Even as online trading has disappointed, or at least affected skepticism as to whether or not a keyboard (or a mouse) can replace a trader, some market players are already peering further down the line - to what happens when all relevant transactions, including those involved in commercial financing, become automated?
"What we are seeing happening is increasingly, dot-corps, large enterprises and exchanges are recognizing that financial services are the key to driving liquidity in whatever market they're going into," said John Macauley, a vice president at A.T. Kearney.
Macauley, who specializes in business-to-business e-commerce and financial risk management, sees commercial finance becoming automated the same way that mortgage underwriting, auto lending and consumer credit has become automated.
Among other impacts, the Web already increases speed of information, and reduces the marginal cost of information to nearly zero. Further, it reduces the marginal transaction cost to close to zero.
"As Web trading becomes more mature, those numbers will get closer to fruition," he said. "The economics are going to become overwhelming: both the funds/cost benefit and processing/cost benefit."
On the consumer finance side, automated origination-to-warehousing has already been achieved to some extent, as in First Union's involvement with Westar Financial Services and Driveoff.com (see "e-Conduit", ASR 2/7/00).
In the Driveoff.com example, auto loans are originated by the online vendor through Westar's Laserpro technology. As part of the process, the loans are sold into a conduit administered by First Union.
"We call it originating, decisioning, committing-to, and fulfilling - all in one transaction, real-time, automatically," said R.W. Christensen, chief executive officer at Westar. "It can go into a conduit, or it can go into our portfolio or into a term securitization, depending on, what we call, the ultimate investor.'"
Financial services, like auto lending, have traditionally been driven by direct interaction between the lender (in this case the investment bank) and borrower. The bank will underwrite the company, its management and its business flow - providing credit with a risk premium, typically in the 400- to 500-basis points over Libor range, Macauley said.
Macauley sees the developing technology that is being applied to online bond trading as a precursor to automated commercial finance.
"Web trading has not even come near the levels everybody has been forecasting," Macauley said. "But I think that access to third party investors, credit risk, securitization and private placement will begin to pull transactions to the Web, because the financials of it will become overwhelming."
Macauley will contribute an observation piece to ASR's Sept. 11 issue addressing the Internet and automated commercial finance, and its impact on the asset-backed commercial paper market going forward.