When a friend took Brian Maccaba to a horse auction in his native Ireland a few years back, the chairman of online-trading developer Cognotec was struck by the prices flashing above the auction ring: To accommodate the sale's international clientele, bids were quoted not only in Irish pounds, but in sterling, yen and dollars.
Cross-border e-commerce is making the same sort of service necessary on the Internet, Maccaba now says, and that could change how the world's $3.5 trillion-a-day foreign-exchange market operates.
"You can't have e-commerce without foreign-exchange execution," says Maccaba. A French consumer, for example, should be able to see exactly how many francs a book costs on Amazon.com's U.S. Website, which now only prices in dollars. What's more, with a thriving real-time currency market accessible through the web, consumers will be getting much better rates, Maccaba and other industry executives say.
Realizing that the rewards for providing such a service could be huge, Dublin-based Cognotec and some of the world's biggest banks are trying to figure out a way to turn the foreign-exchange dealing necessary for even the smallest cross-border Internet sale into trading profits.
"It's a huge opportunity for anybody who can offer a solution," says Roger Hynes, director of Currency Management Corporation PLC, an online currency-trading firm just outside London.
E-Commerce Throws Lifeline To Forex Mkt
An explosion in e-commerce across national borders could be just the lifeline the foreign-exchange industry needs amid dwindling volumes and lackluster profits in recent years.
A number of events - most notably, the introduction of the euro almost a year ago - have sapped turnover in the world's largest financial market, spurring talk that profit margins in the business for the big banks that dominate the trade may be in an irreversible downward spiral.
By consolidating big chunks of foreign-exchange business created through international web sales, banks may be able dramatically to increase volumes and liquidity - and, by extension, income.
"I think that certainly the perception globally is that foreign exchange kind of has been on the wane, especially with the advent of the euro," says Len Lebov, global head of foreign-exchange e-commerce for Citibank, one of the largest participants in the global forex market. Citibank launched a homegrown online forex-trading system earlier this year, and Lebov says the bank is investigating the potential the growing popularity of e-commerce may have for its foreign-exchange business.
"You are seeing, and will continue to see, quite an explosion in international commerce," Lebov says. That will probably increase the number of foreign-exchange customers to include small and medium-sized businesses and retail investors. "It's not just the big corporates."
Indeed, Cognotec's Maccaba says the Internet will be a major force in shaping the future of foreign-exchange trading. Financial companies in the U.S. and Europe are already offering retail and interbank foreign-exchange dealing on the Internet, and Maccaba's success in selling his online forex system to big banks like First Union, UBS and Lloyds Bank has caught the attention of some of the world's biggest Internet concerns.
Softbank Corp. of Japan paid $20 million for a 10% stake in Cognotec last month, adding the company to its stable of holdings in online heavyweights like Yahoo Japan Corp. and E*Trade Group Inc. Softbank and Cognotec had already cooperated in FOREXBANK, an online trading company for Japanese and Korean banks.
Rewards Colossal, Challenges Daunting
Maccaba estimates that in five years' time, 20% of global gross domestic product could come from Internet business, with almost a quarter of that likely to be cross-border. That translates into big business for banks that can figure out how to package small web purchases - anything from books and flowers to stocks and bonds - into large, tradable foreign-exchange tickets.
"Anywhere there's a cross border purchase, there's an FX component," says John Beckert, president of Cognotec's Americas operation. "It's so big and it's moving so quickly, the numbers become irrelevant to me."
But the challenges are also huge. Both Beckert and Citibank's Lebov put real-time, foreign-exchange pricing for web shoppers at least a year away.
Packaging the millions of sometimes-tiny online billings into larger blocks that can be traded easily between banks in the vast forex market may prove too costly, says Hynes of CMC.
"It becomes quite expensive when you're dealing with such small amounts," he says.
But banks aren't wasting time exploring the potential e-commerce presents for their forex businesses, says Rob Standing, Chase Manhattan's head of global trading in Europe. "E-commerce and foreign-exchange are obviously pretty much intimately related," he says.