After last week's bank merger activity, competition in the cash management business should get even more cutthroat, an industry consultant predicts.

Larry Forman, a consultant specializing in cash management at Ernst & Young in New York, said nearly all the participants in four big bank mergers this year are major cash management players. Competition will get stiffer, he said, because these larger entities have bigger technology budgets and larger economies of scale.

Smaller banks are in jeopardy, Mr. Forman said. "The only way they are getting any real growth is through mergers and acquisitions."

Last week, First Chicago Corp. and NBD Bancorp announced an agreement to merge, as did PNC Bank Corp. and Midlantic Corp.

This year's two other major deals are First Union Corp.'s pending acquisition of First Fidelity Bancorp. and Fleet Financial Group Inc.'s agreement to buy Shawmut National Corp.

According to early results of Ernst & Young's annual cash management survey, the business "may actually be contracting" as a percentage of banks' total revenue. The survey, whose results have not yet been published, showed "out-and-out shrinking, in real dollars," Mr. Forman said.

That's because corporations are consolidating their banking relationships. Indeed, the typical U.S. corporation used just more than seven banks for cash management purposes in 1990, according to a 1994 survey by Greenwich Associates, a Connecticut-based research firm. But after a five-year downward trend, that number in 1994 was just over six.

Revenues are declining, Mr. Forman noted, because corporations can exact better terms from their cash managers due to the increasing business they give their lead banks.

The new superregionals will present a more attractive choice for corporations, which increasingly take into consideration a bank's interstate capabilities, Mr. Forman said.

Cash management services, with their high fixed costs and volume-driven profitability margins, are tough for banks to offer profitably.

Lockbox, check collections, and disbursements from controlled or zero- balance accounts are often viewed as commodities. More innovative services, such as those related to electronic data interchange, require major technological investments but yield marginal returns.

Nevertheless, cash management remains a sacred business among a select group of banks that historically have espoused a philosophy of maintaining close relationships with major corporate customers.

"It's the psychological perspective," said Gary Scott, president of G.A. Scott & Associates, a newly formed bank consulting firm based in Chicago. Banks view cash management, which helps corporate customers manage their funds, as forming the "anchor of the relationship," he said.

If a bank positions itself solely as a lender, or only as a place where corporate payroll accounts are kept, customer loyalty will not be cultivated, Mr. Scott said. "Corporations have many different types of credit access alternatives."

Mr. Scott, a former employee of First Chicago, said its merger with Detroit-based NBD would bolster the combined entity's cash management power in the Midwest, especially versus BankAmerica Corp., which last year acquired Continental Bank Corp., Chicago, another strong corporate bank.

"Continental had talent," Mr. Scott said. The acquisition strengthened BankAmerica's position, making it "a considerable threat to First Chicago."

NBD's more than 600 branches will add significant presence for the new bank company. The Detroit bank, which operates in Michigan, Indiana, Ohio, and Florida, brings diversity to First Chicago's regional customer base and adds middle-market accounts, experts said.

"NBD is reasonably strong in cash management," so the merger will help First Chicago offset the Bank of America threat, Mr. Scott said. "However, from the point of view of First Chicago, I think that right up there was clearly the need to maintain a lead in retail banking."

He said Bank of America is a premier retail bank, thanks largely to its chairman and CEO, Richard M. Rosenberg, who "grew up in retail."

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