Magazine article American Banker

Consultant Believes City, State, US Governments Are Potentially Lucrative Markets for Operational Services

Magazine article American Banker

Consultant Believes City, State, US Governments Are Potentially Lucrative Markets for Operational Services

Article excerpt

Consultant Believes City, State, US Governments Are Potentially Lucrative Markets for Operational Services

WHEN THE PROFIT potential of wholesale lending and operational services is considered, the corporate marketplace gets most of the attention. But Marshall D. Sokol, a consultant on cash management, thinks banks might be ignoring another lucrative market: the government.

According to Mr. Sokol, a handful of banks have carved out a profitable business niche by providing operational services to the federal government. Some other institutions have sought out credit and operational business from state and city governments. But overall, the market is largely untapped, he believes.

Mr. Sokol elaborated on his views earlier this month when his consulting firm, MDS Cash Communications Inc., held its eighth annual conference for government cash managers, in Arlington, Va.

Excerpts from the interview follow.

Q. What banks are big in this area?

A. Right now, the major banks in government banking at the federal level are Citizens and South, First Chicago, Mellon, Bank of America. With ACH [automated clearing house] usage, in terms of sheer volume, you have Chase Manhattan. And after that, to the extent that you have other major banks involved in government, it's in specialized aspects of the market. For example, Manufacturers Hanover being very large in government securities clearing. After that, you're down to the second tier.

Q. Why do so few banks dominate?

A. Because the have made a commitment to the market early on and have worked very hard at it and have done a very professional job.

Q. Are other banks missing out on a good opportunity?

A. The market is less than one-third tapped in terms of potential. The number of banks coming in to provide services for the federal government is increasing every day.

Q. What would you advise banks to do to get into this area?

A. Spend a lot of time really learning how government finances and accounting work. It's going to be different and in many ways more difficult than what they've experienced with the private sector.

Q. How does the size of potential state and municipal government customers compare to the size of corporate customers?

A. Well, the smallest state government is a high-ranking Fortune-sized company. And if you looked at the 100 major cities in the United States, they [would] rank high on the Fortune list of dollars as well. And this is a fact that very few banks have truly appreciated, much less the governments themselves.

Q. Where is the potential profit in this? Is it from balances left at banks or from transaction fees?

A. Both. The balances are very sizable, although they are volatile at times because of the seasonality of many of the deposits. But the transaction volume is tremendous, and operational services can do very well. Governments are a fair business partner, in terms of allowing banks and other vendors to price their services fairly. They have not been as sharp, shall we say, in dealing with the banks as the corporate community has.

Q. Are there opportunities for banks on the credit side as well?

A. Today more than anytime within the last several years. Because with the uncertainties with the tax-exempt status of municipal bonds and securities, plus with the growing demands in the credit markets in general, public financings are more difficult at the state and local level, and banks will be in much greater demand to not only provide credit but to come up with very creative credit packages to make it possible for the state and local governments to find ways of not adding additional interest burdens on their taxpayers.

Q. Is the potential credit business part and parcel of the cash management business. Will one lead to the other, or can they be approached separately? …

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