It seems banks' cash management business has changed for the better this year after a woeful 2002, but persistent trends point to continued challenges.
On top of a sluggish economy and low interest rates are fundamental changes such as technological developments and heightened competition for commercial banking business, bankers said in interviews this week.
Ernst & Young reported this week that 2003 growth in revenue from cash management services at the top 100 banks could turn out to be 5%(it used first-quarter data for the projection). But David L. Shafer, the managing director of the consulting firm's national cash management practice in Kansas City, warned that banks could face a lengthy crunch on their cash management revenues.
The trends squeezing sales today are the same ones that pummeled them in 2002, when cash management revenues rose just 1.5%, to $12.6 billion, for the top 100 banks. That followed increases of 6%-7% the previous three years and was the smallest increase in the 20 years Ernst & Young has done the survey.
Mr. Shafer said historically low interest rates, a sluggish general economy, and the shift toward electronic transactions were to blame for 2002's poor showing, and noted that only some of these trends have reversed. "The economy is cyclical, and the interest rates are cyclical," he said in an interview Tuesday, "but really and truly, the volume of checks is going down."
Ranjana B. Clark, an executive vice president and the head of treasury services at Wachovia Corp., said the picture for banks is not great.
The top five in the survey projected growth rates in the 3.5% range for 2003, which "is optimistic," but "I don't think we're going to see that," Ms. Clark said. She said she anticipates "several years" of sluggishness for cash management products.
Cash management revenues for the top five banks fell 1% in 2002, Ernst & Young said. It did not name the banks, but they are understood to be the banking units of Bank of America Corp., Bank One Corp., J.P. Morgan Chase & Co., Wachovia, and Wells Fargo & Co.; Citigroup Inc. does not make the domestic list but is a giant in international cash management operations. The remaining banks in the top 20 are expected to do better this year, with Ernst & Young projecting 7% growth.
The shift away from paper hits banks in several ways, said Lawrence Forman, the associate director of cash management at Ernst & Young in New York. Though companies might pay 5 or 6 cents per item for check processing, the bank might earn only 2 cents per item for automated clearing house transactions.
What's more, many of the revenue-generating services that banks provide for their corporate customers - from the controlled disbursement of check payments to account reconciliation - revolve around paper transactions. As paper is removed from the processes, the revenue may go with it, Mr. Forman said.
That means shifting to e-payments should hamper growth for years to come. "Those secular changes are going to prove to be a drag on revenues," Ms. Clark said. Automation will allow the banks to spend less to process transactions, he said, but "the bottom line is a different story."
Sanjiv Sanghvi, executive vice president of treasury management at Wells Fargo, said some of the perceived losses of business represent simple shifts of those transactions to other parts of the bank. For instance, companies for years have used controlled disbursement to pay suppliers, with Wells collecting a "click fee" for producing and mailing those checks.
Now, however, more corporate managers use purchasing cards to make smaller purchases. That business, while outside the traditional cash management silo, is growing at double-digit rates and will continue to do so for the next couple of years at least, Mr. Sanghvi said.
Innovations such as document imaging at the wholesale lockbox also provide Wells with new ways to make money, Mr. Sanghvi said. "We're not doing it from Treasury transactions anymore. We're doing it from all the information we're selling around those transactions."
Ms. Clark said Wachovia hopes to capitalize on the e-commerce shift.
"We want to be able to offer our clients the appropriate suite of migration products," such as converting check payments to automated clearing house transactions at the lockbox. And the bank could develop new businesses in adjacent areas, such as invoice printing on behalf of clients, she said. "That would sort of enlarge the size of the pie."
Smaller banks stand ready to grab business away from larger rivals. Anthony A. Gautney joined BankAtlantic Bancorp of Fort Lauderdale in 1998 from Comerica Inc. to establish BankAtlantic's cash management department. "This is the strongest year we've experienced," said Mr. Gautney, who is a senior vice president of the bank and the manager of the department.
"We are going to provide the products of a big bank and the service of a community bank," he said. "We've heard loud and clear" that customers "are not happy with the big banks."
A regional like BankAtlantic, with $5.6 billion of assets, puts far more emphasis on small-business clients and middle-market companies than do cash-management giants that serve multinational behemoths, but it has fewer products to pitch. However, as a recent entrant to the business, it has been able to capitalize on the shift to electronic technology more nimbly that banks that have established products.
"My cost curve is radically different from theirs because I don't have the hardware, the software, and an IS that does nothing but maintain it," Mr. Gautney said. "My cost is lower than their cost, but my margins are just as strong."
The big banks tend to say they are not worried about losing customers to smaller banks.
"Large companies that have complex needs, I think, are gravitating to us more than ever. They are asking us to do more-complicated things," said Paul Galant, a managing director at Citigroup and its head of cash management worldwide. Smaller institutions lack the resources to vie with Citi, he said.
Mr. Galant did, however, acknowledge that customers have become extremely fee-conscious. "Virtually every corporation I know of has been getting very scrappy," he said. "They're looking at every nickel."
