Bank revenues from cash management services grew 9% in 1998, to $9.5 billion, the fastest rate of growth for the highly mature business in a decade, according to a study from Ernst & Young.

The nation's economic expansion was cited as the primary source of growth by Lawrence Forman, director of the New York consulting firm's 16th annual survey, which does not include sales from international operations. The last time cash management revenues grew nearly this fast was in 1990, when they rose 8.5%.

Though 1998 revenues exceeded Mr. Forman's 7% growth forecast by $200 million, he tempered the news by noting that revenue growth has probably reached its high-water mark. Banks will be hard pressed to match their 1998 performance, he said, because of a probable slowdown in fourth-quarter sales related to year-2000 conversion problems. From the study of 61 of the largest 100 banks in assets, Mr. Forman is predicting a growth rate of 8% in 1999, which would produce $10.3 billion of bank revenues.

"The survey recorded a year of phenomenal growth relative to recent performance, but there is a hint that we might be reaching a peak," Mr. Forman said. "I think there is a lot of caution about repeating that kind of performance."

Pam West, group executive of global products and strategy development at Bank of America Corp., said she is "assuming that Y2K is the nonevent we all think and certainly hope it will be."

But she agreed that cash management revenues may level off "because of uncertainty. I think the economy might slow some."

Despite a potential slowing, performance next year would still be well above the modest 4% growth the industry recorded in 1994, Mr. Forman said. He noted that actual growth rates in recent years have consistently exceeded his projections.

Cash management services basically let corporate treasurers control collections and disbursements. Bank products associated with the business include paper and electronic payment services, lockbox collections, controlled disbursement accounts, and information reporting via treasury workstations.

Among the 20 banks classified as the "peer one" group -- having assets exceeding $40 billion -- the prediction for 1999 is for 7.5% growth. Other respondents expect 10% revenue growth rates.

Bankers offered other reasons for the growth. Jane Verkouteren, senior vice president at First Union Corp. in Charlotte, N.C., said she believes that banks are benefiting as corporations move to electronic systems and away from paper.

Though revenues from electronic cash management systems are lower than those in the paper world, the profit margins are considerably healthier, Ms. Verkouteren said. What's more, banks are profiting because corporations are paying for both paper and electronic banking services.

"During this transition stage, companies are operating two systems, and that means more fee income to banks," she said.

Though the survey showed that the cash management business continues to consolidate among fewer large banks that can afford the cutting-edge technologies, anti-competitive pricing practices have not materialized. Though the top five banks accounted for 49.5% of total revenues, according to the study, prices are still going down, Ms. Verkouteren said.

"Hopefully, people in the industry will see that this (consolidation) has not been detrimental at all," she said. "The competition is more intense than ever."

The top five banks averaged $940 million of revenue, up from $800 million in 1997. The largest 20 banks in Ernst & Young's study accounted for 81.5% of the total revenue.

"The five banks that control most of the market continue to be very competitive with each other," Ms. Verkouteren said. "We all want each other's share of the pie so we continue to try and grab for it."

Measuring revenues by product, the dominant growth service is information reporting, which grew 17%, to $712 million. The service is gaining in popularity, thanks to the Internet, since it involves accessing bank account information electronically.

Mr. Forman said the trend of developing Internet services could help smaller banks compete with larger institutions by opening up cash management opportunities to small-business customers.

However, most banks are behind in their plans for developing an Internet cash management service. Only 25% of the responding banks actually offer an Internet service. Two years ago, 41% of these banks said they would have a service available in 1999.

Officials at City National Corp. in Beverly Hills, Calif., are highly optimistic about the Internet service they hope to offer in the second quarter of next year. The company, which serves much of the entertainment world in Hollywood, sells companies a PC dial-up version that is popular among small to midsize businesses, a market segment that large banks are heavily courting.

An Internet service would be far easier to distribute and maintain, officials there said.

"Balance reporting and information reporting is the hottest product you can sell to a customer and is very near the top in terms of our middle-market sales," said Randy Tewell, vice president at City National.

Mr. Tewell joined the $7 billion-asset company in 1996, along with several dozen veterans of the former -- and formidable -- cash management powerhouse First Interstate Bancorp, after it was bought by Wells Fargo & Co.

Other bankers saw a dark side to the Internet's role in information reporting services.

David Frady, senior vice president at Hibernia Bank in New Orleans, said large competitors in his Louisiana market are setting a disturbing precedent by offering free information-reporting products to small businesses.

Banks must maintain fees associated with delivering cash management information on-line, he stressed. The move to free services is shortsighted, he said, because information reporting is one of the most profitable services offered by banks.

"We don't have deposits anymore, and all the large loans are taken to market," Mr. Frady said. "But we have payments and information, and here we are giving it all away for free."

Hibernia commands 45% of the corporate banking market in its region, and primarily deals with businesses with less than $5 million of sales. Its cash management revenues exceeded $43 million in 1998, up 20% from the previous year.

Sweep services remain among the most popular cash management offerings, with 86% of the surveys' respondents saying they offer them. The number of corporate customers using sweep investment products rose 22% in 1998, to about 150,000 customers, according to Ernst & Young.

As of January 1999 the daily average balance of swept funds had risen 42% from a year earlier, to $130 billion. Revenues from spread income associated with sweep services are not measured in the Ernst & Young survey.

A sweep account temporarily moves excess corporate funds from non-interest-bearing commercial accounts into interest-bearing instruments such as proprietary bank mutual funds, repurchase agreements, and commercial paper.

Thus, sweeps could cause bank revenues to decline, since banks could keep all of the interest on these balances. But Mr. Forman also said the net result of sweeps is often positive because corporations that actively manage their cash often decide to use bank sweep programs and sometimes introduce more funds into the banking system from nonbank sources.

A more intangible benefit from sweeps is the enhanced bank/corporate relationship. Mr. Forman said banks have been aggressively marketing sweeps for defensive purposes to prevent a souring of the relationship. Not having a sweep program can hurt a bank, because corporate funds will not "sit idle forever," Mr. Forman said.

"Someone will wake up and ask, 'Why haven't I been sweeping funds before? Whose side are you on anyway?' "

Mr. Tewell at City National, whose institution runs a family of eight proprietary mutual funds through its City National Investments division, said, "The preference would be to have the balances on the balance sheet, but it is definitely something we have encountered in competitive situations. We have been able to win customers by offering this, and we have been able to retain customers by pointing out the different kinds of things that they can sweep their funds into."

Another rapidly growing cash management product -- one that has been embraced by banks and corporations alike -- is purchasing cards. According to the study, the number of corporate purchasing card users rose 120%, to 1.7 million. (The number excludes cards issued by American Express and one undisclosed top-20 bank. The actual number of cards issued could be well over 2.5 million, Mr. Forman said.)

Of the banks that offer purchasing cards, just over half said the programs are run by the cash management divisions and not the credit card units. Forty-one percent said they offer purchasing cards, and 74% of "peer one" banks sell them, according to the study.

"Purchasing cards have been embraced by large banks," Mr. Forman said.

Revenues from purchasing cards were not included in the survey's total.

The second-fastest-growing product, as measured by the survey, involves automated clearing house and related electronic data interchange services. Revenues from that grew 13%, to $427 million.

Demand deposit account services -- which include funds transfer fees associated with sweep services, general check disbursements, zero balance accounts, and coin and currency -- remained the largest contributor of cash management revenues. They grew 8%, to $3.7 billion.

Wire transfers were the next largest revenue generator, producing $1.4 billion of revenue, up 10.5% from a year earlier.

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