offering their small-business customers checking accounts that sweep excess cash into money market mutual funds. These banks are eyeing cash sweep programs as a way to strengthen ties with small businesses, stem an outflow of deposits, and boost proprietary money market fund assets. The numbers tell the story. Companies with less than $50 million in annual revenue accounted for 29% of cash management revenue at midsize banks in 1994, up from 22% the year before, according to a study released earlier this month by Ernst & Young, the accounting and consulting firm. To a large extent, banks haven't had much choice. Nonbank competitors have been pushing the service so aggressively that small businesses have come to expect it at their banks. Indeed, banks themselves have been offering the accounts to consumers for the past decade. But old banking habits die hard. The easy money to be made on demand deposit accounts has kept many banks from making an aggressive move into cash sweeps despite account erosion, some executives said. "Banks have resisted them because they haven't had to pay interest on these assets," said R. Gregory Knopf, vice president and managing director for proprietary mutual funds at Union Bank, Los Angeles. "But customers are very aware that they can get interest on these balances." Nonbank brokerages have been luring bank customers with sweep products for years. "When Merrill's cash management accounts were introduced in the '70s, the money they sucked out of the banking industry was incredible," recalled Gary N. Kocher, executive vice president Bisys Fund Services, Columbus, Ohio, and a former bank chief executive. Banks that are trying to keep customers - both corporate and retail - from fleeing to other financial service providers have to keep up or be left behind, he said. "If you've created a broker-dealer to compete with the outside world without offering a sweep, you're going to have trouble," Mr. Kocher said. "From a pure bank profit point of view, there's no reason why you'd want to" offer sweep accounts, said Steve D. Potter, business product development manager at Barnett Banks Inc., Jacksonville, Fla. But the "slow drip" of money out of some checking accounts forced Barnett to confront how many assets "it would let walk away," Mr. Potter said. Bank sweep accounts typically shift excess cash from a non-interest- bearing account into money market mutual funds or repurchase agreements at the end of each day. In a survey conducted last year, Treasury Strategies, a Chicago consulting firm, estimated that daily volume of commercial sweep accounts averaged $56 billion. Some banks have responded to customers demands. Building on a successful sweep program for larger companies, Barnett recently introduced a product geared to businesses with $5 million or less in annual revenues. The outflow of cash prompted some banks to start programs for purely defensive purposes that quickly evolved into net asset attractors. "We became aware that we were losing assets of key customers to (other) banks and brokerages" last year, said Union Bank's Mr. Knopf. In response, the bank introduced a sweep program that included two of the bank's proprietary mutual funds. The sweeps have since added more than $150 million in assets to two proprietary mutual funds. And demand deposit balances have actually grown - not shrunk, Mr. Knopf said. "We're starting to find out that you can gather assets rather than lose them," Mr. Knopf said. By capturing these assets, bankers stand to reap larger advisory fees from assets swept into their proprietary mutual funds. Sweep products do earn their keep, Barnett's Mr. Potter said. Assets funneled into the two Emerald proprietary funds offered as part of the program annually earn the bank's investment unit "in the range of 50 basis points," he said. Even after overcoming persistent fears of disintermediation, smaller banks have to master back-office hurdles to automate the sweeps. The expertise to do that has favored larger banks in the past, but some say that's changing. "Historically, it's been concentrated in the top 50 banks," said Randall V. Schultz, vice president of Bisys Information Services, Houston. "But the price of offering sweeps has come down."

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