Electronic data interchange, the fledgling cash management service offered by about 30 big banks, is slowly shedding its image as a money pit.

The change can't come too soon for bankers who have plowed millions into the processing service, which enables corporations to electronically lump invoice data along with corporate trade payments.

While bankers envisioned the product as a natural way to build fee income, it hasn't worked that way. The reason: The first users, typically business giants like General Motors Corp., were able to negotiate fees that barely covered operating costs.

But for banks, the good news is that smaller players with less clout are now being attracted. And the fees they are willing to pay can generate profit margins as high as 50%, according to some bankers.

Volume Explosion Expected

Bankers once down on EDI feel that that willingness -- combined with an expected explosion in EDI volume over the next few years -- could soon make electronic cash management services very profitable.

Still, the fact remains that for most banks, the service is not yet in the black.

"Banks right now aren't making money from [EDI services]," said Mark Stuparich, a vice president at Chase Manhattan Corp. and a member of the National Automated Clearing House Association's EDI council.

Mr. Stuparich said many corporate cash management customers see the pricing schemes of the automated clearing house as a yardstick with which to measure what they should pay for financial EDI services.

Challenge for Bankers

But bankers contend that financial EDI transactions -- typically consisting of electronic payments accompanied by voluminous remittance information -- are much more complex than typical automated clearing house payments like electronic payroll deposits.

"Our challenge is to convince clients that the data massage and other services we do are worth more money than the few cents they pay for plain-vanilla transactions," Mr. Stuparich said.

Even if most banks are not making much money, Mr. Stuparich and others believe there are good reasons for those that plan to remain in the $6 billion a year cash management business to pay attention to developments in the EDI arena.

Phenomenal Growth

The best of these reasons is the phenomenal growth rate. According to several EDI trade groups. electronic company-to-company payments and correspondence are growing by more than 50% per year.

However, more than 99% of all corporate trade payments are still made manually. This spells enormous potential for banks. Many experts believe that by the end of the decade more than half of U.S. corporate-to-corporate payments will be made electronically.

"With 38 states already requiring electronic tax filings, the model for [electronic] payments is already in place for most big companies," said Peter J. Stein, first vice president at NBD Bancorp, Detroit. "It's just a matter of time before more companies begin to demand these services" from their banks.

|At the Beginning'

"We're at the beginning rather than anywhere near the middle or the end, in terms of opportunities for banks," said Ralph Joy, vice president in global cash management at Mellon Bank Corp.

EDI got its real start in banking in the mid-1980s when First Chicago Corp. began doing some basic electronic payments at the behest of one of its biggest cash management customers, General Motors. GM wanted to do business electronically, and it had the clout

Translations Provided

But according to Mr. Stein and others, electronic cash management can be more than just a pacifier for large clients.

EDI experts say, however, that to make the business profitable banks must find new ways to add value to the electronic products they offer.

Along these lines, most cash management banks are looking to help translate EDI messages that can arrive in a bewildering array of data formats from a wide range of corporations. While more corporations are using an EDI format called X. 12 that is designed to standardize intercompany communications, some still use industry-specific formats.

Translating these data formats is but one of the ways that banks can make up for some of the revenue that will be lost through the evaporation of paper-based services such as wholesale lockbox and account reconcilement.

Most Prefer Paperwork

Although many big corporations may want to send and receive electronically, experts estimate that 75% of U.S. wholesale cash management customers still want to do the bulk of their payments and remittance correspondence on paper.

Bankers see this transition period as another profit opportunity: Even if a company wants to make all its payments electronically, it can only do so if its trading partners are capable of receiving electronic transactions.

The fact that most companies in the interim will need to accept a mix of checks and electronic payments from their customers plays right into bankers' hands.

On the accounts-payable side, EDI will displace a number of functions as well. But here again, banks are finding some new niches.

A Suite of Services

First Chicago and Mellon, for instance, now offer a suite of electronic services through which a corporate client can effectively hand over its entire accounts payable file to the bank.

"Although some industries have been slow to adopt EDI," said Carol E. King, a vice president in EDI product development at First Chicago, "it would be foolish of any bank that wants to remain in cash management services to believe that it [EDI] will just go away."

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