal combines innovation (use of e-mail for payment notification and confirmation, account management), with integration into existing payment systems (Paypal relies on traditional banking accounts and card infrastructure for actual fund transfer). Paypal’s income is derived primarily from the float on accounts it manages, complemented by fees charged to purchasing customers and service providers. This business model allows Paypal to undercut the traditional merchant acquirers, particularly for the small businesses. Paypal has expanded its operations to 35 countries and expects to turn cash-flow positive before the end of 2001.

Wholesale banking initiatives: Identrus and SWIFTNet

However, the most significant aspect of the current dynamics of the e-finance is the clear change of attitude of the banking industry, from reactive to proactive. Several initiatives aiming at introducing Internet technologies into the core payment infrastructure were launched in the last two years. The two most significant are Identrus and SWIFTNet.

 

Identrus, is a US-based organization created in early 1999 and owned by 42 global financial institutions, which act as Identrus Certificate Authorities for corporate customers in more than 133 countries. Identrus seeks to create a global trust infrastructure, based on public key infrastructure (PKI), enabling business-to-business commerce among all companies, which are using this infrastructure. Identrus network will link in a structured and hierarchical way various security and certification systems created by its members. Identrus itself will operate a root certificate authority (root CA), an entity at the pinnacle of the electronic identity hierarchy. Identrus' legal and technical infrastructure is based on a set of uniform system rules, contracts and business practices for comprehensive trust and risk management.

In December 2000, four major banks, ABN AMRO Bank, Bank of America, Deutsche Bank and HypoVereinsbank, went live with Identrus and deployed trust-enabled B2B applications.

Graph 6.

Identrus scheme

From the standpoint of the payment infrastructure, the December 2000 decision of SWIFT to migrate to a new IP-based network, SWIFTNET, represents a major milestone. S.W.I.F.T. network is a core element of the global payment infrastructure. In Europe, S.W.I.F.T. has co-operated with central banks to support their real time gross settlement systems, serving as a common messaging service for the majority of high value payment systems in the Euro zone. SWIFT provides the infrastructure for TARGET system. Its role in market infrastructures is also expanding, as it is becoming messaging hub for clearing and settlement systems in securities (Global Straight Through Processing) and foreign exchange systems (CLS bank).

SWIFTNET will combine IP standards with highly secure, high performance network, owned and operated by SWIFT, in close co-operation with a specialized telecom operator, Global Crossing. The principal SWIFT application, FIN, will migrate to SWIFTNET before the end of 2004. It is anticipated that SWIFTNET will offer a wide range of other services, including information, security, payments, etc. The fully range of e-based services to be delivered over SWIFTNet has yet to be fully announced. However, in September 2000, Identrus in has announced a strategic alliance with SWIFT.  Introduction of IP standards will allow SWIFT members and users to have a single interfaces to various infrastructures and services.

SWIFTNET’s ambition is clearly to become the infrastructure of choice for new generation of Internet technologies-based payment systems and related services.

From closed to open architecture

Payment systems, particularly the wholesale systems used for transactions among financial institutions  have been moving to an electronic infrastructure since the beginning of the 1970s. The electronic payment systems and networks were based on proprietary protocols and dedicated telecommunication infrastructure.

 

The Internet radically changes this situation. It is an open network infrastructure, involving direct non-hierarchical links between the buyer, the vendor, any intermediaries between them and the technology providers. The Internet model dissociates the network from the physical infrastructure. It allows interconnection between heterogeneous networks and provides ubiquitous common standards, whose development is no longer controlled by a single entity or even a group of entities. Furthermore, with encryption technology, digital certificates and smart cards, it is now possible to provide security in a modular and flexible fashion. Thus a highly secure environment can be created on the public networks.

Thus introduction of Internet entails a radical value shift.

 

Graph 7

Internet payments: Radical value shift

 

Traditional payment service providers

 

 

Internet

Closed network

Private infrastructure

Mono-industry

 

Open network

Public infrastructure

Cross-industry

               Source: GEF.

This view is not necessarily universally shared. For many payment systems, use of IP standards and protocols does not entail a radical change in their business practices and their governance. It remains to be seen whether the full advantages of Internet architecture can be gained without fully accepting the open network model.

 

Electronic trade finance systems

Designed to facilitates international trade, the cross-border movement of goods and services,  trade finance systems rely on complex flows of complicated documents, traditionally paper-based, which makes it slow, costly and error-prone. The United Nations estimates that US$460 billion is spent annually on processing the paperwork associated with international trade.

For several years, various participants in international trade have sought to simplify the flows and migrate from paper-based to electronic documents. These were laborious and often frustrating efforts due to the difficulties of defining common standards.

The advent of Internet technologies has a potential to significantly accelerate the evolution toward fully electronic trade finance. Its impact can be seen both in already established   and recently created trade facilitation services.

Bolero

Bolero International Ltd. was created in April 1998 as a joint venture of S.W.I.F.T and the Through Transport Club (TT Club), representing the world logistics and transport industry (with some 10,000 members). In Fall 2000, Bolero obtained venture capital funding of USD 50 million, led by Apax Partners.

Bolero is intended as a platform for the secure electronic transfer of commercial trade documentation and data worldwide via the Internet. The platform went live in October in September 1999, using SWIFT messaging service and was renamed bolero.net.  

Bolero acts as a neutral third party to ensure highly secure electronic delivery and receipt of the information along the entire trade chain from front-end order processing and management, through to back-office trade document exchange and payment. In addition to a common technology platform, bolero.net provides an unified legal structure that binds together all parties involved in international trade (importers, exporters, shipping agents, freight forwarders, customs and international banks). After extensive consultation with the industry, Bolero  issued a Rule Book, which allows any dispute to be resolved in the same way it would be with paper documentation. Signing up to the Rule Book is a pre-condition to using Bolero. Combining technological platform and a legal framework is its distinguishing characteristic.

Customers, such as Sanwa Bank or Otto Versand, have estimated that through bolero.net processing time for trade documents could be cut from 15 days to 2 days and overall costs reduced by 30 to 50%.

 

At present, Bolero operates over the SWIFT network. It is planned as one of the first services to migrate to SWIFTNet.  In order to demonstrate its commitment to Internet technologies and their tangible benefits, Bolero and its users have developed BoleroXML, a set of specifications which describe the standard structure and contents of the electronic

version of a common trade document such as Commercial Invoice, Bill of Lading and

Packing List.

Bolero is committed to providing an open solution that runs over the Internet and made available interface specifications. So far, over 30 companies, including Sun Microsystems AMS, Mercator, Neon, China Systems, Midas Kapiti and Surecomp, have become bolero.net partners. Major customers themselves can develop their own interfaces to connect to the Bolero System.

TradeCard

TradeCard is an example of an Internet-based start-up. It was launched in 1997, with a venture capital funding  of Warburg Pincus (total investment reached USD 70 millions through September 2001), and went live on the web in 2000. TradeCard focuses on what is often considered a critical bottleneck in international trade transactions: lack of inexpensive and efficient system for crossborder trade payment settlement. In March 2001, TradeCard introduced an automated, collaborative, global trade settlement platform which claims to streamline and automate the processing of virtually any payment transaction, whether it is domestic or cross-border, guaranteed or open account, large or small. Headquartered in New York, with offices in San Francisco, Seattle, Chicago, Hong Kong, Taipei, Seoul and London, TradeCard processed $10 million in trades from November 1999 through January 2001. The firm’s monthly trade volumes are increasing by 50–100%. Between January and September 2001, the number of clients increased from 130 to 600 companies. TradeCard works with a dozen international banks and has entered into strategic partnerships with Coface as payment insurer, Marsh, the largest broker of cargo insurance, MasterCard and Thomas Cooks, as well as with Cap Gemini Ernst & Young to provide financial supply chain tools to CGE&Y clients and prospects.

Other companies active in facilitating crossborder trade payments via the Internet include Actrade, FinancialOxygen, Qiva, Clear-Cross and Xign Corp.

ITFex and LTPTrade

These two companies, one based in New York (ITFex), one in London (LTPTrade), are B2B exchanges, created in 2000, seeking to create an Internet-based secondary market for international trade finance instruments such as forfaiting bills, bankers acceptances or shipping guarantees. 

At present, this is an extremely fragmented and illiquid market, with an annual trading volume estimated at US 75 Billion in 2000 (less than 3% of  relevant outstanding assets). Celent Communication estimates that Internet technologies will stimulate the emergence of an electronic trade finance instruments markets, whose value by 2005 should reach over USD 700 billion or 20% of the total. At the same time, Celent recognizes that the growth of electronic trade finance market will be slower than that of e-markets for other instruments such as bonds or equities. This is due not only to the disparate nature of trade finance instruments (even if the on-going standardization efforts will reduce this disparity) but also to the lack of established automated trading mechanisms, such as matching, and of pricing benchmarks.

It is too early to judge the prospects of IFTex and LTPTrade. Their development plans were adversely affected by the general slowdown in the B2B commerce. Both exchanges are now operational. In September 2001, LTPTrade has launched the  new release of its trade finance dealing and information platform. Key features of the new platform include improved offering and dealing functionality, as well as expanded research and information resources. That month, there were 629 members signed up to the LTPtrade.net platform from 125 financial institutions in 29 different countries. No data are available on the actual trading volume.

Headquartered in New York, with offices in Chicago and Miami, and representatives in Brazil, Peru and Argentina, ITFex had, as of August 2001, about 400 registered users, most of which are commercial banks, importers and exporters. The completed deal volume was estimated at USD 20 million.

 

Credit information and management systems

Risk management is a critical dimension of any financial system. In order to safely execute their credit or payment transactions, financial intermediaries need to know the counterparties to these transactions and their credit and payment track records. This need is particularly important for SMEs, whose development is often hampered by a perceived lack of creditworthiness, due to the absence of reliable data and information.

While banks have their own risk management and credit assessment units, they also rely on specialized services, which provide credit information and assessment data, as well as ways and means, such as credit risk insurance, to reduce the credit and transaction risks. Among best known of these services are Dun & Bradstreet, Equifax and Coface.

Internet makes the credit risk information and management tasks simultaneously easier and more complex. By reducing the cost of information and standardizing data formats, it makes it easier to gather and disseminate the credit information. It also facilitates integration of information and transaction. At the same time, Internet expands considerably the number of potential counterparties and the range of transactions. Businesses active online are also faced with thousands of new buyers and sellers that they know nothing about. And they need to make their creditworthiness assessment quickly and keep it current.

While the on-line credit information gap is glaring,  it is not easy to fill. Required skills are highly specialized and cannot be acquired overnight. Prior experience and accumulated historical data are essential. Barriers to entry are high. Not surprisingly, this segment continues to be dominated by the existing suppliers, each of which has adopted an aggressive Internet strategy. These strategies have common elements, with all suppliers making their existing data available via the Internet, but they also show significant differences. Also, alternative approaches to credit information assessment, using innovative technologies, are emerging. However, those approaches are been adopted and are  being deployed by the existing suppliers rather by new entrants.

Dun and Bradstreet

Dun & Bradstreet (D&B) is probably the oldest existing provider of  business information (since 1841). The D&B D-U-N-S Number, the Data Universal Numbering System, has become the standard for keeping track of millions of businesses worldwide. It provides unique identifiers of single business entities, while linking corporate family structures together. D&B links the D&B D-U-N-S Numbers of parents, subsidiaries, headquarters and branches on more than 62 million corporate family members in 120 countries. Used by the world's most influential standards-setting organizations, it is recognized, recommended and/or required by more than 50 global, industry and trade associations, including the United Nations, the U.S. Federal Government, the Australian Government and the European Commission.

 

D&B's has developed and is implementing a comprehensive Internet strategy. In 2000, its Web-related revenues were USD 240 million, twice that of the 1999 and some 17% of the total revenues. The stated objective is for the Interned-based services to generate the majority of current revenues by 2002. To achieve this objective,  D&B announced in May 2001, the D&B Global Access Toolkit, which significantly expands D&B's online global data delivery capabilities.

D&B also seeks to become an important player in B2B e-commerce. To achieve this goal, the company entered into strategic partnerships with Oracle, Siebel Systems, SAP and other B2B players to integrate D&B products into their offerings.

For instance, in August 2001, VeriSign, Inc., the leading provider of Internet trust services and domain name registration services, and Dun & Bradstreet announced an agreement, under which e-businesses applying for the VeriSign’s Shared Hosting Security service will automatically be authenticated by Dun & Bradstreet using the company's global database.

In May 2001, Dun & Bradstreet and Intuit Inc., a leader in small business financial management solutions, announced a strategic initiative to offer small businesses a new suite of Web-based D&B business services. The agreement will bring D&B's information and customized technology solutions to a new and virtually untapped small business market and will provide QuickBooks® small business customers with information and tools that can help them make better, more informed business decisions.

 

Beyond strategic partnerships, D&B has also invested directly in leading-edge Internet companies, developing technologies and products of potential interest to D&B.  One such a company is Open Ratings. Based in Boston, Open Ratings offers a comprehensive supplier performance management solution for the Global 3000 buyers, Buyer Insight™ Enterprise.  The solution, a co-developed by Open Ratings and Dun & Bradstreet, equips buyers with sophisticated patent-pending technology, developed by Pattie Maes, MIT Professor, and her colleagues, to provide predictive performance ratings and business information about over 15 million suppliers throughout North America. Buyer Insight Enterprise helps buyers more effectively select, evaluate and monitor suppliers by going beyond extrapolative decisions from historical performance to truly forecasting future performance. To do so, Open Ratings technology uses various information sources including quantitative transaction and contract compliance data, qualitative buyer feedback, and other third-party sources of operating and financial information including business and operating history information from D&B's global database.

Equifax

Building on its core business of credit reporting, Equifax has developed a range of diversified services including transaction processing, direct marketing, customer relationship management and e-commerce security solutions. Enabling and securing global commerce is the principal objective of the company. In July 2001, Equifax spun off its Payment Services into a separate company, Certegy.

The principal asset of Equifax is the world’s largest repository of consumer credit information and unparalleled consumer lifestyle and demographic databases. Information Services’ operations span the United States, Canada, the United Kingdom, Spain, Portugal, Italy, Chile, Brazil, Argentina, Peru, Costa Rica and El Salvador. Its credit reporting services offer data on more than 400 million consumers and businesses.

In January 2001, Equifax launched a new service – The Small Business Financial Exchange. Managed by Equifax, the Exchange brings together initially 15 of the largest U.S. small-business lenders – such as Bank of America, Bank One and Wells Fargo – to report and maintain comprehensive trade data on small businesses. This is the first and only source of aggregated risk and exposure information on the estimated 25 million small businesses in the United States. The Exchange will enhance lenders’ ability to make small business credit decisions and facilitate financing needs for this important segment of our economy. The Small Business Financial Exchange went live in August 2001.

 

Equifax Internet strategy is structured around three major axes:

-          To facilitate direct and secure access of consumers to information about them and to preserve the privacy of this information in the online world

-          To develop Equifax Secure products, which identify and authenticate participants in online transactions, in order to make the Internet safe and secure for commercial transactions. Customers of Equifax Secure include Checkfree and SunTrust. Strategic alliances were formed with VeriSign, Paymentech and PricewaterhouseCoopers.

-          Equifax ePORT initiative capitalizes on the benefits of Internet technology to lower costs, speed delivery and increase product penetration for the existing credit information services. Since Equifax ePORT was introduced in the second quarter of 2000, active users have grown to more than 24,000 customers.

In 2000, Equifax provided over the Internet more than 100,000 consumer credit profiles and more  than 190,000 consumer authentications per month.

Coface and @rating

The Coface Group, headquartered in Paris, is the world leader in export credit insurance. With some 70,000 clients worldwide, Coface operates in 93 countries on five continents. Coface offers an integrated range of guarantees, including credit insurance, guarantee insurance, exchange risk cover and fidelity insurance, to its client companies throughout their international expansion.  It also provides receivables management and credit information services.  In order to allow its clients to analyse and monitor the financial position of their trading partners throughout the world, Coface has developed a Common Risk System, an on-line database containing information on 35 million companies worldwide.

 

In December 1999, Coface launched a Web-based rating system, @rating, allowing companies to insure trade debt throughout the world.  The @rating system uses the data from the Common Risk System to develop a simple and easily accessible credit rating system, which allows any company to:

-          Check a trading partner's reliability online

-          Apply for an @rating Quality Label online

-          Protect transactions online

-          Check payment experience online

 

@rating provides a method of assessing trade debts of less than 6 months duration, and between 1,000 – 100,000 Euros, (representing the range of most e-commerce transactions). It represents a simple means for the company's suppliers to protect themselves from the risk of default and to set customer credit limits, based on constantly updated information. For the first time, ratings are generated by an agency with over 50 years experience in actually insuring the risks it is rating. Groupe Coface and its partners in Credit Alliance will be ready to back the rating with a guarantee of payment, using credit insurance policies.

 

To complete its risk monitoring capability, Coface expanded @ratings to cover country risks (data on 140 countries are provided and regularly updated).

All Coface group products now incorporate the @rating Solution. Since its launch, some 350 partners (banks, factors, electronic marketplaces, Chambers of Commerce, etc.) have integrated the @rating Solution in their service offering.

2.3.  E-finance in developing countries

Internet is a global phenomenon and so is e-finance. Its deployment is not limited to developed countries. World Bank has carried out in 2000 and 2001 a number of studies on e-finance in emerging markets. Admittedly, these studies were based on fragmentary and incomplete data, nevertheless they clearly demonstrate the dynamism of e-finance in emerging countries, with countries such as Brazil, South Korea or India, experiencing strong growth in e-banking and/or e-broking. At the same time, there are however significant different not only among regions but also among countries within the same region.  It is interesting to note that to a large extent, while initial impulse has been often provided by foreign institution (Deutsche Bank launched the very first Internet banking project in Latin America in 1996 and Citibank has developed a  special "e-toolkit" across all its branches worldwide.), local financial institutions have now successfully taken the relay. In many cases, e-finance initiatives were launched by entrepreneurs, who have acquired financial and./or technology experience in developed countries.

 

Dynamics of e-finance in emerging economies, while not dissimilar are clearly not identical to that in the developed countries. It appears by and large to be driven by, on the one hand, Internet banking, and, on other hand trade finance.  Activity in financial markets is very limited, although in some countries such as Korea or Mexico, on-line brokerage services appear well-developed. On the other hand, some e-financial services appear specifically tailored to the emerging countries. This is the case of micro-finance, which will be discussed in the chapter on SMEs’ specific services.

 

In the remaining of this chapter, we shall take a quick look at selected activities in Internet banking and trade finance in the emerging economies.

 

Internet banking

According to World Bank survey, the average online banking penetration for emerging countries by the end of 1999 was close in 5%. For some countries, the penetration is considerably higher and growing rapidly.

 

In Brazil, for instance, about 8% of the banking customers use online banking and according to the Yankee Group, this percentage should reach 15% by the end of 2001.

According to July 2001 report by Pyramid Research, Brazilian banks have been investing heavily in e-banking services and rapidly developing their online client base. Today, the majority of the top Brazilian banks offer advanced e-banking services, and many are also offering online banking via mobile phones.

Banco do Brasil, invested nearly $ 28 million in 2000, and expects to double this investment in 2001. The results are particularly encouraging: the increase in online transactions reached 315% in 2000 from 22.4 million to 92.8 million. In March 2001, Banco do Brasil had 12.8 million clients, 2.6 millions of them using e-banking. All the other large Brazilian banks also experience the growth trend. Bradesco, Brazil's largest private bank, adds between 4000 and 5000 clients per day to its e-banking service and with 3 million on-line clients in August 2001 (27% of the total) is the world’s third largest Internet bank.

 

Internet banking also met with considerable success in Korea, where the number of online users have increased from 120 000 in 1999, to 4 million in 2000 and 7.5 million in June 2001. Between June 2000 and June 2001, the number of Internet banking transactions surged 600% to reach 75 million. Korea is also a global leader in on-line brokerage (with a penetration higher than in the United States) and in mobile banking.

 

In India, over 50 banks offer on-line services. The largest private bank, ICICI, has multiplied by four its online banking users, who represent over 15% of the total.

 

Internet banking is also developing rapidly in South-East Asia, in Thailand, Malaysia and Singapore, and to a lesser extent in Philippines, hampered by the its weak telecommunication infrastructure.

 

E-trade finance

Emerging markets are expected to continue to be the main growth engine for the trade finance sector. Last year, trade finance flows between the U.S. and Western Europe diminished. But by contrast, in Eastern Europe, Latin America and Asia, activity grew by 15%.

 

The total volume of letters of credit received by all Latin American exporters in 1999 should reach $ 87bn, in addition to the $ 29bn in documentary collections. Of this total, only $30bn will come from Latin America's trade with the rest of the world (USA included). Intra-regional trade is often made up of mid-large size companies who lack open-account trade tools and rely on old-fashioned Letters of Credit.

This creates an opportunity for financial institutions seeking to offer electronic trade finance services.  Banks such as Bradesco in Brazil or Banamex in Mexico seek to develop on-line wire transfers, on-line initiation of letters of credit, on-line inquiry status or on-line purchase for exchange.  65% of Mexican companies surveyed use at least one of the above mentioned products, and more than half of the Mercosur companies turn to high tech trade finance tools. Argentina leads Mercosur in the proportion of companies using technology products (58%), but Brazilian companies use them more extensively than in other Mercosur countries - 2.8 versus 1.7 products on average per company

However, local banks, as large as they may be in their country, suffer from their lack of global coverage. This explains their interest in global initiatives such as as TradeCard and Bolero. Global banks such as Citibank, JP Morgan Chase or ABN Amro are of course very active in this area and offer not only competitive pricing on trade financing products but also access to their networks and platforms. And when they cannot beat their local competitors, they co-opt them. In July 2001, Citibank bought Banamex for USD 12.5 billion.

 

In other parts of the world, e-finance trade initiatives are still in early stages. In India for instance, Exim Bank, Germany-based West LB and IFC (World Bank affiliate) have created in March 2001 a joint venture, Global Trade Finance Pvt Ltd, to offer factoring and forfaiting services to Indian exporters. West LB has a 40-per cent stake in the venture, while Exim Bank has 35 per cent and IFC 25 per cent. In addition, the company has foreign currency lines of credit from both West LB and IFC, as well as a rupee line of credit from Exim Bank. GTF was set to begin operations in Fall 2001. One of its objective was to allow exporters to initiate their transaction on-line.

A more ambitious project, Global Trade Finance Network (GTFNet) seeks to facilitate the finance of trade debt receivables generated, primarily, from emerging markets, their acquisition and distribution worldwide. It is defined as a cross-territory extranet-based "business to business" network, with headquarters in  Singapore and hubs in the UK, Middle East and the Americas. Founded by Tara Kimbrell Cole and sponsored by  prestigious board, chaired by ex-CEO of Standard Chartered Bank, GTFNet is not as yet operational.

2.4.    Lessons from e-finance experience

E-finance: it is only the beginning

The above overview of e-finance, while far from comprehensive, clearly demonstrates the breadth and the depth of e-finance development. The dot-com crash and the difficulties of B2B marketplace development over the last two years may have changed the public perception of Internet (and market valuation of many Internet companies) and slowed somewhat the speed of its deployment but it has not changed the fundamental momentum of e-finance. In a few years, there will be no distinction between finance and e-finance, all financial technology, from user interface through middleware to the core applications and networks will be Internet-enabled and Internet-based.

 

Yet, the process of evolution toward e-finance is still in its early stage. For one thing, Internet technology will continue to evolve toward larger bandwidth, fixed-wireless convergence and terminal independence.

Four common misconceptions

Yet, beyond the technology, it is essential to understand the business dynamics of e-finance. On this score, it appear to us that there are four common misconceptions about e-finance, which help to explain some serious strategic errors, committed by promoters of e-finance.

Cost reduction potential

There is no doubt that Internet has a potential to reduce financial transaction costs. However, the cost reduction potential has often been exaggerated or misinterpreted. Cost dynamics of e-finance are quite complex. For one thing, in order to achieve the full potential of cost potential, it is important a create a fully automated system, capable of straight-through processing. Such system may require heavy investments in computing power, network building and programming capability. Furthermore, the costs of migration from legacy to Internet-based architecture are often very high. For that reason, many e-finance enthusiasts favored a pure play model, creating an Internet bank from the scratch. The underlying assumption was that the newcomers had a crucial cost advantage. Unfortunately, this assumption proved false. Whatever cost advantage newcomers may have achieved via technology, it was decisively undermined by the need for heavy client acquisition spending. Furthermore, while technology cost savings were often hypothetical, marketing costs were actual expenditures, amounting to between USD 150 and 300 per actual customer. While such costs could be justified in on-line broking (and as a result some newcomers managed to gain sizeable market share), this was not the case for Internet banking.  Internet did not invalidate the basic marketing rule that the cost of selling a new product to an existing customer is 10% of the cost of selling to new customer. Internet costs are like an iceberg, large part of which remains invisible but still there.

Ease of implementation

A related fallacy was one of the ease of implementation. While it is cheap and quick to create a basic Web site, to design and implement a fully functional, industrial-strength application capable of accommodating in a secure manner a large number of complex transactions and huge variation in volume is a complex and protracted undertaking. In addition, there is limited prior experience to draw on and the necessary skills and know-how are still scarce. Thus, potential for specification creep and cost overrun is as large in Internet as it is in the traditional IT environment. This was vividly demonstrated by Vontobel bank in Switzerland, which in Spring 2001 announced a loss exceeding 120 million euros, due entirely to an overly ambitious Internet banking project .

Revolutionary impact

Until 2000 it was commonly thought that e-business would revolutionize the financial industry and destroy the incumbent “dinosaurs.” Yet, the evolution of e-finance clearly demonstrates (with a possible exception of on-line brokerage), the advantages of established financial services suppliers, be they banking, transaction processing or information, as long they have the capacity to evolve and to embrace the new approaches and technologies. The dominant business model today is that of a “click and mortar” and the best chance for an innovation to succeed is to be adopted by leading players.  This does not mean that the financial services will not change, as they have been doing for the last thirty years. Rather that the change will be more gradual and cannot take place outside established systems and structures.

Disintermediation

Contrary to some high-profile pronouncements, the Internet economy is not frictionless. Actually, with a dramatic increase in the number of transactions and expansion of the universe of potential relationships, the level and intensity of friction is likely to increase. The abundance of information, opportunities and relationships increases the need for new intermediation structures and mechanisms. The challenge to the financial institutions and  financial services providers is not the disintermediation but the changing nature of intermediation. Thus, the emergence of e-finance has stimulated the emergence of the new categories of intermediaries such as financial portals, transaction aggregators, financial applications services providers, etc.

Looking at the leapfrogging argument

 

The authors of the World Bank paper on e-finance raise the possibility of leapfrogging, affording countries with underdeveloped financial systems possibility to jump ahead. 

The arguments developed above suggest that while possibilities for leapfrogging exist, it is not certain they are widespread. Countries with weak financial systems also often suffer from the absence of technological infrastructure and associated skills, which make creation of a vibrant e-finance system quite arduous. To build a cyberfinance offer from scratch requires the mobilization of high-level skills in the financial, telecom and IT sectors, which many developing countries don't have and can not develop without strong support. Examples of countries like Korea or Estonia, which have attained the sophistication, comparable to that of most advanced OECD countries are not necessarily replicable.  Furthermore, we have seen that even in more advanced emerging economies, there is a dearth of projects in critical systems and applications such as trade financial hubs or financial markets. Nevertheless, it is true that e-finance offers for the opportunities for quicker deployment and better coverage than the traditional approaches to financial systems development.

 

E-finance impact

While dynamics of e-finance do not entail a sudden upheaval, they will lead to profound and durable transformation of financial services.  They will broaden the access, not only in terms of a number of potential users but also in time and in space: from anywhere on the planet, 24 hours a day, seven days a week. E-finance will enhance the information and technology content of financial services and thus further blur boundaries between finance and technology, information and transaction, as well as between financial institutions and technology providers. This evolution raises substantial regulatory issues.


3.    E-finance for SMEs

3.1.  E-SMEs experiences in developed countries

Public sector initiatives

Global Marketplace for SMEs

The wide availability and low costs of Internet made it appear as an ideal vector for the promotion of SMEs, in particular by reducing their lack of access to markets and market information.

It is therefore not surprising that one of the priority pilot projects within the G-8 Information Society program launched in 1995 was a global marketplace for SMEs. This was one of very first public initiative in international e-commerce. The project was structured around three major themes:

Theme 1: Global Information Network for SMEs
Theme 2: SME Requirements - Legal, Institutional and Technical
Theme 3: International Testbeds for Electronic Commerce

Despite strong support from G8 governments and the European Commission, which provided substantial funding, the results of the project were rather disappointing, particularly concerning the launch and the follow-up of international testbeds.

 

One explanation for the difficulties was the coexistence of global, regional and national initiatives. Nearly all governments in OECD countries have tried to promote their SMEs, by sponsoring specific e-commerce and e-finance platforms. These efforts have not always been well-coordinated. Furthermore, the respective role of public authorities and private sectors bodies were not always well-defined. Should the e-commerce support be channeled via by existing trade associations such as chambers of commerce or via new bodies dedicated to e-commerce. Furthermore, there were substantive issues concerning definition of SMEs and the distinctions between B2B and B2C domains for instance.

 

At present, public authorities efforts to support e-commerce for SMEs  appear to focus on two type of services:

-          SME-specific information networks

-          Investor networks

E-commerce information networks

Over the last few years, several organizations were created both within national, regional and global framework to promote e-commerce.  These organizations include:

-          CommerceNet, which is US based  but maintains global partnerships and affiliation in countries such as Finland, Spain, Italy, Netherland, Japan and Korea.

-          Electronic Commerce Association in the UK

-          Electronic Commerce Europe

-          The U.S. Business Advisor 

-          French Association for Electronic Commerce (AFCEE)

-          Japanese Electronic Commerce Association

-          ….

These organizations are quite heterogeneous, they differ considerably in their objectives, governance, funding and results. Some of them specifically address requirements of SMEs, others do not. At present, there is no overall coordination between those various organisations. Neither the Global Information Network for SMEs nor the European Observatory for SMEs, created in 1992 appear able to create a network of network of e-commerce information for SMEs.

Investors network for SMEs

One of the toughest challenges for a small entrepreneur is to find a trustworthy investor, The majority of SMEs is funded not by commercial banks or institutional investors but by ‘business angels,” private individuals willing to invest their money and their skills into a business they believe it. Internet is a very convenient tool to find a business angel but also to build a network linking entrepreneurs and investors. Business angels networks can mobilize substantial pools of informal venture capital that were formerly fragmented and invisible, stimulate demand for equity finance that would otherwise have been latent, and facilitate investments by creating communication channels. The European Commission has supported setting up of such networks. For instance, it provided funding for  the European Business Angels Network (EBAN).  EBAN is a non profit association aimed at:

-          Encouraging the exchange of experience among business angels networks and encouraging " best practice "

-          Promoting recognition of business angels networks

-          Contributing to programs of assistance to the creation and development of a positive environment for business angels activities.

It brings together national business angels networks from five countries (Germany, Italy, Netherlands, Finland and the UK). Data on the network activity is limited. In the UK, total investment achieved in 1995/96 through all UK Business Angel Networks was GBP6.8 million (10.2 million euros) in 117 investments. Average investment was GBP50,000 (75,000 euros) in each business.  EBAN estimates the number of active investors in Europe is estimated 125.000 and the number of potential investors at 1.000.000. Their investment capacity is between 10 and 20 billion euros.

Go-online EU  initiative

In March 2001, European Commission has published a plan to help European SMEs to “go digital. ” The plan is structured around three action lines (create a favourable environment for electronic business and entrepreneurship, accelerate the take up of e-business and improve ICT skills), leading to 11 actions, which include provision of loan guarantee facility to the SMEs and promoting electronic business interoperability.

 

Private initiatives

Private sectors efforts seek to facilitate access of SMEs to business opportunities, to electronic markets and to sources of funding.

Business portals

Portals specially designed for SMEs offer cheap and convenient answers to the variety of small business needs. The challenge is to maintain a range of services both easy to find and effective. Many banks have launched SMEs oriented business portals in order to ensure customer loyalty and create a basis for Internet-based services. This is the case for Royal Bank of Scotland and Barclays in the UK.

AllBusiness

AllBusiness is a provider of online resources for the 22 million small- and medium-size businesses in the United States. It has been created as a result of the merger between AllBusiness.com, a small business resource site, and Bigvine.com, Inc., a B-to-B barter site. The company is privately held and is backed by leading investors including Kleiner, Perkins, Caufield & Byers; American Express; Kohlberg Kravis Roberts & Co.; and NBC Internet Inc. The site provides Comprehensive Content and Publishing services, covering sales and marketing, technology and e-commerce, and human resources activities. The company also provides an online commerce platform for barter, including professional services, office supplies and equipment, and travel.

Mondus

Mondus, created in the UK in 1999, focuses on office supplies and automaton products, telecom & IT, as well as a broad range of business services (finance, legal advice, office services). This type of service allows SMEs to directly compare prices and obtain goods at the best price, also allowing buyers to launch tender offers on the site. It is also a leverage for selling companies. In September 2000, Mondus reached 170 000 users. Its funding, provided by Italian business directory publisher, SEAT Pagina, reached in USD 150 million. With a staff of over 120, Mondus operates in the UK, France, Germany and Italy.

B2B marketplaces for SMEs

Despite its recent slowdown, most analysts expect B2B commerce market to grow substantially in the coming years. The Gartner Group forecasts that the worldwide B2B e-commerce market will reach USD7.3 trillion by 2004. Most B2B initiatives have focused  so-called big-ticket deals among large enterprises. Furthermore, many SMEs see the B2B markets as a way by large buyers to put additional pressure on suppliers to lower their prices. At the same, they can see the advantage of broader access and exposure. Efforts to involve more actively SMEs in the B2B markets take two forms: to adapt large exchanges to the specific needs of the SMEs and to develop specific exchanges for SMEs.

The General Electric Exchange Services

An example of the first approach is shown by GE. Its e-business marketplace, GE Global Exchange Services' (GXS), operates one of the largest B2B e-commerce networks in the world, with more than 100,000 trading partners. The network's 1 billion annual transactions account for $1 trillion in goods and services. In late 2000, GXS announced that by mid-2001, it will open its access to SMEs. In August 2001, GXS launched a new service, Express Marketpace, that lets companies of any size, industry or location, begin immediate and low-cost supply chain collaboration, from selection through settlement, using only a Web browser.

PurchasePro

From its inception in 1996, PurchasePro, targeted small and medium size business, which represent over 90 of the US business population. Headquartered in Las Vegas, PurchasePro has initially focused on the hospitability industry, before expanding its market coverage to office supplies and other intermediate goods. PurchasePro operates the Global Marketplace interconnecting more than 140,000 businesses and provides a highly scalable, hosted software powering hundreds of private and public marketplaces. However the financial troubles of the company causes doubts over the long-term survival of the company.

Investor funding

The UK Venture Site

The Venture Site is a not-for profit matchmaking service for small companies seeking equity finance and "business angel" investors. For SMEs, the site allows anonymous advertising for venture capital needs and access to a large database of potential investors.

Investors can anonymously advertise their availability on the venture capital market, search the database and become involved as a manager or consultant.


3.2.  E-SMEs experience in developing countries

Overview of selected experiences

As in the case of e-finance, e-business  offers aimed at SMEs are proliferating. They include are business portals, electronic marketplaces, private equity investments, microfinance and business hubs.

Business portals

Global portals
Global Trade Point Network (GTPNet)

Business portals, offering useful information at a reasonable cost without any geographical restrictions, have been recognized very early as an essential element of e-commerce strategy geared toward SMES.  UNDP has launched a Trade Point programme in 1993. Its premise was that Internet made accessible trade opportunities to everyone around the world, regardless of geographical location, technology and infrastructure availability or economic status. Its specific objective was to develop a global network of local portals, called Trade Points, offering trade information services, company databases and trade leads. Their content would generate Electronic Trade Opportunities (ETOs) for both buyers and sellers.

Global Trade Point Network (GTPNet ) developed rapidly. By mid-2001, 160 Trade Points were operating in about 90 countries.

According to a 1998 performance survey, the ETO System achieved a level of penetration and expansion of electronic trading that far exceeds expectations.  Using the GTPNet and the Internet, the ETO system has transmitted over 2 billion Electronic Trade Opportunities (ETOs) since 1993 and was used by about 8 million companies.

However, as system expanded, it became more difficult to manage and control. The quality of information was heterogeneous and uneven, there was no agreed service standards and no infrastructure to ensure the follow-up for opportunities. Governance of the system proved unwieldy.

Recognizing this situation, in July 2001, UN has taken the decision to radically change the Trade Point program structure and to transfer its control and ownership  to a new international non-profit organization,  the World Trade Point Federation (WTPF), created in May 2001 and bringing together local Trade Point organizations.

A study was initiated to provide an unified technical support structure for local trade-points and identify a long-term technical partner who would manage it.

 Private initatives

There are also private initiatives, such Canada-based foreign-trade portal, Foreign Trade On-Line™,  which provides profiles  of companies around the world, looking for either buying or selling opportunities. Profile presents basic information about goods and services offered and contact details.  Profiles are organized into 27 sectoral categories.  Foreign Trade On-line offers assistance in creating portals  but does not offer matching or follow-up services.  There is no information concerning the number of companies using the portal and leads’ success rate.

Other global trade portal initiatives include Tradezone, Digilead, Wtnet and several others. According to GBOT (Global Board of Trade), there are at least 400 trade boards, listing foreign trade opportunities.  GBOT, a California-based private company, created in 1995, has developed a special tool, The Trade Accelerator, to allow a company to post its lead simultaneously to trade boards tracked by GBOT.  Over 20 000 trade leads are currently listed on GBOT.

 

Regional and local portals

Business portals can found in all emerging regions. Most often, they benefit from mixed support, combining public and private funding. Below is few examples of such portals in Africa and Asia.

Africa4biz

Africa4biz.com presents itself as “Africa Trade Centre on the Internet”. The site is intended as a bridge between African companies and the rest of the world. The site is organized as a directory by professional categories. It seeks to cover various African countries (from South Africa to Kenya, Nigeria to Morocco and Egypt). Although information is sketchy and often incomplete, it provides a support for a more ambitious and comprehensive database. There is no specific focus on SMEs  but most companies listed clearly belong in this category.

Thailand

Electronic commerce efforts in Thailand are spearheaded by the Electronic Commerce Resource Center (ECRC), set up in December 1996 under the National Electronics and Computer Technology Center (NECTEC), National Science and Technology Development Agency (NSTDA) and the Ministry of Science, Technology, and Environment (MoSTE). 

ECRC operates a web portal. Another portal is run by NECTEC. Both sites provide general business information.

 In July 2001, SMEs were given further incentive to make a move into the electronic commerce sector with a number of public and private sector initiatives. The Department of Industrial Promotion (DIP) will work with a media group, which operates a Shinee.com site to encourage up to 60 selected SMEs to experience e-commerce free of charge. The DIP and Shinee.com venture will provide SMEs with a free web site.

Malaysia

For Malaysia governement, electronic commerce is a high priority, spearheaded by The National Information Technology Council (NITC) of Malaysia. Chaired by the Prime Minister, NITC Council functions as the primary advisor and consultant to the Government on matters pertaining to IT in Malaysia's national development. Various e-commerce activities are showcased in Malaysia E-commerce hub, which provides a rich variety of links. For instance, some 30 merchants, accepting on-line payments, as well as banks offering Internet services and security services could be reached from the hub.

E-marketplaces development

Electronic marketplaces seek to go beyond trade opportunities portals than portals, offering tools to realize these opportunities through the matching of buyers and sellers, the transaction follow-up and fulfillment. Following the explosion of B2B marketplaces between  late 1999 and late 2000 in OECD countries, with thousands of private and public B2B exchanges projects, many electronic marketplaces initiatives were announced in emerging countries. The reflux of B2B marketplaces in developed countries has adversely affected the progress of these initiatives many of which have been scaled down or closed down. Nevertheless, in several countries, particularly in Asia, development of B2B marketplaces continue and some of them are now operational.

Asia

China

Chinese companies appear as clear leaders in B2B marketplace development. Headquartered in Hong Kong and operating across China, with offices in California, London, Seoul and Taipei, Alibaba.com presents itself as a leading provider of online marketing services for importers and exporters and the world's largest marketplace for global trade.

Alibaba has over 750,000 registered members from more than 200 countries, growing at a rate of over 1,500 members each day. They are mostly from small- and medium-sized companies in developing countries around the world. They are located in rural areas, as well as large cities, in countries as diverse as Kyrgyzstan, Sierra Leone and Brazil. For the most part, these are not "high-tech companies." They are low-tech companies using technology to expand their market reach and grow their businesses. Alibaba's websites allow users to browse company information and trade leads by 27 industry categories and 700 product sub-categories, ranging from agriculture to software.

Alibaba.com's institutional investors include SOFTBANK, Goldman Sachs, Transpac Capital, Fidelity Capital, Venture TDF, Pte Ltd of Singapore and Investor AB of Sweden.

To complete its trading capability, Alibaba relies on a secure online payments system, developed, through a partnership with a leading bank, the Industrial and Commercial Bank of China, which accounts for half of the annual total settlement volume of the entire banking system of China and is aggressively developing and promoting B2B payment solutions).

 

Another Chinese success story is Hong Kong-based Li & Fung, which transformed  itself from a traditional purchasing agent into a manager of the logistics of producing and exporting consumer products across many producers and countries. Through its web offering, which facilitates order aggregation, the company targets small and medium enterprises (SMEs).

 

Elsewhere in Asia, Singapore company eplus Technologies is expanding its solutions services beyond the local 92,000 SMEs to others in the region. B2B marketspaces are beginning to appear in India as well.

In Thailand, the Department of Export Promotion (DEP) has recently signed contracts with five business-to-business e-marketplace solution providers: Thailand.com, WeThai.com, ThailandExport.com, ThaiExpoNet.com and Samart Internet. The aim is to encourage up to 8,000 companies to move to the Net.

 

In Malaysia,  fourteen B2B marketplaces are currently active. They include broadly based marketplaces such MTeX (Malaysian Trade Electronic Exchange), as well specialized exchanges such as Eyewearland.com, which manufactures and exports frames and sunglasses. One exchange, Dextel Online, provides business matchmaking services for SMIs and SMEs.

Latin America

Potential for B2B e-commerce in Latin America is considerable. According to a 2000 study by InfoAmericas, 60-70% of mid-sized companies in several Latin American industries are connected to the Internet, compared to 5% of consumers. This makes sales of business goods and services on-line a feasible and potentially attractive proposition.

The arrival of digital marketplaces may help to level the playing field for many small local suppliers who simply cannot afford to reach their potential market through traditional distribution channels. SMEs will also save costs by sourcing directly from their suppliers through online networks, rather than through the costly multi-layered distribution models.

The first to develop their SME strategies were the IT suppliers. 25-30% of new PC sales come from SME segment and with it the sale of accessories and supplies. An estimated 50-60% of companies with at least 10 employees have a network installed and network products and support services are in great demand.  Thus, a company such as Telefonos de Mexico (Telmex) has decided to sell computers to anyone with a phone line, charging $50 per month and adding it onto the phone bill. In less than six months, Telmex became the largest PC reseller in Mexico by creatively targeting a previously untapped market.

Latin American banks have been rather cautious in e-commerce initiatives for SMEs. Nevertheless, there are some exceptions.

The Mexican subsidiary of Spanish BSCH has launched P-market, an online marketplace linking SMEs with various suppliers. The bank offers online functionalities to allow SMEs to manage their finance on line, and is also developing an online procurement system, called Procura Electronica, to be launched in the second half 2001. The bank expects its online clients to grow from 3500 early 2001 to 30 000.

In Brazil, Bradesco bank also participates in e-commerce initiatives involving SME transactions, such as the shopping mall shopfacil.com and the purchase exchange latinexus.com.

 

Private equity mobilisation

Linking private equity investors with SMEs in emerging countries is far more challenging than in OECD countries. With few exceptions such as Singapore, there is no local venture capital industry. And business angels networks are often family or ethnically-based. Nevertheless, some efforts, spearheaded by international players, have been launched to created Internet-based private equity networks.

 EmPower Link

In January 2001, UK’s International Development Consortium (IDC), created in 1997 to develop closer links between the University of Hertfordshire and its business environment. has established a joint venture, Empower Link Holdings (Pty), with a South African investment fund, Omega, to take EquityLink, its very successful business angels network, created in 1995, into south Africa, linking it with UK and European opportunities.

EmPower Link will provide support services to South African SMEs including management development, financial management, developing businesses, sales and marketing, IT and innovation in technology and design. It is expected to significantly contribute to the development of a comprehensive SME support infrastructure in South Africa.

Softbank Emerging Markets

In February 2000, Softbank, one of world’s best-known Internet companies, has announced a creation of a joint venture with the International Finance Corporation (IFC), the World Bank's private-sector arm, to spawn start-up Internet companies in as many as 100 developing countries.

The joint venture is an investment fund called Softbank Emerging Markets (SBEM),to  be based in California's Silicon Valley on a capital base of $200 million. Seventy-five percent of this will come from Softbank and the remaining 25 percent, from the IFC.

To begin with, SBEM will act as an incubator, investing in and providing advice to promising local Internet ventures in 10 to 20 countries.

SBEM plans to establish a number of holding companies to conduct actual investment and oversee operations of local joint ventures in these countries.

First local office was opened in March 9 in Malaysia. So far, no investments were announced.

Technology hubs

One of the key problems of SMEs in the emerging economies is their unfavorable sectoral mix. Most of SMEs which are active in traditional sectors and lack export capability. Lack of high-tech SMEs is certainly a major handicap for emerging countries and an obstacle to the development of locally-based e-commerce. On the other hand, the growth of Internet creates an opportunity to create new businesses, specialized in new technologies. However, in order to realize this opportunity it is necessary to have access to technology and to create an environment capable of nurturing the new businesses.  In the OECD countries, successful high-technology businesses are often concentrated (clustered) in small geographic areas, where they can obtain access to a wide range of resources, including technical skills, academic research, financial expertise, development know-how. More importantly, such clustering favor informal as well as formal contacts. Silicon Valley in the US, Silicon Glen and Cambridge in the UK, Sophia Antipolis in France are often quoted as examples of high-tech clusters.  There also such clusters in some developing countries (Bangalore in India or Penang in Malaysia). Two recent projects, both located in Africa, are more specifically oriented toward Internet-based technologies. They are :

-          El Ghazala in Tunisia, where the government launched in 1999, the Communications Technology Park, which now houses six tech outfits, including software startup Cynex and Picosoft, a consulting and systems company. To help supply the park's workforce, Tunis' Institute of Advanced Business Studies has just launched an MBA program in information technology and ecommerce.

-          Gauteng Innovation Hub in South Africa, a collaborative project between the University of Pretoria and CSIR, a local research and development organization promoting the IT industry, to build the, a tech corridor from Johannesburg to Pretoria. Guateng hub aspires to be an incubator, educational center, and administrative base for emerging and established tech companies. If all goes as planned, a cross-continental fiber-optic cable project called Africa One will be in place just in time for the Hub to go online in 2002.

 

Micro-finance initiatives

Micro-finance, or small-amount lending to individuals or very small SMEs in emerging countries, is seen as an important component of  financial system in developing countries. Internetcan stimulate and accelerate its development. It provides a cost-efficient communication support and offers a potential to lower the transaction costs, which can often exceed 50% of the amount lent. Not surprisingly, a number of Internet-based microfinance initiatives have been launched.

PlaNet Finance

PlaNet Finance is a Paris-based international non profit institution created in October 1998, aiming at reducing poverty by using the Internet to promote the development of microfinance.

PlaNet Finance supports organizations that provide financial support to the world's poorest. Its direct clients are microfinance institutions and other organizations that provide banking services for the poor and the very poor. PlaNet Finance does not aim to compete with banks, but to help them to develop their activities in this new field as efficiently as possible. It operate with of private partners / sponsors and with a network of local partners.

Pride Africa

Pride Africa is a microfinance network providing access to credit to more that 80,000 African SMEs from Kenya Malawi, Tanzania, Uganda and Zambia. The financial and information service network provided by Pride Africa offers micro-finance opportunities for local people and small enterprises that previously had no access to flexible financing due to rigid banking regulations and the information monopolies of government and large businesses.

SMEloan

SMEloan serves the needs of Hong Kong's SMEs. The company offers Express Loans up to HK $1 million, approved within one minute of submitting an online application. This allows business owners to instantly obtain their financing. Though not specifically a microfinance institution, in practice most  SMEs borrow modest amounts. SMEloan offers possibilities to borrow more than the HK $1 million, using more time-consuming procedures.

4.    Prospects and challenges for e-finance for SMEs

4.1.  Prospects and key success factors

 

Promising first steps

The trends identified in e-finance for SMEs in emerging countries so far looks rather encouraging. Some achievements can be cited :

-          High level acceptance of technology by customers and financial institutions

-          Many innovative approaches

-          Initial tangible results in terms of market access and revenues generation.

 

However, most projects are still in the pilot stage or still have not been deployed on the large scale. It is therefore much too early to determine which are likely to be most successful and therefore should provide the “best practice” benchmarks to be replicated in other countries. More importantly, the key question as whether e-finance will fundamentally change the conditions of access of SMEs to finance remains unanswered.

Nevertheless, from the experience so far, two broad key success factors can identified:  adaptation to local requirements and strong support from public authorities.

 

Adapting global technology to local requirements

While Internet technologies are global and their core is standardised, their applications can and need to be adapted to local circumstances.  Internet offers this amazing capability to reconcile global uniformity and local flexibility. It makes it easy to cross borders but at the same time create new configurations of networks and clusters. Distinctions between proximity and remoteness remains highly pertinent, even if the distance under consideration becomes virtual rather than geographical.

The most successful e-finance stories in emerging countries, such as ICICI or Bradesco, are those of institutions that respond to local requirements, in terms of their product mix and delivery channels. The need to localize the financial solution is even stronger for the e-finance for SMEs, which for the most part operate within a limited geographical area. Furthermore, their characteristics, size, financial structure and sectoral mix, can vary considerably even within the same city or region. At the same time, Internet technologies create an opportunity to create strong links between SMEs in different countries. For instance, a Tunisian start-up, Intelligent DSP, works with the New Delhi office of Analog Devices to develop remote monitoring services for electrical power meters. More broadly, successful e-commerce initiatives facilitate the emergence of new forms of business organizations such as virtual hubs and networks.

 

Government support and commitment

Most e-finance developments have taken place through an interplay of competitive market forces, with limited public sector intervention. Some of them, particularly in Internet banking,  have been launched by foreign institutions. The situation is quite different in the case of e-finance for SMEs, where public sector intervention is quite frequent. It is not only that the public authorities have to create the broad framework conditions for e-commerce development (appropriate legislation and technological infrastructure, to mention two most important) but also they need to ensure that SMEs take advantage of the new environment and opportunities it creates. The great majority of e-SMES success stories emerging countries described above were largely due to  the public sector involvement. This is particularly the case of Asia, where governments of Singapore, Malaysia and Thailand played a decisive role in all aspects of e-commerce development.

But this was also the case of Tunisia, where Internet development has been a long-standing top policy priority. In 1991 it became the first Arab and African country to connect to the Internet. At present, it has a highest relative Internet penetration of any African countries.

Laws supporting e-commerce and digital signatures (based on the uniform law proposed by UNCITRAL) have been passed, and numerous public and private online services allowing Tunisian citizens to take advantage of e-commerce are being rolled out. Tunisia government also actively promotes development of high-tech SMEs.

 

However, while the public sector involvement in e-commerce promotion appears in many cases highly effective if not critical, it differs in many aspects from traditional government interventions. It is more flexible and proactive and relies less on administrative edicts and more on co-operation with private sector. Rather than maintaining stability, it promotes innovation. The new modus operandi often entails setting up of specialized agencies. In Tunisia, Internet initiatives are spearheaded and coordinated by Agence Tunisienne de l’Internet (ATI), in Malaysia, by National Information Technology Council (NITC), high-powered bodies with wide remit, ranging from legislative to research and development projects.

An interesting aspect of public support for e-commerce is that local governments, as well as central governments, can play a major and often decisive role. This is for instance the case of China, where many e-commerce initiatives were launched by provincial governments. For instance, in Zhejiang province, the provincial government established an Internet center in every big town to help farmers post trade offers on sites such as Alibaba.com.

4.2.    Challenges

Challenges faced by those who seek to promote e-finance and e-commerce in developing countries are numerous and varied. They share two broad themes:

-          Reconciling apparently incompatible opposites: global and local, digital opportunity and digital divide, public and private, closed and open

-          Developing new forms of business organization and cross-border, cross-sectoral co-operation and partnerships.

 

Digital opportunity or digital divide ?

Can Internet and other information technologies contribute to the reduction of poverty and acceleration of growth in developing economies ? Views on this question are highly contrasted.

On the one hand are those who see Internet technologies as an extremely powerful development enabler, whose unique characteristics (in particular pervasiveness and speed of dissemination, low marginal costs and global nature) allow rapid creation and growth of  new economic and social networks. Thus, Internet technologies creates a “digital opportunity”: used in the right way and for the right purposes, Internet can have a dramatic impact on achieving specific social and economic development goals as well as play a key role in broader national development strategies. This vision underpinned a launch in July 2000 of a Digital Opportunity Initiative, which brought together UNDP, Markle Foundation and Accenture Consulting and which published a report, “Creating a Development Dynamic”in July 2001.

 

The contrasting view is that not only  Internet is not a development panacea but it may actually accentuate income and growth disparities, by creating. a “digital divide.”  between those have and those who have not access to the Internet and related information technologies (see Table 8 below). Precisely because Internet creates so many new opportunities, the lack of access to it can aggravate the social and economic disparities, generated by the well-known deficiencies in to basic telecommunications infrastructures of developing countries. Moreover, the digital divide creates opportunity gaps not only between countries but also within countries. Such gaps are particularly critical for businesses, where skillful use of Internet is generally seen as a crucial competitive advantage. In the developing countries, this advantage is even greater and it can therefore be expected that SMEs with access to the Internet will be more successful than those who do not.

Designing and implementing policies that reconcile the digital divide and digital opportunity is a complex task, both conceptually and operationally. According to the ISOC INET 2000 conference, held in Yohokama in August 2000. Strategies for bridging digital gaps must address the “8 Cs” of the Internet economy: connectivity, content, community, commerce, capability, co-operation, culture and capital.

Table 8

Digital divide

 

 

Internet users (% of population)

 

1998

2000

USA

26.3

54.3

High income OECD countries (ex-USA)

6.9

28.2

Latin America & Carribean

0.8

3.2

East Asia & Pacific

0.5

2.3

Eastern Europe & CIS

0.8

3.9

Arab states

0.2

0.6

Sub-Saharan Africa

0.1

0.4

South Asia

0.04

0.4

World

2.4

6.7

Source: 2001 Human Development Report

For the SMEs support, the imperative to create a level-playing field and facilitate equal access has to be balanced against the need to encourage high-growth businesses and innovation. While most SMEs will remain small and many will die, some should be afforded the opportunity to grow and to grow rapidly. The technology sector in the developed countries is driven by companies, which started small but became huge, even dominant. E-finance and e-commerce initiatives and programs in emerging countries should facilitate higher rate of growth and emergence of  new champions.

 

The changing role of international development organizations

 

Supporting SMEs is one of the traditional functions of international development organizations (IDOs) such as the World Bank and its private sector arm, IFC, and UNIDO, who have large-scale and wide ranging programs of assistance. These organizations are well aware of e-commerce potential and seek to support its development in developing countries. They stimulate the debate about key conceptual issues,  contribute to the development of new approaches, encourage the implementation of appropriate local, regional and global policies, fund programs and projects and monitor their implementation.

 

Yet, as the IDOs become more involved in e-finance and e-commerce activities, it is also becoming clear that their role in the development process is evolving and that they must adopt new and different approaches, in particular:

-          shift their emphasis from funding toward knowledge management and transfer.

-          develop new forms of partnerships with the NGOs and the private sector

 

IDOs appear ideally placed to spearhead global knowledge management and transfer initiatives.  They have unparalleled access to data and information, including historical data, they have experienced staff, backed by the best academic and consulting minds, and they have formal and informal networks of contacts and relationships. And yet, they appear to experience difficulties in marshalling those resources into co-ordinated and comprehensives initiatives. Problems of managing Global Trade Point initiative were discussed above. Similarly, it took World Bank several years to launch its Development Gateway, which has become operational in July 2001.  

These difficulties can be attributed in part to the traditional problems of co-ordination between various IDOs, which seek to assert their leadership in a new domain. Thus, each IDO launched its own global knowledge and information network. While these networks all offer links to each other,  their content often simultaneously overlap and underlap, providing an uneven coverage, with many critical gaps.

A problem may be structural, stemming from the very nature of Internet, which stimulates proliferation of information and networks and operates in a non-hierarchical way. IDO’s gateways need to be conceived as networks of networks. At the same time, conceptual and design tools have to be developed and implemented not only to track dynamic information but also to assess its reliability  and establish performance benchmarks, in order to facilitate the dissemination of best practices and “learning by doing.”

 

The dynamic of Internet and e-commerce also calls for new forms of co-operation and partnership with organizations which detain the critical know-how and implementation capability such as non-governmental organizations (NGOs) and large private technology and financial companies.

Working with NGOs

The crucial contribution of NGOs to the development process has now been recognized by IDOs. Growth of Internet led to the emergence of new categories of NGOs, which seek both to stimulate local e-business initiatives and facilitate the cross-border transfer of relevant know how. For instance, Singapore-based PAN (Pan-Asian Networking initiative), supported by Canada's International Development Research Centre, has launched e-commerce services for textile and handicraft manufacturers in Bangladesh and Nepal. In Latin America, a regional NGO, Fidamerica, supported by IFAD, has launched 34 projects in 16 countries since 1995.

While NGOs are often viewed primarily as non-profit organizations,  the category also comprises informal networks bringing together ethnic groups dispersed among around the world such as Chinese or India diasporas.  These groups have a high proportion of both technicians and entrepreneurs, active in e-finance and e-commerce. The diaspora networks facilitate both transfer of know-how and development of transborder projects such as alibaba.com.

Working with large private sector companies.

The critical mass of e-finance and e-commerce resources, know how and actual operational experience are concentrated within a limited number of large private sector companies, headquartered in OECD countries. Those companies provide key elements of infrastructure, networks, systems and applications that comprise e-finance and e-commerce. They operate globally, both in terms of sourcing  and  selling their products and services. Relationships between those companies, national governments and IDOs have not been always easy and created a legacy of mutual distrust and suspicion. Nevertheless,  both the companies and the public organizations increasingly recognize the need for new forms for co-operation to promote e-finance and e-commerce.

An example of such a co-operation is Netaid.org foundation, launched jointly by UNDP and Cisco corporation with the objective of using Internet to combat poverty. Private firms such as Accenture played a major role in the Digital Opportunity Initiative.

In the financial sector, Deutsche Bank has created a Microcredit Development Fund, which contributed to the creation of  12 microfinance institutions,  which lent some USD millions to households and micro-entreprises in 2000.

It is hoped that the difficulties experienced by leading Internet companies in their core markets will not curtail their willingness to pursue and expand the new co-operative approaches.

 

Evolution of global e-finance platforms

One area in which such co-operation is essential is the evolution of global e-finance platforms  such as SWIFTNet and Identrus, which are the key elements of the emerging new global finance architecture. As their design and implementation evolve, they should take into consideration the requirements of e-finance and e-commerce in developing countries. These requirements are particularly important in two areas:

-          Development of payment and settlement systems based on those platforms. At present, projects for such system tend to focus on the needs of global corporations.  The development of payment services and settlement services for SMEs, in connections with specialized B2B marketplaces should be actively encouraged.

-          Interoperability between global and local e-finance platforms. In the Internet world of open standards, various platforms should be interoperable. In practice, interoperability is as much as a business question as it is a technical problem. Conditions of interoperability should therefore be given careful considerations.

Increase the availability of information about SMEs

Global trade and information platforms, such as Bolero or @ratings raise a somewhat different challenge. These platforms explicitly cover developing countries and SMEs in those countries. However, for the platforms to offer full benefits of their potential, both the quantity and the quality of information about the SMEs has to be enhanced. To be listed in such platforms as @ratings, SMEs need to show reliable figures with timely updates. This is a complex, time-consuming and onerous task, particularly for the SMEs in the informal sector, which is a very large part of the economy in a number of countries. Internet provides potential means to lower the costs and reduce the length of this task. Initiatives aiming at increasing the availability of reliable data about the SMEs should be given high priority in e-commerce support programs and policies.

Technological integration

Internet, mobile communications and smart cards

, Internet technologies are a moving target. They continue to evolve and expand. As bandwidth continues to expand, it becomes technically feasible and cost-effective to integrate data, voice and video, thus making customer interfaces and services more user-friendly and richer in scope.  Another key trend is the convergence between fixed and wireless networks, which is at the core of new mobile telecommunications networks  (3G and CDMA).

 

Many countries view this evolution as key to effectively lowering the cost of their service delivery channels. Philippines and Indonesia, archipelago nations, or Mongolia, with a small population spread  a large area, see mobile Internet as the only way to introduce e-commerce and e-finance.

Another critical technology is the smart card. This technology has been used in South Africa for instance to create financial infrastructure for people without banking accounts. In the medium term, the smart could provides a secure and cost-effective support for specialized payment and settlement services for the informal sector.

Handling complexity

While the evolution of Internet technologies holds considerable promise for e-finance and e-commerce, it also increases the complexity of the underlying systems and applications. For the emerging countries, the challenge ahead will be to build up capacities, particularly local expertise and talent, to manage this complexity

 

Balanced regulatory framework

While e-finance and e-commerce do not eliminate borders, they makes them more porous. Internet allows companies and households to circumvent regulations and restrictions. For example, in many countries with exchange controls, it is possible to open accounts with foreign banks or brokerage houses via the Internet. Internet makes it easy to operate from off-shore. Also, Internet offers vast opportunities for fraud and some developing countries have acquire a dubious distinction of being seen as hackers’ heavens.

 

Without a robust regulatory framework, the development of e-finance and e-commerce will be jeopardized. Yet, if such framework is too rigid and formal, it may discourage innovation and entrepreneurs and, more importantly, deter informal sector from joining e-commerce. In the end, e-finance and e-commerce will succeed only if they create a stable physical and virtual infrastructure of trust, shared by all parties concerned: public authorities,  local and foreign entrepreneurs, financial services providers and customers.

 

 

 

 

 



5.    References

 

 

UNCTAD, Building Confidence: E-Commerce and Development Report, 2001

UNDP, Markle Foundation, Accenture, Digital Opportunity Initiative Report, July 2001

Claessens, C.,  Glaessner, T., Klingebiel, D.,  "Electronic finance, reshaping the financial landscape around the world", The World Bank Finacial Sector Discussion Paper No.4, 2000

Claessens, C.,  Glaessner, T., Klingebiel, D.,  “E-Finance in Emerging Markets: Is Leapfrogging Possible?”by Stijn, Thomas and Daniela, The World Bank, Financial Sector Discussion Paper No.7, June 2001

Emarketer.com: “The eBrazil report”.

Martin, H. and Soupizet, J.F., “The EU and the information society in developing countries”. The Courrier ACP-EU, no 170, July-August 1998

Pyramid Research: “Africa / Middle East perspective”.

Goldfinger, Charles, "European Financial Services: The twin challenge of eurofinance and cyberfinance", Brussels, March 21, 2001.

Global Electronic Finance: "Internet and payment systems", Financial Issues Working Group, March 2001

Global Electronic Finance: "Internet and securities markets", Financial Issues Working Group, February 2001

Fairlamb, D., “Online Money trading takes off”, Business Weeek, September 3, 2001

Rao, M.,  “Development: 1,000 ways to close the digital divide”, globalinfo.org, August 18, 2000

Rao, M.,  “Internet ushers in fourth wave of banking and finance innovation”, E-finance summit, Singapore, March 2001

Celent Communications, Guide to Electronic Bond Trading Systems, January 2001

Celent Communications, Trade Finance: Revolutionizing a Medieval Market,  June 2001

Economist, The, “The hollow promise of Internet banking,” November 11, 2000

Hilton, A.,  Internet banking : a fragile flower, CSFI, London, April 2000

Morrison, David, “An outlet to growth”, World Link, September 2001

Goldstein, A, and O'Connor D., "E-commerce for development: prospects and policy issues", OECD Development Centre, Technical Paper no 164

IFC, " E-Finance Global Initiative Briefing Note", Global Financial Markets Group, February 12, 2001

OECD, "Understanding the digital divide", Paris, 2001

Murdoch, A., “Value for money: Magnifying microcredit”, World Link, September 2001

UNDP, Human Development Report 2001, New York

 

 

 

Internet sites:

 

http://www.globalfinanceonline.com

watersinfo.com

bondnet.com

VeriSign.com

Pyramid.com

InfoAmericas.com

bnamericas.com

Identrus.com

bolero.net

TradeCard.com

Dnb.com

mondus.com

venturesite.co.uk

eban.com

GEXS.com

PurchasePro.com

Africa4biz.com

Bangkokpost.ocm

FT.com global archives

Alibaba.com

Eplus.com

EquityLink.com

Idc.com

Planetfinance.com

prideafrica.com

SMEloan.com

ati.tn

DevelopmentEx.com

mssf.org

247Customer.com

 

 



* Managing Director and Associate Consultant, Global Electronic Finance, Brussels