Banks' corporate cash management services, despite being commonly relegated to the "mature business" category, have increased their revenue growth rate for the third year in a row.
Revenue jumped 7.5% last year, to $8.7 billion, according to Ernst & Young's annual industry survey. The last time it grew that fast was in 1992.
Ernst & Young is projecting a 7% rise this year, to $9.3 billion.
"The industry is doing well," said Lawrence Forman, the auditing and consulting firm's analyst who oversaw the 15th annual cash management study, which included a survey of 58 institutions.
He credited the strong U.S. economy, increases in payment volumes, and innovations in technology for exceeding the firm's 1997 growth forecast of 7%.
"It is a broad-based growth with a tremendous concentration at the top," he said.
Indeed, revenues are quickly consolidating in the hands of a few big commercial banks. The top five generated 41% of 1997's total, which would be adjusted upward to 48% as of Aug. 1, when 1998 merger activity is factored in.
The five-bank concentration was only 34% in 1996.
The top 20 cash management providers controlled 78% of the business in 1997 and 82% through Aug. 1.
The fastest-growing products are automated clearing house/electronic data interchange and information reporting, both 15% above 1996 levels.
The Internet is also feeding growth. Among survey respondents, 47% said they planned to offer information reporting over the Internet within 12 months. And 39% said customers could be initiating transactions over the Internet by 1999.
With the top five banks generating an annual average of $800 million of cash management revenue per bank, they have "a seemingly insurmountable lead," Mr. Forman said.
There are clear scale advantages, as larger banks can devote more resources to new products and services. First Union Corp., one of the top five, recently made a $70 million product and service development commitment.
That poses a competitive threat to smaller institutions, said Mr. Forman, compounded by the fact that the big ones are increasingly marketing to the small and middle-market customers served by smaller banks.
And with the increasing reliance on the Internet, "location is not going to matter. There is a real danger to your franchise," Mr. Forman said.
"The midsize to smaller cash management players have to be scared," said Nicholas Alex, senior vice president of BankAmerica Corp.
The $572 billion-asset BankAmerica is targeting small and middle-market businesses because they provide the best opportunity to sustain the bank's double-digit revenue growth goal, said Pam West, senior vice president.
She said smaller banks will be severely challenged to compete against products that can be tailored to meet the needs of small, middle market and large corporate customers alike.
Small cash management banks should seek their fortunes in specialized niches rather than try to "be all things to all people," Ms. West advised.
Having completed its merger with NationsBank Corp., the new BankAmerica is a cash management powerhouse. It does not disclose numbers, but observers estimate that its cash management revenues exceed $1 billion-well over 10% of the U.S. market.
"These megamergers will offer real depth to our clients," Ms. West said.
BankAmerica also anticipates international growth. Its banking operations in 39 countries fill a big gap that NationsBank had, Mr. Alex said.
Fourteen of the 19 banks in the Ernst & Young survey with more than $57 billion of assets reported comparable growth rates in international and domestic cash management operations. Only 11% of the banks with less than $13.5 billion of assets said they offered cash management services internationally.
Hibernia Corp. of New Orleans is in the latter group, with $13.4 billion of assets, but its $36 million cash management business has been growing at a 23% annual rate.
"Big banks have been so focused on merger and acquisition activity that they have lost touch with their middle-market customers," said Hibernia senior vice president David Frady. "We have taken full advantage of that. I can't grow that fast if someone else isn't losing customers."
With 11,000 corporate relationships and 80,000 commercial accounts, Hibernia commands 40% of the corporate market share in Louisiana and East Texas, Mr. Frady said.
He added that 98% of Louisiana's businesses have less than $5 million of annual sales and are not as sensitive to price as are multinational corporations. Smaller businesses seek out the "personal touch" provided by Hibernia's style of corporate services, he said.
At the same time, Hibernia is large enough to capitalize on new technology-based services, he said. It has offered Internet-based treasury workstations, for example, since November 1997.
Towernet, developed in-house, lets customers with as little as $500,000 in sales initiate domestic and international electronic funds transfers and receive advanced information reporting and image-enabled lockbox services.
"If we see something we want to do, we can generally get it done quickly without having to go through the bureaucracy of a large organization," Mr. Frady said.
PNC Bank Corp., with $76 billion of assets, is boosting cash management growth by expanding its range of services. Pittsburgh-based PNC increased cash management revenue 15% last year, to $213 million.
PNC now wears a number of cash management hats, said Francine Miltenberger, senior vice president. It acts as a consultant, systems integrator, technology provider, or outsourcer.
"I think we are truly stretching the boundaries of the services we traditionally provide," Ms. Miltenberger said.
Ms. Miltenberger said PNC is playing a lead role in reengineering Xerox Corp.'s accounts receivable operations. Along with Electronic Data Systems Corp. of Plano, Tex., PNC is building an electronic lockbox system that would automate Xerox collections.
Using EDS' Internet-based electronic data interchange software, Xerox's corporate trading partners would transmit payments and related information to Transpoint, the electronic bill payment and presentment venture owned by Microsoft Corp., First Data Corp. and Citicorp.
After retrieving the information from Transpoint, PNC would execute payments via the ACH network, converting remittance information into electronic data interchange formats, which would be used to automatically reconcile Xerox's accounting system.
"We are becoming an information integrator," Ms. Miltenberger said.