The Bank of Bermuda has been burned by online merchant processing and now considers it to be too risky a line of business for the returns it offers, according to the bank's chief executive officer Henry Smith.

Speaking to The Royal Gazette yesterday in response to criticism levelled at the Bermuda's largest bank that it was standing in the way of progress for e-business on the Island because it will not process online transactions for companies incorporated here but without a physical presence, Mr. Smith said that the bank was in favour of e-commerce but would not do this kind of processing.

He said it was not a profitable business and was too risky a proposition for his bank to undertake, and did not like the criticism that he was standing in the way of progress.

“The business of acquiring e-business transactions is without question a big bank business,” he said yesterday. “I believe you have to be a global player, a huge global player, to really succeed in that business. The cost of processing is enormous, it's a scale business and we tried processing through FEDs (First E-commerce Data Services - a company set up in September, 2000) and found that we just couldn't compete. The business belongs to the FDRs, the first data resources, of the world and not to little banks and we are a little bank in the scheme of things. It may not look like it here. So processing, there is no way we can compete and we found out the hard way and it cost us money.”

The bank lost approximately $30 million on its e-commerce investments (see accompanying story), including payment processing and payouts for fraudulent use of credit cards. And the bank has come under fire for its decision not to provide online processing for banks and this week Government E-commerce Advisor Nigel Hickson said that if Bill Gates came to Bermuda to set up an e-business he could incorporate an exempt company and have everything ready to go, but would be turned away at the doors of Bank of Bermuda due to their policy.

Mr. Smith said: “Basically it was actually a direct accusation, which I think is a bit unfortunate, because we are in the business of e-commerce big time.”

He pointed to the “tremendous” amount of business it does over the Internet through EasyLink online and through Global Connect.

“(These) are very, very successful platforms and we do acquire for local companies Internet-based transactions we do all their transactions, and if some of them are Internet-based, then we acquire them.

“What we don't do is acquire Internet-based transactions for companies that are not based in Bermuda with substance. I guess the thing that bugged me a little bit was the suggestion that if Microsoft showed up on our doors we would say no and that would be the end of e-commerce in Bermuda, which is pretty crazy, because it wasn't Microsoft that was turning up.

“(The Royal Gazette) wrote a couple of articles on our FAC problem and the problem was that these were all start-up companies with no real substance, they weren't here where we could reach out and touch them and in the end we are responsible. We are the lender of the last resort effectively and we are responsible for the merchant, and obviously because you wrote the article on FAC and you got it exactly right, we lost money because the merchants themselves were in many cases themselves the victims of fraud and who knows whether they were victims or not. Nonetheless, we were left holding the bag because we, according to the rules, were responsible for the merchants.”

And he went on to explain just why a bank such as Bank of Bermuda could not move into merchant processing in this way.

“The risk associated with acquiring is way beyond our means, probably because we are not big enough to take losses like that,” said Mr. Smith. “More importantly we are not global enough to actually reach out and touch the merchants. If you are Citibank there is a good chance that no matter where a merchant is actually based, you are going to have a presence there and you can go and see the merchant, you can do due diligence on them, you can have influence over them and you can make a very informed decision about whether you are going to process for them or not.”

He said that the bank had offices here and in a few places around the world, but did not have that kind of scope.

Mr. Smith said: “In a nutshell, if we don't know the merchant and they are sitting in our backyard, then we don't have the capacity to acquire transactions for them.”