More banks are likely to stop sorting consumer bill payments for corporations, a study by a leading consulting firm indicates.

According to the Ernst & Young survey of 104 of the country's largest banks, most big banks could boost the number of consumer bill payments they sort for corporations by 60% without making any significant new investments in capital.

Furthermore, this sorting business, which goes by the name retail lockbox, is growing at a mere 3% annually.

Profit Margins Narrow

Sluggish growth, excess capacity, and heated nonbank competition are squeezing profit margins, which means that more profit-minded banks should exit the business, said Lawrence Forman, a consultant in the New York offices of Ernst & Young who compiled the data.

"The banks that are out of this business are thrilled that they're out of it, and can't understand why the others are still in it," Mr. Forman said.

There are indications that an exodus may have begun. Earlier this year, one of the largest providers of retail lockbox services, Wachovia Corp., of Winston-Salem, N.C., said it was exiting the business because the returns did not justify the necessary investment in new technology.

Big Player Exits Field

NationsBank Corp., a big provider of wholesale lockbox services for corporate-to-corporate payments, exited the retail lockbox business in 1992 for similar reasons.

"I agree with the conclusions that where drawn" by the Ernst & Young consultants, said Martha Morrison, a NationsBank lockbox and vault product manager in Dallas.

Many other banks, including Bankers Trust New York Corp., have found a middle ground by outsourcing their retail lockbox business to a nonbank, giving the bank's customers access to the services but precluding any big revenue opportunities.

Only three-quarters of the respondents to the Ernst & Young study even offer retail lockbox services, a lower availability rate than for any other cash management service.

Select Clientele

Most banks with retail lockbox units sell the service only to selected customers. Eight percent of those selling the service aren't actively marketing it.

One in five of those banks that sell retail lockbox services have outsourced their operation to another company. One in 10 of those offering the services are considering outsourcing.

The reason retail lockbox is such a competitive business is that just about any big company can get into it. For example, companies can run their own retail lockboxes.

Likewise, nonbank service companie, like National Remittance of McLean, Va., or Cashflex in New Jersey, have proved they can run a retail lockbox just as well as a bank.

Commodity Business

And with companies paying only pennies per item for sorting services, and changing lockboxes to save a fraction of a cent per item, retail lockbox is widely seen as a commodity business.

Even so, with consumers mailing billions of payments each year to corporations, the retail lockbox business is sizable. Ernst & Young estimated that banks got about $150 million of revenue last year from retail lockbox units, while nonbanks got $50 million.

And despite the competition, some banks manage to squeeze a fair profit from the business.

A Little Extra for Shareholders

"It provides a value to our stockholders" above the return on equity for First Interstate as a whole, said David Drake, a bank vice president in charge of cash and check services.

He added that First Interstate Bancorp, which sorts 10 million payments a month through its retail lockbox unit, plans to strengthen its operation by buying an expensive new image processing system early next year.

Other large bank providers of retail lockbox services that are believed to have strong commitment to the market include Mellon Bank Corp. and National City Corp.

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