How Banks Can Win the Globalization Debate

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by Geoffrey S.L. Shaw

At the heart of the globalization debate is the issue of trust. By their charters, banks are agents of trust for the individuals, companies and communities they serve. Because of the trust bankers enjoy, they are in a unique position to explain the benefits of globalization in terms that average citizens - not just members of the financial community - can understand, believe and support.

Most bankers and other business leaders believe that efficient access to global trade and capital markets is what globalization is really about. Most opponents of globalization also believe that fair and consistent access to these markets is a good thing. But they don't trust today's bankers and corporations to set the rules of play.

One can argue that over the past year opponents of globalization, whether in Seattle, Washington, D.C. or Prague, have done a better job of messaging their fears than the banking and commercial community has of messaging the benefits. Opponent fears are generally centered on continued globalization of business and finance resulting in disenfranchising smaller companies, communities, and economies from fair participation in global trade and capital markets.

The most effective counter to such an argument would be to point to specific actions, not just rhetoric, aimed at enhancing the franchises of all companies, communities and economies, regardless of size or stage of development to participate in global markets. Happily, this is exactly what bankers can do if they choose.

Bankers and their corporate technology and business partners have a compelling story to tell today about being in the vanguard of developing trust-based systems and business practices to assure that companies, communities and nations can be equally enfranchised. The key to these systems is bank certified and issued electronic identification certificates that can be securely transmitted across the Internet.

With such a certified identification service in place on the Internet - operated and maintained by participating banks who collectively assure the identification of the companies, governments and individuals to whom they issue electronic identification credentials - participating businesses can build trusted trading relationships with other participating businesses, and participating banks can provide payment, settlement and risk management services to these businesses.

While it is still possible - barely - to argue that Internet access is not yet truly available everywhere in the world, wireless technology is about to make it so. And banks are about to make ubiquitous the availability of assured identification certificates that essentially act as passports to global markets.

This timely combination of omnipresent Internet access and bank-issued and assured identity certification will soon enable any business that can prove its identification to a participating certificate-issuing bank to use that certificate to assure similarly participating businesses that it is who it says it is. Upon this assured identification infrastructure, trusted payment, settlement and risk management applications can be built, and, upon that, trusted trade relationships between hitherto unknown parties can be established.

It is not a long step from assuring the identification of parties in a business transaction, to assuring the credit worthiness and business behaviors desired by those business partners. As trusted identification, payment and settlement services deployed by banks proliferate, so increases the opportunity for individuals, small companies and emerging countries to join the established community of global trade.

Assured identification certificates create a chain of trust between participating banks and their customers to whom the electronic certificates are issued. Clearly, extending this chain of trust to facilitate trusted payment and settlement services to enable trade between participating bank customers and their suppliers and customers is a matter of first priority. This work is also being addressed by leading banks around the world today on behalf of their commercial customers who place high value on bank assured trusted identification, payment and settlement capability.

Bankers who understand this have an unprecedented opportunity to seize global competitive advantage and to provide the local leadership that today's globalization debate demands. Bankers who ignore this do so at their peril and the peril of their stakeholders.

If this opportunity seems far-fetched, consider the following. Today, the U.S.-based Gartner Group estimates that B2B e-commerce conducted over the Internet will reach U.S.$7.4 trillion a year by 2004. Other estimates are higher. These stakes make the effort, investment and risk associated with the work that leading banks are doing today well worthwhile.

And, those who may question the international banking community's ability to efficiently and effectively safeguard and manage such a complex and mission critical system on behalf of the international business community should consider the following. On the day you read this, banks worldwide will settle more than 1 million payment transactions with an aggregate value in U.S. dollars of more than $5 Trillion across the SWIFT network alone. They do this and have been doing this every business day for several years. In the United States over $3 trillion in payment transactions is settled electronically every dayii. This represents a secure electronic turnover of approximately one third of the current U.S. GNP every business day. That is a lot of electronic commerce, and it supports the leadership opportunity that banks have today to become leaders in electronic market making worldwide.

The public key infrastructure and other technologies to enable these systemic and procedural advances in payment and settlement based on assured and certified identification are already at hand and well understood by leading banks and their business and technology partners. The mechanisms for refining them to meet existing customer use-case requirements and implementing them as secure financial services infrastructure and application services are already being worked out by these banks, their partners and customers. In some cases, organized companies of banks like Identrus, LLC are providing the forum and infrastructure for this work.

In others, banks are doing it independently to meet the expressed needs of trading partners and customers while paying specific attention to interoperability and open systems requirements. In any event, business models based on assured identification and related payment, settlement and risk management application services are being carefully - and rapidly - developed to facilitate streamlined supply chain financing and management, flexible sourcing, and demand management.

This approach to assured, identification based, trusted commerce creates a series of mechanisms that reward trustworthiness and good behavior while punishing its opposite. The advantages of this system include the following:

Trust-based credentialing provides for nearly immediate payment and account reconciliation upon delivery of goods and services. This dramatically increases the velocity of the redeployment of the trade partners' capital.
Trust-based credentialing alters every electronic economic transaction conducted by introducing explicit and assured trust into electronic business relationships.
By allowing international trade to be managed with less interference from central banks and governments, trust-based credentialing increases the velocity of decision-making and action.
Because it rewards honor and integrity over dissembling and cheating, trust-based credentialing also marries economic success to moral virtue, with all the attendant benefits to those who play by the rules.

Such interoperable systems, deployed by individual banks and companies of banks worldwide, fundamentally change the economics of capital costs, supply chain costs and relationship management costs. As such they are of great interest and value to companies and economies at all stages of development. As importantly, such systems stand to fundamentally level the rules of participation in international trade. In such a system all businesses that qualify for a trusted identification credential - i.e., all businesses willing to commit to the moral and ethical business practices demanded by the other participants - are eligible to participate.

To be sure, not all banks fully realize the opportunity such advances represent. But those that do - and many do - have a significant competitive advantage over those that do not.

This is how international trade will be conducted in the future, and it will create unprecedented opportunity for economic prosperity in developed and developing countries alike. But it's up to bankers to tell the story.

Geoffrey S. L. Shaw is chairman of GlobalCommerce www.commerce.com, a pioneer and technology leader in development of online payment, credit and risk management software and services for the post-procurement market in business-to-business e-commerce. GlobalCommerce is headquartered in Broomfield, Colorado, USA. Shaw is also coauthor of the forthcoming book, A World of Trust, which examines the impact on trusted commerce in the global economy.

First published on BankersOnline.com 01/22/01.