Smaller cash management banks smaller are trying to use this era of technological transition to win market share away from the top five, and some observers think they can succeed.
Some of the challenges come from first-tier and midsize banks trying to win competitive advantage with geographic or product-based strategies. But Web-based cash management systems can deliver online capabilities to even the smallest banks and businesses.
Meanwhile, the big five have plans to use technological advances to extend their businesses to smaller corporate clients.
Cash management revenue is not growing much. Ernst & Young reported last month that industry revenues were essentially flat in 2004, for a third consecutive year. It said banks estimate 2005 growth at 3.5%, about half the historic rate, as banks and clients shift from paper-based processing and reports to electronic systems.
Some second-tier competitors see opportunity in that shift.
A sign of changing times:
In mid-2002, JPMorgan Chase & Co., which calls itself the world's largest cash management bank, was touting its purchasing card's advanced features, which included Internet reporting and management capabilities.
At the end of 2005, Comerica Inc. of Detroit is offering a purchasing card that also includes individual spending limits for each card and limits on the type of merchant where each can be used.
Daniel J. McCarty, the senior vice president of treasury management services at the $54.3 billion-asset banking company, said purchasing cards soon could account for 40% to 45% of cash management transactions, especially among the middle-market companies that are Comerica's primary target.
Its bet on cards is part of its "high-touch customer service approach," Mr. McCarty said. "We're big enough to have the product and we're small enough for you to know who you're talking to. I think that's a differentiating factor."
The research firm Aite Group LLC of Boston says such strategies could help midsize banks chip away at larger rivals. Aite forecast in October that the market share of cash management revenue held by the five largest banks in the field - 57% in 2004 - would slip to 51% in 2008.
Christine Barry, a research director at Aite, said banks with $9 billion to $30 billion of assets are likely to be the greatest beneficiaries of the shift, but not necessarily the only ones.
"In an industry going through transition, no player is too small to be ignored," Ms. Barry said.
Lawrence Forman, the associate director of Ernst & Young's cash management practice, does not think the top tier is destined to lose share. He said the biggest banks could gain by acquiring rivals.
Apart from Bank of America Corp., which is already near the deposit cap that limits its potential for growth by acquisition, the other top five banks still have room, Mr. Forman said. "In five years, if the top five are not at 60% [market share], I would be surprised."
However the market-share numbers turn out, it is clear that the business is undergoing changes that in some cases are still in the early stages. One such trend: some banks see potential in consolidating the work that others would prefer to shed, such as lockbox operations.
In August 2004, for instance, Mellon Financial Corp., the $38.7 billion-asset Pittsburgh banking company with a large retail lockbox business, began to resell its retail lockbox services so other banks could offer them to their business clients under their own names.
Today such "white label" offerings make up 10% of Mellon's cash management revenue and represent its fastest growing segment, said Michael J. Cross, a first vice president in Mellon Global Cash Management and its director of marketing. He said the goal is to gain share in a shrinking market for paper-based processing.
"Technology costs money. How do you go to your CEO and ask for money when your revenues are declining, when your margins are thinning?" Mr. Cross said. "The smaller and midsize banks have to do something. They are not going to put their relationships at risk by falling behind on technology."
Even the smallest banks are seizing on technology to offer business services they could not provide in the past. Home Bank, a $336 million-asset mutual savings bank in Lafayette, La., began offering online cash management - including automated clearing house payments and online setup for wire transfers - in early 2003, when its outsourcer, the Information Technology Inc. unit of Fiserv Inc., introduced such a service.
Sandi Chalmers, an executive vice president at Home Bank and its chief financial officer, said the commercial offerings are helping the thrift move beyond its residential-finance roots.
"There was some pent-up demand for it," Ms. Chalmers said, although she declined to provide specifics on adoption by businesses in the rural Louisiana parish. She said in the past year, Home Bank has begun offering payroll cards to companies employing unbanked workers, again outsourcing the processing to ITI.
"It was a good time for us to make this conversion," Ms. Chalmers said, "to move away from a traditional thrift balance sheet and move more to the balance sheet of a commercial bank."
Brad Smith, the president of Abound Resources, an information-systems support firm in Austin, said the technology enables smaller institutions to play to their strengths, such as building customer relationships.
"They may have an advantage because they don't have to buy a mainframe system and integrate it into 15 different applications," Mr. Smith said. "They can compete readily on price. They are bringing customers into the cash management business who haven't been there before."
But the industry's largest companies also see an opportunity to build their businesses.
Diane R. Quinn, a managing director at Citigroup Inc., said her company, long known as a leading provider of international payments, plans to move downstream.
"We're seeing tons of opportunities there, smaller companies that are doing global expansion," Ms. Quinn said. She argued that her company's technical expertise would attract smaller customers. "It's a very different story than if you're just offering a payment system."
Michael W. Daley, a senior vice president at Wachovia Corp. and the manager of its treasury services product solutions group, said that vendor technology is not enough to enable smaller competitors to whittle away its business.
"While they are nibbling, we are still taking our big bites," he said. "You're seeing a trend of more integration, not less integration."
