The accelerating transition to electronic payments appears to have hurt banks’ cash management revenue, and low interest rates have exacerbated that trend.
Bankers say that the declines they reported last year may be reversed this year — and a new survey backs that up — but the authors of a report based on that survey are questioning that conclusion.
Jose Becquer, the executive vice president of treasury management sales and marketing at Wells Fargo & Co., called falling check volume and weak interest rates a “double whammy in 2003.”
Though banks are eagerly promoting e-payments as less expensive for both banks and customers, the transactions also carry lower fees for banks. In addition, low rates have driven many corporate customers away from sweep accounts in search of better returns from nonbank products.
Mr. Becquer said that the San Francisco banking company has been “trying to cannibalize our business” to sustain its revenue as electronic transactions have replaced checks. “We knew the decline in checks was coming, so we had to get out in front of this.”
Though e-payments are less expensive than checks, the “margins are superior on electronic products compared to paper products,” he said.
He also said that income on sweep accounts has at least slightly increased in the past two months. “As rates come back, we’ll get the benefit of seeing the sweep accounts return.”
According to a survey released this week by Ernst & Young LLP, the banking industry’s cash management revenue last year fell 0.5% from the previous year, to $12.55 billion. The New York company, which has produced the annual study for 21 years, said this was the first decline it had seen.
David L. Shafer, a managing director of Ernst & Young’s national cash management practice, said that the revenue decline could get worse this year, in large part because of the surging popularity of accounts receivable conversion, the process of turning paper checks into automated clearing house payments at a corporate lockbox. Banks typically earn a nickel per item for processing checks, while an ACH transaction may pay only a penny, he said.
The shift toward electronic payments began to hammer cash management revenue well before ARC become the payments industry’s growth leader this year, Mr. Shafer said.
Second-quarter ARC transaction volume jumped 791% from a year earlier, and third-quarter volume jumped 509%. Nacha, the electronic payments association, has predicted that there will be more than a billion ARC payments this year. And while sweep account revenue might rebound this year as interest rates rise, the shift away from paper check processing will probably accelerate as ARC volumes continue to grow and as banks begin to process more checks as digital images, Mr. Shafer said.
However, his prediction contradicts the results of his own study, which estimated that industrywide cash management revenue would increase by 3% this year. The survey depended on bank-reported data, which he said may have been overly optimistic; the report cited “implausibly strong” revenue forecasts for this year.
Still, Mr. Shafer said banks’ profits could increase, despite falling revenue, if they take advantage of the improved efficiencies of processing payments electronically. This transition is “an opportunity for the banks to take out some costs” from the system.
Mr. Becquer said that Wells’ revenue has grown so far this year, and that the company now is “a little less negative and a little more bullish.”
However, it is clear that the treasury management field is undergoing a significant transition. Revenue from check-related products slumped last year, as corporate pre-encoded cash letter volume fell 14%, and check clearing revenue dropped 9%. On the other hand, ACH debits grew 23%; check conversion and online payments fueled the growth. Those patterns have become only more exaggerated this year as check volume has continued to drop.
Banks also lost 19% of their sweep-account customers last year, following an unprecedented 26% decline in 2002, Mr. Shafer said. Corporate customers use these interest-earning accounts for short-term cash holdings, but low rates have hindered this strategy.
These patterns made Mr. Shafer and the survey’s director, Lawrence Forman, the associate director of Ernst & Young’s national cash management practice, skeptical about banks’ confidence in a rebound in cash management revenue anytime soon.
The survey did not identify any banks by name but divided the 63 respondents down into groups by their assets. The banks ranked six through 20 by asset size projected 9% revenue growth for this year, but the researchers noted that the banks that had made up the same group in the previous report had projected a 7% gain for 2003 but delivered growth of only 2%.
“There’s just no way we see that they’re going to get anything like” the numbers they are forecasting, Mr. Forman said.
Even so, the researchers said, the shift toward electronics presents new opportunities for nimble companies. Mr. Shafer cited Commerce Bancorp Inc. of Cherry Hill, N.J., which has developed a remote capture imaging system that corporate treasurers could use to make deposits by sending the bank check images instead of the original checks.
“It seems some of the smaller banks are in the forefront of rolling this out,” Mr. Shafer said.
Other technology shifts might also boost bank bottom lines, even if they do not involve what are considered traditional cash management applications.
For example, Mr. Forman pointed to a November survey by Visa U.S.A. that found 51% of corporate finance executives plan to reduce the use of checks and 40% plan to increase their use of purchasing cards.
And though Mr. Forman said such products are “not in our traditional pie chart of cash management revenue,” the net result could be to stem banks’ actual loss of revenue. “It might be a little bit milder than we’re indicating.”
