Every bank today is waxing poetically about the opportunities presented with cash management services. Why, then, does it seem that the poor cash management officer is always drinking alone at the end of the bar while a boisterous gang of lenders jokes about non-course deals and LIBOR pricing?
Let’s level with each other. The strategic talk about cash management is partially lip service. Helping businesses manage their money is basically the world’s second oldest profession, but our industry struggles to fully respect and integrate cash management into our core business.
Banks that ingrain cash management into the hearts and minds of more folks will soon have their own wad of cash to manage. Recent industry statistics highlight where opportunity abounds:
The timing has never been better for banks to get serious about their cash management strategies. Emerging industry trends make this market ripe for those who are innovative and aggressive. Here are some key areas to watch:
While big banks have driven the largest corporations into an arena of scale and cutthroat pricing, the mid-market and small business segments continue to have strong potential. McKinsey & Co. recently found that cash management is at least as important as credit for the majority of mid-market companies. Many high transaction companies such as insurance and professional services use some credit services but base their banking choice on cash management capabilities.
The bubbling innovations in ACH processing will clearly change cash management. With new NACHA rules, lockbox customers will be able to convert consumer checks into ACH items. A guaranteed 48-hour float sounds good to many companies. The impending passage of the Check Truncation Act will provide further fuel to this fire, as banks of first deposit begin converting checks to ACH. Secondly, electronic check conversion (ECC) at the merchant will grow slowly, but steadily behind the efforts of Wal-Mart. Finally, NACHA’s Project Action may provide businesses with expanded opportunities to accept online ACH payments. No one knows quite where all this change will end up, but banks must be proactively taking their business customers into this new payment world.
Though it’s been bouncing around the halls of Congress for some time, most bankers are confident that Reg Q (interest on commercial checking) will be repealed soon. This will change the rules of cash management. Although most banks effectively pay interest today through earnings credits, some competitors will be working overtime to “re-intermediate” funds back from off-balance instruments to the balance sheet. For small and mid-sized banks without major cash management market share, this will be an opportune time to make aggressive moves that larger players wouldn’t dare match.
Although bill payment continues to see slow penetration, direct biller presentment is showing some real underground traction. Industry studies are showing that large billers can justify the investment in electronic bill presentment with only a 2% – 3% adoption rate. The movement from traditional lockbox to an “integrated receivables solution” has just begun. For most businesses, it’s too early for bill presentment, but this clearly needs to be part of a bank’s long-term cash management vision.
So, fine GonzoBankers, if your bank has the stomach for a real cash management strategy, I offer the following action plan:
Many banks need to set the foundation for cash management by cleaning up the operations within their commercial account base. This stuff sounds simple, but I guarantee I can find non-compliance in your bank:
a) make sure every commercial deposit account has an appropriate officer code with the relationship manager identified
b) ensure that all appropriate commercial accounts are on analysis and that charges are actually hitting the analysis statements
c) track and measure loan officer fee account analysis fee waivers vs. the size/profitability of the commercial relationship
McKinsey & Co. recently summed up the need for the basics nicely: “Some bankers see cash management as a purely operational product that does not really require a relationship. In the extreme, the relationship banker does not even know his client’s cash management revenues or deposit balances.”
Leading cash management providers have realized the value of dedicated sales professionals who focus on the liability vs. asset side of the balance sheet. Unfortunately, Cornerstone typically sees 10 – 15 loan officers for every dedicated cash management salesperson. With kamikaze loan pricing, it’s hard to figure out why this resource allocation makes sense. Sunwest Bank, a small community bank in Southern California, has a cash management professional for every three loan officers. Now there’s a commitment to the business!
While specialists are needed in cash management, growth also needs to be fueled by referrals and direct sales from the bank’s commercial loan officers, investment officers and branch sales professionals. Most of these folks haven’t a clue about cash management products. My plea is for banks to develop a simple training module and certification test on cash management that could fall into the job description of front-line personnel. We don’t need Certified Cash Managers (CCMs) here – just enough to be dangerous and spot opportunity.
Nothing goes better with product knowledge than a bit of cold hard cash. Today’s cash management incentives are often too light. $100 for a cash management referral? Probably not enough to get a gun-slinging commercial lender’s attention. Twenty-five basis points on average DDA balances generated? Now we’re talking.
Some of the most successful banks have differentiated themselves with special industry expertise. Whether the niche is medical associations, property managers, homeowners’ associations, or private school tuition payments, the focused players are winning. Banks with these niches have the opportunity to deepen their service offerings by understanding the specific reporting requirements, system interfaces and regulatory challenges in the particular industry.
The more work flow improvements that can be enabled by technology, the more profitability and retention will increase in a bank’s cash management relationships. Here are some examples:
When the dot.coms went bust, a lot of banks lost interest in the technical innovations that are possible in business services. The success of Web, image, and ACH technologies is beginning to reignite this interest, albeit with more pragmatic focus and expectations.
It all sounds like one heck of an opportunity, GonzoBankers. So next time you’re at the local watering hole, wave over that cash management officer and buy him or her a drink. It’s time to integrate this business.