Ernst & Young says corporate cash management is in a slump — but bankers say it sure doesn’t feel that way.
The accounting firm says banks’ cash management revenue, which fell or stayed the same in the previous three years, will probably rise only slightly this year.
That is among the findings from Ernst & Young’s 22d annual survey of cash management banks. The report said the biggest factor in the lackluster revenue growth is the shift away from away from paper-based processing and services to electronic ones, from the remote capture of check images to purchasing-card products that transmit detailed reports directly to the corporate accounting systems.
Though the new electronic services generate less revenue for the banks, their operational costs are lower. That means banks potentially can turn a better profit from cash management while also providing better service.
Diane R. Quinn, a managing director at Citigroup Inc., one of the world’s largest cash management providers, dismissed what she called the “gloom and doom” of the Ernst & Young report, released in late November.
“We’re seeing explosive opportunities as companies migrate from paper to electronics,” said Ms. Quinn, Citi’s North American head of cash management corporate sales.
Donald E. Berk, a senior vice president in treasury product management at Northern Trust Corp. of Chicago, agreed.
“It’s never been a more exciting time to be in this business,” Mr. Berk said. “For the last 20 years the business has been fairly stagnant, in my opinion.”
He argued that the changes help midsize providers such as Northern Trust compete with larger companies. “You can acquire scale through technology and you can be very competitive through the migration from paper to electronics,” he said.
Ernst & Young’s report said that the industry’s fee-equivalent cash management revenue was unchanged in 2004, at $12.55 billion; that figure does not revenue from purchasing cards, which the firm asked about for the first time in this poll. It said the survey participants — 58 of the nation’s 100 largest banking companies and four large nonbank providers — projected 3.5% growth in cash management revenue for 2005, though the accountants were skeptical that the industry could achieve that growth.
“For an industry that derives a major portion of its revenue from processing and reporting on paper-based payments,” the report said, “the shift to more electronic payments has put the industry’s revenue growth on a starvation diet.”
It continued, “The most optimistic scenario we can envision entails several more years of lean times, with banks absorbing volume and revenue losses on their paper-based businesses, as they gradually readjust their revenue mix to a greater dependence on electronic payments.”
In an interview last week, however, partners in the firm agreed that banks could maintain and even improve their profitability in the face of sluggish revenue growth by emphasizing the more profitable products.
Lawrence Forman, the associate director of Ernst & Young’s national cash management practice, said, “When we look at the products that are the most profitable, they are by and large on the electronic side.”
Mr. Forman said that electronic services, such as sweep accounts, information reporting, and ACH and wire transfers, were among banks’ most profitable cash management offerings.
Bankers too said that the growth of online cash management presents completely new opportunities for banks now that treasury management is focused on moving information rather than money.
Steve M. Ellis, an executive vice president and the head of wholesale services at Wells Fargo & Co., said Wells has had strong customer response to its Commercial Electronic Office, an online portal for cash management and other corporate banking services.
“We tend to be pretty bullish on it ourselves,” Mr. Ellis said. “The Internet has fundamentally changed the way information is delivered. We think that’s a boon, not a negative. You can push information to customers in ways that you couldn’t do in the past.”
Michael W. Daley, a senior vice president at Wachovia Corp. and the manager of its treasury services product solutions group, said that improved information reporting opens opportunities for growth in broader areas of liquidity management for companies, “with their investment needs and their deposit needs and their short-term needs, along with collections and deposits,” he said. “It’s not just about transaction processing.”
Still, transaction processing remains central to corporations’ banking relationships, and all of the cash management leaders are looking to new products, such as remote check imaging, to propel growth in the year ahead.
“Remote deposit capture and image cash letter have had phenomenal growth in a very short period of time,” Mr. Daley said. “2006 will be a very vibrant year for image cash letters.”
Craig T. Vareum, a vice president at JPMorgan Chase & Co. and the senior product manager of domestic check deposits in its treasury services group, said the New York banking company has developed software to help decide whether to clear a remotely imaged check under regular check-clearing rules or whether to convert it to an ACH transaction.
He said image deposits and ACH conversion serve different segments of the corporate market. “They’ll both coexist, as they are today, for the near and the long term.”
Mr. Ellis said that technologies such as remote capture underscore the ways that technology is transforming the cash management business.
“In the past people would have to come to you to make a deposit,” he said. “In the world of the future — today, actually — people can make a deposit right out of their office. It’s like a lockbox in every customer’s office. You’re changing the game.”
