Wholesale bankers are developing new growth strategies for cash management services, and are anticipating extending what now look to be two solid years of growth into 2007. But bankers and observers continue to counsel caution, citing continuing upheaval in the payments space and uncertainty about interest rates, among other things.
Cash management's expected three-year growth streak, should it pan out, would follow three years of flat to declining revenue for the segment. In that period, 2002 to 2004, cash management was hurt by tough economic conditions as well as challenges specific to payments. While the business climate has improved in the past two years, economic challenges remain. Meantime, the pace of change in payments has continued and even increased in some respects.
These changes take a variety of forms - including new types of automated clearing house transactions and the growing use of corporate cards, along with the decline of check payments and the movement of certain offerings to automated, real-time systems.
Spot checks with six large institutions this month found the bankers looking at a variety of cash management priorities but focusing on ways to get their clients to use more electronic alternatives to conduct transactions and analyze their financial positions.
In the latest survey of bank operations, by the accounting firm Ernst & Young, bankers projected 5% growth for this year in cash management revenue, which grew 3% last year. Lawrence Forman, the associate director of the firm's national cash management practice, called that "a pretty bullish forecast."
Looking toward 2007, bankers said they expect another strong year in the wholesale banking business.
"Bankers tend to be optimistic," said Alphonse J. Briand, a managing director in Bank of New York Co. Inc.'s global payments and trade services unit. "From what we've seen, for pretty good reason."
In interviews with American Banker, the accountants and bankers said a number of factors are driving new growth: the progressive replacement of paper-based systems such as checks and written information reporting, by electronic ones such as ACH and Internet-based reporting; and higher interest rates, which have revived corporate interest in services such as sweep accounts.
The list goes on: globalization, including more corporate cross-border transactions with suppliers and government mandates that are prompting banks and corporations to transform treasury operations; and as the market continues to evolve, new payment systems - such as payroll cards for unbanked employees - that will continue to challenge established ideas about what constitutes cash management.
The stronger 2005 and 2006 results follow three years in which the Ernst & Young studies found cash management revenues were flat or falling. Mr. Forman said that part of that reflects the state of checks. As paper-based offerings become a smaller share of banks' overall cash management business, the fading of checks becomes less of a drag on their revenues, he said.
"Two things are happening simultaneously - the dollar value is in decline, but the decline rate is slowing a little bit, from a revenue standpoint," Mr. Forman said. Banks reported a 9% drop in check-clearing revenue for 2003, but that slowed to 7.5% in 2004 and to 6.5% in 2005, the study found.
Banks are projecting that the 2006 tally will show flat revenue from check clearing, Mr. Forman said. "I don't believe that's plausible. We think something between 4% and 6% seems reasonable."
Some bankers said the recent improvement in overall revenue does not mean the tough times are over. Brian Lambert, a senior vice president and the head of business development in the treasury services unit at Wachovia Corp., said that many corporations have not yet begun transforming their internal treasury operations to take advantage of electronic systems - and may not for years to come.
"I don't think it's the case that the worst is behind us," Mr. Lambert said. "Paper is aging. It may not be aging gracefully, but it's not going to fall off a cliff."
David Fuller, a senior vice president in SunTrust Banks Inc.'s treasury and payments solutions management unit, said he doubted that checks would fade from the corporate scene anytime soon, especially for business-to-business transactions.
"Consumer behavior may be changing, but B-to-B processing sometimes may require re-engineering," Mr. Fuller said. "The check is a long way from going away. The paper-based product set is still a great area for us."
Others say they see faster movement toward electronic systems. Daniel J. McCarty, the senior vice president of treasury management services at Comerica Inc., said, "The migration from paper to electronic has turned into a stampede from my standpoint."
Remote capture of check images has become Comerica's fastest-growing cash-management offering, and the big question in 2007 is whether merchants will choose to continue sending checks to Comerica as images or whether they will begin converting them to ACH transactions under the back-office conversion rule going into effect in March.
The fluidity of payments on the receivables side is prompting treasurers to look anew at their payables as well, Mr. McCarty said. "Something is going to happen to their check anyway," he said. "Let's step back and look at substitution," perhaps using purchasing cards rather than checks to pay suppliers.
Purchasing cards were banks' revenue-growth leader in 2005, with 14% growth, the Ernst & Young survey found. The accounting firm had asked about P-cards for the first time in its study for 2004, and the rapid uptake by corporate America underscored to some bankers the limitations of using historical definitions to analyze the payments business.
As Wachovia's Mr. Lambert put it, a "transformation is happening right now" in payments.
Hubert J.P. Jolly, a managing director in Citigroup Inc.'s corporate and investment banking division and the company's head of North American payments, said cards would become more popular with workers seeking access to employer-sponsored benefits such as health savings accounts and flexible spending accounts.
The decline in checks has not yet reached the insurers that administer those payouts, Mr. Jolly said. "Trust me, they're keen to reduce those."
In addition to health care, employers will use cards increasingly for payroll, as another way to eliminate checks, he said.
The shift to stored-value cards from checks will be "the next big area of opportunity," Mr. Jolly said. And the use of the cards for corporate disbursements, in contrast to purchasing, remains outside the scope of the cash management survey, he said.
Checks remain important in areas such as controlled disbursement, where companies outsource the printing, mailing, and management of the checks to their banks, but many are reducing their controlled-distribution points to one from two or three because of the quicker image-based clearing enabled allowed by the Check Clearing for the 21st Century Act, Mr. Jolly said. "With Check 21, you don't need a controlled distribution point on the West Coast and one on the East Coast."
The shift to electronic technologies is affecting other offerings that banks historically have provided on paper, such as account reconciliation and other types of information reporting. Practically all major cash management banks let clients receive such data over the Internet - the Ernst & Young survey remarked that banks can sometimes boost their revenue by providing this type of information both in paper and online.
Bank of New York's Mr. Briand said information reporting is shifting increasingly to structured formats such as extensible markup language, which can be read by machines and people alike. "It's all about working with our clients to be sure they are getting the information they want when they need it," he said.
A few banks have begun looking at wireless and other emerging technologies.
Danny Peltz, Wells Fargo & Co.'s executive vice president of wholesale Internet and treasury solutions, said "office-in-the-pocket" applications would be one of three key themes for Wells in 2007, alongside electronification and globalization. It's "the second coming of mobile," he said.
Wells already offers cash management alerts to treasurers' cell phones and similar gadgets, and the development of high-bandwidth wireless networks feeding data to more powerful, versatile devices with full-scale (if tiny) keyboards, opens the door to new services, Mr. Peltz said. "You will be able to do a lot more with your mobile device than you ever have in the past."
Though uncertainties abound, the bankers seemed enthusiastic about their prospects.
"It's a very exciting time to be in the payments business," Mr. McCarty said. "There are no road markers that say, 'This is the path to success,' so there are many challenges, too."
Ernst & Young's Cash Management Services Survey, now in its 23rd year, put the industry's cash management revenue in 2005 at $13.8 billion on a "fee-equivalent" basis, drawing from reports by 49 banks, including 19 of the top 20 and 40 of the top 50.
The firm's methodology is such that the reporting runs nearly a year behind the results. The firm sends out its questionnaire in January for the preceding year, and the bankers typically respond by April or May. The comes an extensive process of refining the analysis, which yields findings for the bankers that, while more detailed by product line and service than the companies report in their financial statements, are not included in the executive summary that Ernst & Young publishes for the public.
