relationships, revenue growth in the business has dropped, according to Ernst & Young's annual cash management survey. Cash management services generate $7 billion per year for U.S. financial institutions. The top 20 banks earn an average of $200 million per year from the business, which entails collecting, disbursing, and transferring funds on behalf of corporate customers. But, in recent years, revenue growth has slowed from the 7% and 8% annual increases seen in the late 1980s and early 1990s. Last year, revenues grew by only 4% - 2.25% behind expectations. This year's haul is expected to be 5% larger than 1994's, but few expect the growth numbers to rise much beyond that in the near term. The dropoff stems from the reduction in the number of banks with which large corporations do business, experts said. Many companies view cash management services as commodities and are demanding pricing concessions based on the added business they give to fewer banks. Given that such demands are becoming more common, Lawrence Forman, a market research manager with New York-based Ernst & Young, said the revenue growth predictions for this year may prove overly optimistic. If a few of the top players come in below expectations, another year of 4% growth is likely, he said. However, the revenue lag is not confined to the large players. "It isn't the case where a small group of banks are having a hard year; it really is a broad-based drop in revenue," Mr. Forman said. Despite the industrywide drop in revenues, the top-tier players are benefiting as corporations reduce their numbers of cash management partners. Last year, the market share of the largest 20 cash management players jumped to 56%. This group held 37% of the market in 1991. Smaller players as a group either have experienced no growth, or have lost market share, Mr. Forman said. Based on this trend, Ernst & Young predicts the top 20 group will account for 75% of all cash management revenue. "There are winners and losers," Mr. Forman continued. "The second tier of banks (those with assets between $11.3 billion and $35 billion) end up with a completely stagnant revenue situation from now until the year 2000," while most other banks become "completely irrelevant from a cash management standpoint." The result: "More banks will be looking at what their core competencies are," said Edward Valenzuela, first vice president with Mellon Bank Corp., Pittsburgh. Survivors in the cash management field will be those with substantial volumes, who can then "spread the costs of the ever-increasing investment in technology," he said. Mr. Valenzuela generally agreed with the survey's findings, but he said the bulk of the business will be concentrated among considerably fewer than 20 banks. "My own personal feeling is that it will probably be only 10 major players, and maybe not even that many," he said. Connie Beck, an executive vice president with NationsBank Corp., agreed with that assessment. "I would not expect there will be 20 major providers in five years," Ms. Beck said. "I think it will be a smaller number than that; probably less than 10." James G. Graham, senior vice president at PNC Bank Corp., Pittsburgh, also concurred. He said many banks have undertaken "short-term strategies" by specializing in certain niches within the business, when companies in fact want an entire menu of products and services. Banks are falling behind in the business because of merger and acquisition distractions, which have "forced a lot of people off of their (new) product agendas," Mr. Graham said. Meanwhile, although most bankers apparently agree the business is becoming concentrated among fewer players, others offered a more optimistic view of the future. Richard H. Snelsire, a senior vice president with Wachovia Corp., which has dual headquarters in Atlanta and Winston-Salem, N.C., conceded that there is "probably some overcapacity in the industry." He agreed that large sums of investment dollars were required to remain a player in what is a highly competitive business. But he also noted that much about the banking business quickly can change. As an example, he said the high costs of new technologies, such as imaging systems, could soon drop, allowing more institutions to offer complete lines of cash management services. "All we know, in my opinion, is that there are going to be fewer and fewer major players in this business, (but) there is too much volatility today to determine what that number is going to be," Mr. Snelsire said. In other survey findings, revenue by specific service lines were generally down from past levels. The exceptions were automated clearing house services, which had a 13% growth, and retail lockbox, which bounced back with a 3.5% growth following a 2% contraction in revenues in 1993. The increasing automated clearing house revenues, which contributed a 4% share to the overall cash management business, were fueled by growth in financial electronic data interchange transactions. The survey, sent to the nation's top 300 banks ranked by asset size, had 88 respondents, including virtually every bank in the top 50.

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