Cash Management Business on the Upswing — But for How Long?

Amid the credit crunch and recession fears, banks may find a bright spot: cash management. The cash management business in 2006 enjoyed a 6 percent revenue increase -- double the gain of the previous year -- according to Ernst & Young's recently released 24th Annual Cash Management Survey (CMS). Further, CMS respondents predicted a 6.5 percent growth in revenue from cash management services for the upcoming year, continuing the industry's move away from the unremarkable period of 2002 to 2004 when increases were less than 1 percent per year (see related chart, below).

This was good news for the survey's 51 respondents (48 financial institutions and three vendors) and, by extension, all banks that actively market cash management services to their wholesale or commercial customers. According to E&Y (New York) associate director Larry Forman, who has directed the firm's annual CMS since 1990, the survey serves the dual purposes of information gathering on cash management products and services, and tracking trends and technologies within the business -- which produced $14.6 billion in fee-equivalent revenue in the United States during 2006.

Strong growth in electronic products -- wire transfer, information reporting, ACH and electronic data interchange (EDI) -- contributed heavily to the revenue increase reported in the survey, Forman notes. According to the report, EDI, the electronic communication of business transactions, "had a record-breaking year," with revenue in the space up 18 percent. Forman adds that in conversations with participants following the survey, the respondent banks explained the growth in wire transfers as a result of increased globalization and trade, more cross-border pooling and netting by corporations, and an increased need for real-time or same-day settlements.

Investing in Cash Management

Given the strong growth in cash management demands by corporate clients, banks have been investing in their cash management capabilities. The CMS identified three factors as the most influential on recent cash management investments by banks: the decline in check volume, large-scale conversion of checks to ACH debits and Check 21-related acceptance of images as the legal equivalent of original paper instruments.

Another cash management area in which Forman expects banks to continue to invest is account reconciliation. By employing check imaging and positive pay solutions, banks are increasing their ability to fight fraud. Furthermore, payee positive pay -- an antifraud process in which the payee is identified in a transaction, along with the check number, the account number and the amount -- is starting to make some headway among banks. Forman estimates that 80 percent to 90 percent of banks have added positive pay, but just 27 banks in the CMS survey (slightly more than half) had payee positive pay, which requires image recognition software to capture the name of the payee.

Just how prevalent is the use of check images in the industry? Responding to a new question on the survey this year ("Do you accept check images at your controlled disbursement point?"), more than two-thirds (69 percent) of respondents said they required substitute checks at all of their controlled disbursement points (down from 74 percent the previous year). But two-thirds added that they likely would accept check images within the next year, pointing to another area of investment.

The good news surrounding the cash management business, however, is somewhat tempered by the larger economic picture. According to the E&Y report, higher interest rates "enhance the value proposition of many cash management products and services." With the Fed dropping rates to combat a recession, Forman says, "There's no positive light to put on lower interest rates -- it's a dark cloud for cash management revenue."