Cash management revenue growth rates unexpectedly shrank at the biggest banking companies last year, bucking a four-year trend.
Revenues at companies with assets of more than $60 billion edged up only 6%, compared with 9% in 1998, according to Ernst & Young's annual study of the cash management business. Growth was even slower - 5% - at the five biggest providers of the service.
Cash management, a bread-and-butter business for banks, pulled in $10.2 billion for the industry last year. Each percentage point drop in growth is roughly $100 million of lost revenue, Ernst & Young said.
Some of that revenue ended up in the pockets of smaller banks. Cash management revenue for banking companies with assets of less than $60 billion grew 10.5%, a percentage point better than the year earlier.
Overall revenue growth was 7%, down from 9% in 1998, the highest rate of the decade.
Bankers offered a number of explanations for the drop among the big banks. Foremost among them was that small businesses, an important customer segment of regional and community banks, have become bigger users of cash management services. Big banks, meanwhile, have been focused on large corporations, a slower-growth segment, bankers said.
Some big banks may also be investing heavily in developing cash management services for electronic commerce, such as business-to-business marketplaces that need payment and settlement capabilities. Corporate demand has not fully kicked in yet for these new services, bankers said.
"I don't think the top five banks could be terribly satisfied with their results," said Lawrence Forman, director of cash management at Ernst & Young's national cash management practice.
The results were probably affected by the fact that institutions with more than $60 billion of assets served 42% of the companies with more than $250 million of annual sales, Mr. Forman said. The large corporations are "a slow-growth segment relative to middle-market and small businesses," he said. "That is the most competitive segment."
The results of the latest study, Ernst & Young's 17th, mimicked findings from the early 1990s, Mr. Forman said. Back then "it was a split industry in which large banks primarily catered to large corporations and saw a slower growth rate than the rest of the industry."
Large banks began to close the gap on small and midsize banks in the mid-1990s, Mr. Forman said, by diversifying their customer bases. Ultimately the sharp reversal of fortunes for the big banks is a bit puzzling, he said.
"Among the top five, you see some that have a good share of middle-market and small-business customers," Mr. Forman said. "With that diversity, it's hard not to see how some of these banks might have done better. Certainly they expect to have a better year next year."
Concerns about the Y2K computer threat may explain some of the reversal, Mr. Forman said. A lot of corporations, especially the larger ones that use big banks as their cash managers, avoided adding applications last year to avoid disrupting the computer systems they had worked to make compliant for 2000, he said.
Consolidation affected revenue growth at some banks. Nick Alex, manager of global product and strategy development for global treasury services at Bank of America Corp., said his company "reduced the number of accounts and the number of fixed fees, which takes the edge off revenue growth." The reduction occurred in the wake of BankAmerica Corp.'s merger with NationsBank Corp. in 1998, he said.
"Part of the top-five story could be that as consolidation happens clients take advantage of scale and can begin to have fewer accounts and a more efficient management of their account structure and services," Mr. Alex said. "In the end, it leads to happier customers who eventually might do more business with you."
Francine Miltenberger, executive vice president at PNC Financial Services Group Inc., said consolidation among the companies that banks serve can also affect revenue growth. "On the larger end, corporate entities are undergoing consolidation and management changes and all that kind of stuff that detracts from sales momentum."
Cash management revenues at $72 billion-asset PNC grew about 13% last year, she said.
Banks may have expected electronic commerce to have a bigger impact on revenues than it has had so far, Ms. Miltenberger said. "Customers are focused on being more e-commerce-driven, but they are still in the early stages of implementing that initiative."
Doug Hartsema, executive vice president and manager of treasury services at Wachovia Corp., said he is surprised that revenue growth at large banks was as low as it was. Cash management revenues at Wachovia, which has $67 billion of assets, grew at a rate in the low teens, he said.
Mr. Hartsema said he would have expected the growth rate at large banks "to come off the peak of 9%, but I did not expect a three-percentage-point dip."
The customer base for the large banks may be to blame, he said. "The large corporate market is a little more sluggish than the mid-market. It's more competitive, and there is less of it."
Wachovia has a balanced client list of large corporations and middle-market customers, he said.
Consolidation among the biggest banks may also be a factor in the slower growth, Mr. Hartsema said. Increasing a large base of existing revenue is more difficult than building from a small base, he said.
Taylor Vaughan, senior vice president and manager of cash management services at $19 billion-asset First Tennessee National Corp. in Memphis, echoed many of these themes.
"The concentration of cash management revenues is consolidated at the very top-tier banks," Mr. Vaughan said. "As banks get bigger, it's harder for them to sustain the same level of growth. Lots of their increase comes from acquisitions."
The smaller banks focus on smaller businesses, he said. "That seems to be where a lot of the growth for cash management is coming from."
Richard Ercole, president of treasury management at the $7 billion-asset Imperial Bancorp of Inglewood, Calif., said some banks have become too big to provide the personalized service that smaller banks can deliver.
The big banks "are not providing the same level of service to the middle market," he said. "Being so big, they are going to pay more attention to clients that provide more of their revenue than clients that don't - which are the larger corporations."
Larger banks also are forced to compete more on price. "Larger clients are typically more price-demanding," Mr. Ercole said.
Bill Murray, senior vice president of Allfirst Financial Inc., an $18 billion-asset banking company in Baltimore, said the results of the study did not surprise him.
Many of the larger banks "have undergone consolidation, and by nature when you consolidate, revenues are going to go down," he said. "You become more efficient and eliminate unnecessary services."
He brought up another point not addressed in the study: that banks are losing cash management revenue to credit card companies.
"As companies put in procurement card systems, more consumers are using credit cards to pay bills instead of checks," he said. "Revenue is going into the credit card world."
The number of transactions paid by credit or debit cards has increased 20% in the last year, eating into revenues generated from processing checks, he said.
Big banks also are taking a leading role in offering their customers electronic services, which have narrower margins than paper-based services, Mr. Murray said.
The Ernst & Young study also showed that Internet cash management services are becoming increasingly popular.
This year 53% of the participants have information-reporting services on the Internet, up from 25% in 1999. Thirty-four percent are offering transfers between accounts, and 31% are offering automated clearing house initiations on the Internet. Only 17% claimed to offer any form of Internet transaction capabilities last year.
Twenty-six percent of the study's participants currently offer online check imaging, compared with 5% last year.
"Every category of cash management functionality via the Internet" increased from last year, Mr. Forman said. "We went from spotty coverage to a situation where there is actually a decent chance that your bank has Internet capabilities in the year 2000, and that is only going to increase and grow."
The three cash management products with the fastest growth in 1998 - information reporting, automated clearing house/electronic data interchange, and wholesale lockboxes - were also the leaders last year, the study found. Retail lockboxes and check clearing services had the slowest growth rates in both years.
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