Federal Reserve Eyes Broader Online Role for Banks

SAN MATEO (08/04/2000) - U.S. banks might be getting authorization from the Federal Reserve Board to compete via the Internet with nonbanks as "finders" for buyers and sellers of goods and services, according to a rule change proposed last week by the Fed.

Specifically, the Fed would allow financial holding companies to act as online intermediaries for financial and nonfinancial transactions under the proposed rule change.

In a departure from current regulations limiting such behavior, the Fed in a prepared statement said it seeks to permit "financial holding companies to operate a Web site that allows buyers and sellers to post information concerning the products and services they are willing to buy and sell."

Within bounds, the Fed would allow banks to "receive bids, offers, expressions of interest, or purchase orders from one party and convey them to the other party," according to the statement.

The change would come about from an amendment to the Fed's regulations governing the activities of bank holding companies. The adjustment would not apply to diversified holding companies and foreign banks that do not qualify as financial holding companies.

In addition to uniting buyers and sellers, a bank finder's responsibilities could broaden to include offering "other types of business arrangements, such as a merger, acquisition, or joint venture," according to the statement.

Although buyers and sellers of financial and nonfinancial products would "negotiate and consummate" the deals among themselves, banks would be allowed to offer a variety of financial services, including online certification authority for digital signatures and online payment and billing.

In proposing this move to revamp regulations, the Fed acknowledged the rise of e-commerce. "The electronic sites often include connections to and advertisements by sellers of nonfinancial products and services that may be of interest to consumers of financial products and services," according to the proposal.

Industry analysts greeted the idea with cautious optimism. Randy Covill, an analyst at AMR Research Inc., in Boston, said the role that banks play in business-to-business marketplaces is by definition going to be circumscribed because they lack the domain expertise of industry participants.

But this could be "a healthy development" because of its timing, said Derrick Dominique, an analyst at Hurwitz Group, in Framingham, Mass.

The b-to-b marketplace is still in a state of flux and now is the time to deal with the new role that banks may play in this market, Dominique said.

"If we waited 18 months, it might be too late," Dominique said, adding that the complexity of b-to-b marketplaces requires an early engagement.

The Federal Reserve Board, which is consulting with the Department of the Treasury in developing the rule, has opened the proposal to public comment until Sept. 5, 2000.

New Economy evolution

The Fed's proposed rule change could pave the way for banks to offer new online services.

* Lending and credit

* Check verification

* Check guarantee

* Collection and credit bureau

* Financial and investment advice

* Digital certification

* Payment and billing

* Back-office financial processing.

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