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 …