Consider this dilemma: Competition demands that you give customers what they want, but they are asking for services that would cannibalize the most profitable part of the relationship.

That is how bankers see the increasing demand by small businesses for fee-income-producing cash management services ranging from lockbox and account balance information to higher-yielding sweep accounts that threaten to drain the profits from margin-rich demand deposit accounts.

What do you do? If you are Nina Archer, senior vice president and head of cash management services at Charlotte, N.C.-based First Union Corp., you learn quickly to give customers what they want before someone else does.

"Four or five years ago, we offered a sweep account only as a defensive product because of concern over the (loss of) DDA," said Ms. Archer. "But we started realizing that it doesn't really matter, because somebody else is going to sell it to your customers. You can't close your eyes to that sort of thing."

Today, First Union is considered to be in a select group of banks nationally that are aggressively marketing cash management to both potential new customers and existing ones. Like others, which include BankAmerica Corp. and Milwaukee-based Firstar Corp., the lessons have been the same: make the products and fee structure simple.

Even though cash management isn't just for corporates anymore, most banks are struggling with offering more than just PC links to a customer's DDA account. Experts note that with products targeted at businesses with as little as $2 million in annual revenues, banks uncertain about their cross- sell strategy could miss an opportunity.

So far, successful banks have combined promotion through their branches with joint sales efforts by both small-business bankers and specially trained bankers from the cash management business. They say the key is coordination and giving both teams of bankers sales credit.

"We work across the matrix," said Roberta Drews, a vice president and head of cash management at Firstar. "They (small business bankers) have the customers and we have the products."

Experts say that regardless of the sales strategy, it is critical to focus on what customers need - and are willing to pay for.

"What it comes down to is knowing what level of service outside DDA you can sell," said Larry Forman, a nationally known consultant in the cash management area at Ernst & Young. "Just because of technology alone, there is more you can offer than just five years ago."

More importantly, banks traditionally strong in the middle market are targeting smaller businesses - broadly defined by Ernst & Young as those with $50 million on less in revenues - for cash management. The reason is clear: the field is less crowded and the potential volume is more lucrative.

"The market at the corporate end and in the middle market is getting a little saturated," said Mr. Forman. "If you go to a small business about cash management, you may be the only guy who has come by in the last year."

Indeed, Ernst & Young's 1993 national survey of the business found that banks derived an average of 13% of their cash management revenues from small business, still a fraction of bigger clients. More significantly, the survey found that the share of the revenue pie rose to 22% when the top 20 banks were excluded.

First Union's Ms. Archer estimates her division derives up to 8% of its revenues from the small business segment, which she defines as a business with $3 million to $20 million in revenues.

"We've only cross-sold to 20% of our existing customer base," she says. "We know we can grow that because surveys show that most customers want to do this business with their lenders. We have a goal of up to 75% cross-sell that we think is doable."

But few banks appear to view the potential of cash management in small business as aggressively as First Union. Indeed, most bankers covet fee income from information reporting services, but fear the loss of DDA- related dollars to sweep accounts.

"We only offer it offensively when we want to get someone's business," confides a senior banker at a major East Coast regional. "We don't generally tell our existing customers about it."

That fear is not entirely irrational.

"When we do it, we're not making as much," says Donald Hance, vice president and small business program manager at San Francisco-based Union Bank. "It will cut down on our profits we make off the DDA by as much as 70%."

Still, he admits, in the highly competitive California market, a failure to offer the service could cost a bank entire relationships. "You're fighting an oncoming tide," Mr. Hance said. "If we don't do it, somebody else will."

For those who have focused on small business, the key is to customize products for the market. What works for a Fortune 500 company is likely to be ineffective for smaller firms.

"Companies are often looking for one source for all those services and they're looking for a bank that makes it easy for them," said Firstar's Ms. Drews. "You have to learn to make things simple in terms of your products and your delivery."

For instance, small businesses do not want a corporate-style lockbox to quickly collect large sums of revenue from disparate locations, but they do need some of the same benefits. As a result, Firstar created a small business collection service that provides detailed information to the company on its revenue stream.

This is a business not limited to just major regional banks. Experts say that software advances make it possible for virtually any bank to provide some level of information reporting services. Indeed, some large correspondent banks, such as Chemical Banking Corp., offer their traditionally corporate-oriented businesses to community banks.

Competitors say that Chemical, known for its ChemLink service, offers a private label version of its cash management product called BankLink to its correspondents. (Chemical officials declined to be interviewed for this article.)

No banker interviewed would say how profitable it is to offer the cash management to small business, but it is clear that the best margins will grow with volume.

"I can't say that we have seen the profitability yet that we find with the middle market or corporate clients," said First Union's Ms. Archer. "But if we get the volumes we expect, I would say the profitability will be there."

Ernst & Young's Mr. Forman said that smaller clients could provide better profits than the razor-thin margins of big clients. "It's more expensive to run that business for a small business, but the good news is they're not going to ask for a volume discount."

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