New Cash Management Systems Keep Small Banks Competitive

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Heightened competition from regional banks, out-of-state institutions, and even foreign banks has prompted small and mid-sized banks to upgrade the way they handle cash management needs of customers. Fortunately, several powerful personal computer-based cash management systems have come on the market recently.

Here's how two banks are using them.

Planning ahead. First National Bank of Waconia (Minn.), with $95 million in assets, has offered cash management services to its corporate customers since 1984. Anticipating greater competition from the large Minnesota-based regional banks, First National Bank managers explored their options in the late 1980s. The result of that process was the installation last year of Business Express/PC, a PC-based cash management system from Automatic Data Processing (ADP) Network Services Division, Ann Arbor, Mich.

"It would have cost over $80,000 to upgrade our mainframe to accommodate the same features that are in Business Express/PC," says Lee Anderson, the bank's vice-president, commercial lending. "Our initial license fee for the software was $3,500," he adds, noting that now that 20 clients are on-line, additional copies of the program cost $95 each.

The latest release of the software, Version 2.1, offers small business users direct deposit of payroll and automated account reconciliation.

"We have found that a lot of the smaller banks don't want many of the more complicated high-end features, such as intricate lockbox reporting or full-featured wire transfer," says Andy Vasher, ADP's marketing manager. "They're interested in the basics--balance reporting, funds transfer, automated account reconciliation, and direct deposit of payroll."

First National's business customers vary, with annual revenues ranging from $1 million to $20 million. About 20 clients are now hooked up to the system, following several months of testing. Anderson notes that besides wanting the basic cash management features, several of the earliest users are looking for the ability to make electronic vendor payments with Business Express/PC. This form of electronic data interchange is beginning to be used by large banks with sophisticated cash management systems for cross-border vendor payments. "Eventually that will be a real time saver and money saver for companies, because they would be eliminating paper transactions," says Anderson.

The real benefits. While the potential for fee revenue exists, Anderson and others using such systems don't necessarily count on it. The bank charges for transactions in order to cover its upfront costs, but the real benefits are more subtle than that.

Anderson, for example, could remove an employee from the task of responding manually to requests for cash management services and assign the employee elsewhere.

More importantly, the community bank's use of Business Express/PC offers Waconia's businesses a level of service that Anderson says the bigger banks aren't offering them, at least not yet. When the large banks do begin targeting smaller business accounts in the Waconia market, Anderson reasons, many of these accounts will be less likely to switch banks.

"It's fairly easy for a business to change a lending relationship, but a deposit relationship is tougher to change," says Anderson. And if the customer is using the bank's cash management system to pay suppliers electronically, the bond is even tougher to break.

Protecting market share. A substantial market share does not mean a bank can get by with an outmoded cash management system. …