The cash management business continues to grow at a stable rate, but this year bankers are predicting the lowest level of revenue growth in 10 years, according to a soon-to-be released report.
Bankers participating in Ernst & Young's ninth annual Cash Management Services Survey estimate that cash management revenues will grow by about 7% by the end of 1993, which would represent a slight drop from the 1992 growth rate of 7.5%.
If the expectations are realized, cash management departments at banks will record about $441 million in new revenues by yearend, bringing the total amount of cash management revenue to about $6.7 billion.
Yet even if growth rates do drop as expected, banks will still be in a decent position to make money from their cash management products, experts believe.
|Ruled by Economies of Scale'
The reason for this is that the general consolidation of the banking industry is concentrating the cash management business into the hands of fewer and fewer players whose growing operations are increasingly able to reduce the cost of delivering banking services to corporate clients.
Cash management "is a business that's ruled by economies of scale, and an increasing number of banks are getting the critical mass they need to reduce costs," said Lawrence Forman, manager with Ernst & Young's cash management consulting practice.
"The question is whether those improved efficiencies can be translated into profits."
According to the Ernst & Young report, which is compiled from responses by 104 financial institutions, the top 20 banks garnered 48% of all cash management revenues last year. The same group of banks accounted for only 37% of the revenues in 1991.
A Significant Trend
While these numbers are probably more an incidental outgrowth of the overall banking consolidation than a sign of some concerted effort by large banks to expand their cash management services, the growing strength of the major players in the industry is nonetheless significant.
In an effort to take advantage of the growing scale of their operations, many big banks are substantially increasing their investment in technologies, such as check image processing, that could reduce their operational costs, experts said.
This interest in new technologies is expected over time to translate into fiercer competition for business on the basis of price, which could drive many smaller players out of cash management altogether in the coming years.
The Ernst & Young study indicates this trend is already in motion. The smallest group of banks in the survey - $4.7 billion in assets and smaller - accounted for only 14.5% of all cash management revenue last year. In 1991, the same group gathered more than 18% of the total revenue.
More Emphasis on Profits
Tying into this increased competition is an increased emphasis by the biggest players on turning a profit from cash management services. Historically, most banks have viewed cash management services mainly as a way to attract prospective lending customers.
The expenses involved in providing cash management services were considered part of the cost of securing other lines of business that could turn profits. But the Ernst survey shows that in recent years. more and more banks are trying to squeeze profits from their cash management services.
A full third of banks now operate their cash management business independently of their credit and lending operations, the Ernst survey found.
"Many of the larger banks are saying that the cash management has got to stand on its own two feet," said Ernst & Young's Mr. Forman.
Still Some Concessions
The banks that approach cash management as a profit-making enterprise have not eradicated all vestiges of the old system.
For instance, many of the banks that espouse the profit orientation have begun offering electronic data interchange products that are clearly more a concession to the demands of their large corporate clients than an effort to specifically generate revenues and profit.
While bankers participating in the survey did not note their most profitable products, they did cite the ones that garnered the most revenues.
In 1992, Automated Clearing House services brought in 17% more revenues than in 1991, while controlled disbursement and wholesale lockbox exhibited revenue growth rates of 13.5% and 10% respectively.
The services that dragged down the overall revenue growth numbers in 1992 were information reporting, account reconciliation, retail lockbox, and wire transfer. Those are expected to be the low-revenue services for 1993 as well.
The drop in revenue growth, while not terribly significant, is not without its effect.
Banks realize that new cash management business will be increasingly harder to come by, and there are already signs that they are preparing for that eventuality. For the third straight year, cash management departments have increased the numbers of employees designated to customer service functions.
In 1991, about 28% of all cash management workers were involved in customer service functions, but that percentage is expected to be 35% by yearend.
"The challenge for the next few years is clearly going to be to keep the business that you've got," said Mr. Forman. "The customer service moves are an attempt to do just that.