Sweep accounts are fast becoming one of banks' most profitable corporate services, producing $2.6 billion of revenue in 1997, according to Treasury Strategies Inc.
A survey by the Chicago-based consulting company found that corporate sweep services are widely available-offered by 79% of the largest 1,230 commercial banks-and apparently for good reason.
Their profit margins can approach 90%, said Susan Skerritt, a Treasury Strategies partner. "We estimate the profitability is greater than on all the other cash management products combined," she said.
Assuming her data are comparable, sweep accounts provide a big portion of the $8.1 billion of revenue that Ernst & Young LLC said the banking industry generated from wholesale services in 1997.
"It's an important product that banks should be paying a lot of attention to," Mr. Skerritt said of the sweep concept.
In sweep accounts, idle funds move automatically into short-term investment instruments. The Treasury Strategies study considered only sweep services for corporations, not those offered with personal asset management packages, private banking, or trust accounts.
The survey was based on responses from 298 banks, which hold 72% of U.S. commercial deposits.
Treasury Strategies found that corporate customers are increasingly buying short-term liquidity management services that can guarantee them safe returns and reasonable yields.
Popular corporate investments include overnight instruments such as repurchase agreements (51%), money market mutual funds (22%), and offshore deposits (20%), according to the report.
The study showed money market sweep accounts grew the fastest in 1997-up 71% in assets from the prior year.
Despite the opportunity trumpeted by Treasury Strategies, "many banks still view this product as one they offer on a defensive basis," Ms. Skerritt said.
Anthony Carfang, another partner at the firm, said sweep accounts have helped about $172 billion flow "back into the banking system" in the last six years. The banks' share of this corporate liquidity market was said to be only $20 billion in 1991.
Mr. Carfang said those greater inflows came mostly at the expense of securities dealers. The corporate liquidity management market, at $192 billion last year, was up 34% from 1996.
There are at least 10 million corporate checking accounts in the nation, but only 250,000 with sweep capabilities. Mr. Carfang said he expects such services to become standard on corporate accounts.
The current balances are "just the tip of the iceberg considering total corporate liquidity is measured in trillions," he said.
Ralph S. Michael 3d, chief executive of corporate banking at PNC Bank Corp., Pittsburgh, expressed some doubts about the purported 90% profit margin but agreed that sweeps have helped level the playing field against nonbank competitors.
The sweep account "retains the client's liquidity in the banking system," Mr. Michael said. "It is a terrific way to provide convenience to the customer while also providing us with a product that is highly profitable."
Lawrence Forman, cash management analyst at Ernst & Young, also expressed mild reservations. He agreed that profitable banks have spent significant dollars to automate their sweep services.
But if the industry's slice of the interest income and associated fees resulted in $2.6 billion of revenue last year, Mr. Forman said, then the spreads would have had to vastly exceed the typical 50-basis-point bank charge that he considers to be the norm.
"It's a relatively old product," Mr. Forman said of the sweep account. "It is something that banks have been able to do-but had no big incentive to do-for a long time.
"Corporations that could actively manage their money did it themselves," Mr. Forman said.
Ms. Skerritt said her survey's revenue projections were based on actual bank data and indicate that spreads and funds-transfer fees vary greatly as more "business applications" are developed.
"The range of spreads go up to as much as 150 basis points," she said.