US Cash Management Services Survey 2006
Ernst & Young has conducted the annual Cash Management Services (CMS) Survey for the past 23 years. The 2006 CMS Survey questionnaire was distributed to previous participants and other top 100 bank holding companies that offer and actively market cash management or treasury services to their wholesale or commercial customers. We do not include mono-line credit card banks or other financial institutions that do not offer cash management services. While participation is usually limited to commercial banks, we have invited thrifts to respond when we are made aware of their interest in treasury services. We also invite a small number of non-bank lockbox providers to help us understand lockbox volume trends and the impact of outsourcing. This article is an extract from Ernst & Young’s 2006 Cash Management Services Survey.
To facilitate analysis, responding financial institutions are segmented into three peer groups, based on their US assets. The 20 largest institutions that actively market cash management services were assigned to Peer Group 1 (Peer 1). The next 30, in asset order, were placed in Peer Group 2 (Peer 2), and all banks ranked 51 and below were assigned to Peer Group 3 (Peer 3). The CMS Survey continues to draw responses from virtually all of the nationally recognized cash management providers. The 2006 CMS Survey collected data from a total of 51 organizations, including 49 financial institutions and two non-bank vendors. Fifty of these respondents participated in the 2005 Survey, and the one other respondent last participated in 2004.
After returning the cash management business to positive territory in 2004 with a 0.5% increase, last year’s participants expected more growth ahead, predicting 3.5% revenue growth for 2005. The results for 2005 almost matched this forecast, with a 3% revenue gain. While cash management’s several-year struggle with low interest rates appears to have finally abated, the revenue drag from steadily declining check volumes remained in force, making this 3% increase quite an achievement. In the 2005 cash management services (CMS) report, we opined that even 2% growth would be difficult to attain. Clearly, much went right in 2005 to yield these results. This section of the report details where the growth came from.
The growth calculations included revenue from services such as account reconciliation, ACH (automated clearing house) and EDI (electronic data interchange), controlled disbursement, information reporting, retail and wholesale lockbox, check clearing, coin and currency services, wire transfers, purchasing cards, and the demand deposit accounts category (which included fee income from general disbursement activity, account maintenance, statement services, zero balance accounts, non-interest-related overdraft fees, and sweep accounts).
Heartened by their results for 2005, the participants expect more growth on the horizon, predicting a 5% revenue increase in 2006. In 2005, strong growth in most electronic categories was abetted by revenue gains in two paper-based categories: wholesale lockbox and account reconciliation. Higher interest rates also attracted more dollars to sweep accounts and strengthened the value proposition for a host of cash management services and undoubtedly helped fuel some of the optimism seen in the 2006 forecast. Since 2002, we have witnessed declining check volumes exert braking action on revenue growth. This restraint on revenue growth occurred again in 2005, and we believe this will remain a factor over the next few years. However, as the proportion of total revenue from non-paper payments rises, the impact of shrinking check volume gradually lessens. On an individual product basis, the respondents’ 2006 forecast for 5% growth relies on continued strong growth in purchasing cards and electronic products, as well as no decline in check clearing revenue. We believe it is possible for a few check clearers to gain share and grow check clearing revenue, as the Federal Reserve continues to consolidate its check clearing operations. However, even with this potential source of new volumes, an overall decline in check clearing revenue is virtually certain. Aside from the fanciful check clearing prediction, we agree with the respondents and see the potential for enhanced revenue growth in 2006. In our view, a 4% growth rate seems more plausible. The 3% gain measured for 2005 has given the industry some momentum, and each subsequent year’s growth lessens the industry’s reliance on paper-based payments and makes greater gains possible.
The 2006 CMS Survey collected banks’ fee-equivalent cash management revenue for the last two completed calendar years (2004 and 2005), enabling us to calculate revenue growth rates and measure the overall size of the industry for the top 100 banks. Our methodology includes estimating the revenue of non-respondents based on either previously received data from the institutions or estimates based on peers. Respondents were also asked to provide a revenue estimate for 2006, the current year.
The questionnaire asked participants to include fee-equivalent revenue from their cash or treasury management customers, including corporations, the middle market, small business, government, correspondents, and other non-retail customers that are on some form of account analysis that allocates revenue to the products and services used. Fee-equivalent revenue includes service charges and penalty fees (e.g., per-item charges for overdrafts), regardless of whether payment was made via compensating balances or fees. However, income earned from ‘excess’ balances, float, or the spread between the customer’s rate (e.g., earnings credit rate, sweep account rate) and the bank’s actual investment rate was excluded, as were rate-based charges for negative balances.
Purchasing card revenue included all fee-based revenue associated with purchasing cards (including penalty fees for late payments), even if some portion of this revenue was shared with other areas of the bank or an outside vendor. Respondents were asked to exclude any revenue returned to customers (e.g., rebates, waivers), card association fees, or any revenue derived from interest payments. Finally, respondents were instructed not to deduct the cost of funds.
The CMS Survey makes an effort to measure each peer group’s revenue growth rate on a ‘same-bank’ basis (i.e., discounting revenue gains associated with acquiring other banks). After just 1% growth in 2004, Peer 1 reported a comparatively strong 3.5% growth rate in 2005. While this wasn’t quite up to the 4% growth forecast by last year’s respondents, 3.5% growth represented the best results for the top 20 since 2001, when Peer 1 turned in 7% growth. Displaying confidence in their newfound ability to generate revenue growth despite declining check volume, the Peer 1 banks forecast a very bullish 6% revenue growth rate for 2006.
Peers 2 and 3 reported a 1% decline in 2004, but these respondents outside of the top 20 shared the Peer 1 respondents’ optimism about 2005, and forecast 3% revenue growth. The 2005 results for Peers 2 and 3 fell a little short of their expectations with a 2% revenue increase, but a return to positive growth was clearly a relief. Unlike Peer 1, banks outside the top 20 do not expect a higher growth rate in 2006. The Peer 2 and 3 forecast calls for another year of relatively modest 2% growth in 2006.
In addition to providing data by peer group, we offer the following observations on the top five cash management players (in terms of reported revenue) versus the other 15 banks in Peer 1. After scratching out a 0.5% increase in 2004, the five biggest cash management providers’ revenue grew by 2.5% in 2005. This was just below their original forecast of 3% growth for 2005. The top five now forecast robust 5% growth for 2006. The combined results from the other 15 members of Peer 1 produced a 2.5% increase in 2004. These ‘next 15’ banks also nearly achieved their optimistic 6% estimate for 2005, with a 5.5% increase. Building upon the momentum of a strong year, the ‘next 15’ now estimate a lofty 8% growth rate for 2006.
Revenue data collected by the CMS Survey for years prior to 2004 did not include purchasing card revenue. For the benefit of readers interested in making comparisons between the current data in this report and CMS Survey data for 2003 or earlier, we offer the following observations. Eliminating purchasing card revenue in 2005 does reduce revenue growth within Peer 1 from 3.5%, down to 3%; however, the impact is most keenly felt among the top five providers. Without purchasing cards, the top five experienced only 2% growth in 2005. Reflecting the concentration of industry revenue held by the top five players, without the inclusion of purchasing card revenue, overall industry growth also slows modestly to 2.5% for 2005. For the next 15 banks in Peer 1 and for Peers 2 and 3, the impact of removing purchasing cards is relatively minor and yields no change to the previously reported growth rates.
Last year’s 2005 CMS report was transitional in that it was the first year we incorporated purchasing card revenue into all of the applicable revenue calculations. In 2005, it also seemed appropriate to provide virtually all the revenue statistics without purchasing cards as well, to smooth the transition and ease understanding. However, in this report and in subsequent years, we will focus on providing data that includes purchasing cards, since we believe this more accurately reflects the reality of the current cash management marketplace. One can also make the case that, before 2004, purchasing card revenue was relatively minor and would likely have had a limited impact on the overall data. We hope most readers will agree that what happened before 2004 is rapidly becoming less pertinent to current market conditions, and ultimately we believe the industry will be better served (and less confused) by having this report provide just one set of indicators, rather than two.
The survey measured 2005 domestic fee-equivalent cash management revenue of US$13.8bn for the top 100 US banks. This figure includes about US$1bn of purchasing card revenue. The reported 3% ‘same-bank’ revenue growth rate increased the 2004 revenue total of US$13.3bn up to US$13.7bn. Two other factors helped to contribute the remaining US$100m. First was the acquisition and gradual inclusion of revenue from other financial institutions not previously captured in the CMS Survey, typically because of their small size or because they were thrifts. Second was a clarification on purchasing card revenue. Specifically, prior to the 2006 CMS Survey, some banks had deducted the cost of funds associated with providing purchasing card services from their reported purchasing card revenue. This year’s revised survey instructions to not deduct the cost of funds increased reported purchasing card revenue. The respondents’ estimate for 5% overall revenue growth in 2006 would raise total fee-equivalent revenue up to about US$14.5bn, again including purchasing cards. A slightly slower growth rate of 4% would increase fee-equivalent revenue to roughly US$14.35bn.
In the 2003 Survey, in addition to our usual fee-equivalent measure, we began asking participants for their total domestic cash management revenue derived from the products covered in the CMS Survey when the respondents included income from excess balances, float, and all spread income that is allocated to treasury or cash management. Thirty-one banks supplied numbers in the 2006 Survey. Based upon the answers received, in conjunction with our estimates for the banks not supplying this data point, we estimate that total cash management revenue for 2005 was approximately US$27.5bn. Last year, we estimated that total cash or treasury management revenue was about US$22.2bn in 2004.
On the surface, these two numbers suggest that total industry revenue jumped by over 20%, principally due to a dramatic increase in ‘soft dollar’ categories such as the value of excess balances, float revenue, and sweep account balances. Sweep balances were climbing throughout 2005, and rising interest rates undoubtedly made excess balances more valuable; therefore, some level of increase was to be expected. However, we have our doubts about the magnitude. When we ask for total cash management or treasury services revenue, we are reasonably confident that the respondents follow our instructions to exclude trade and foreign exchange revenue, but understand that other revenue categories find their way into the total, and much of this is justifiable. Therefore, while some of this growth undoubtedly reflects a healthier climate for treasury services produced by higher interest rates, we suspect that a substantial portion of this increase is actually enhanced reporting of additional products and services and is not entirely consistent from one year to the next.
Although we have some reservations about the absolute equivalency of the total industry revenue numbers collected year to year, we continue to calculate the percentage of total revenue derived from the CMS Survey’s fee-equivalent revenue since we know this statistic is of considerable interest to industry observers. This year’s numbers for 2005 show fee-equivalent revenue providing about 50% of total revenue (US$13.8bn of the US$27.5bn total), with float, spread, and excess balance income adding the other 50%. In our calculation for 2004, fee-equivalent revenue contributed 60% of the total (US$13.3bn of the US$22.2bn total measured). Some level of variation in the percentage of total revenue from fee-equivalent sources versus more interest rate sensitive sources seems highly plausible when interest rates have been in near constant motion. On the other hand, if the statistics we capture have some degree of noise and inconsistency, that too could cause volatility. Of course, both of these hypotheses could be true. Over the next few years, we will gather more data and hope this helps us to better understand and evaluate this statistic.
Changes in market share among groups of respondents were influenced by at least four factors: the collective revenue growth rate of each group; the movement of banks from one group to another (due to changes in asset rank); mergers and acquisitions; and restatements of past revenue numbers. The share of fee-equivalent revenue reported by the top five banks increased slightly from 57.5% in 2004 to 58% in 2005. The share of the other 15 banks in Peer 1 also increased from 25% in 2004 to 25.5% in 2005. Peers 2 and 3 saw their revenue share decline, from 17.5% in 2004 to 16.5% in 2005.
Although the data collected by the 2006 CMS Survey did not reflect the impact of some recently announced acquisitions, it seems worth reviewing some of the deals that did influence the data. A few examples include SunTrust’s acquisition of National Commerce Financial, Citizens Financial Group’s acquisition of Charter One Financial, BankWest’s acquisitions of First Community and Commercial Federal, and Wachovia’s acquisition of SouthTrust Corporation. A few more recent deals and announcements sure to have an influence in future CMS Surveys include Capital One’s acquisitions of North Fork and Hibernia, Region’s merger with AmSouth, and Wachovia’s acquisition of Golden West Financial. Although Zions was not a respondent, we also mention its acquisition of Amegy (in Texas), which was a participant in 2005. While this is not an exhaustive list of recently completed and announced deals, its inclusion is intended to give the reader a sense of the number of relatively large deals that are occurring. This continuing consolidation of the banking industry certainly explains why we see a growing share of cash management revenue among the larger institutions.
Nine product areas included in the survey reported some level of revenue growth in 2005. These products included purchasing cards, ACH, EDI, wire transfer, information reporting, account reconciliation, wholesale lockbox, coin and currency, and demand deposit accounts. Purchasing card (P Card) reported a 14% revenue increase. While this represented the highest revenue growth rate among the products measured, it fell below the 16.5% growth purchasing card achieved in 2004. ACH and EDI retained second place and equaled their 2004 performance, with a combined 8.5% increase. Wire transfer (Wires) produced 7.5% revenue growth, while information reporting (Info.) grew by 5.5%. Both these products exceeded their 2004 results of 6.5% and 4% growth, respectively. Following no revenue growth in 2004, account reconciliation (AR) reported a strong 5% increase in 2005. After 3% growth in 2004, wholesale lockbox (WLBX) produced a 5% revenue gain in 2005.
The current CMS Survey marks the first time we were able to report a separate revenue growth rate for coin and currency services (C&C). We measured a small revenue gain of just 1%. After three years of decline, the demand deposit account (DDA) category eked out a 0.5% increase during 2005. As measured by the survey, DDA includes revenue from general check disbursement activity, account maintenance, statement services, sweep services (fees only), and zero balance accounts.
Controlled disbursement accounts (CDA) recorded no revenue growth in either 2004 or 2005. This followed a mild 1% decline in 2003. Consistent with the 6.5% decline measured in 2004, retail lockbox (RLBX) reported another 6% drop in 2005. Finally, the downward spiral of check clearing (Check) is showing signs of gradually moderating. This product’s huge 9% drop in 2003 was followed by a 7.5% decline in 2004, and then a 6.5% fall in 2005.
The percentage of fee-equivalent revenue derived from each product included in the CMS Survey (shown in figure 4) was primarily derived from the 2005 revenue data supplied by the current respondents. Many years ago, we experimented with revenue models that applied the newly collected revenue growth trends to the previous year’s revenue data. We discovered that, over time, this methodology produced results that became significantly different from the most recently gathered data. We believe this occurs because banks regularly update how they apportion revenue to adjust to changes in their product offerings, changes in their billing practices, and changes in their customer base (e.g., which customers are included or excluded). Mergers and acquisitions are also often responsible for major reinterpretations, with new individuals bringing a fresh perspective.
The DDA category accounted for 25% of the 2005 fee-equivalent cash management revenue. As previously mentioned, DDA includes revenue from general disbursement activity, statement services, account maintenance and sweep fees, and zero balance accounts. Wire transfer had the second largest share contributing 14%, and check clearing retained third place with a 10.5% share. Wholesale lockbox and information reporting each accounted for 9.5% in 2005, tying for fourth place. Coin and currency (or vault services) and purchasing card each added 7.5% to the 2005 total, while ACH and EDI delivered a 7% share. The three smallest slices were controlled disbursement and account reconciliation (each at 3.5%) and retail lockbox (with 2.5%). The total fee-equivalent revenue associated with the products contained in figure 4 was $13.8bn.
The CMS Survey collects domestic cash management revenue, with the exception of the cross-border component of wire transfer, ACH, and EDI. Wire transfer revenue includes all revenue associated with same-day US dollar transfers between US and foreign locations and within the United States (excluding revenue from transfers between two foreign locations). A small, but apparently growing amount of ACH and EDI revenues was also derived from cross-border payments.
All of the 2006 CMS Survey’s bank respondents offered transfers between accounts and balance and information reporting via the Internet. Web-based ACH and wire transfer initiation were also available from 100% of the participating banks. Offering images of lockbox items via the Internet increased from 79% of the respondents last year to 96% in the current survey. Images of paid items (typically associated with positive pay) also increased, but at a slower pace. Eighty-eight per cent of the 2006 respondents offered images of paid items, up from 78% last year. Internet access to images of deposited items was available from 41% of the responding banks in 2005. This increased to 49% in 2006 and included 16 of the 19 banks in Peer 1.
For the fourth year, we asked respondents about the availability of letter of credit initiation on the Internet. Sixty-seven per cent said they currently offer letter of credit initiation on the Web, up from 53% in 2005. Another 8% either plan to add or were at least considering adding this capability.
Once again, the survey asked about methods employed to maintain secure commercial user access to Internet products, aside from passwords and PINs. The larger banks in the survey were far more likely to provide customers with handheld devices, such as smart cards, tokens, or SecurIDÆ. In Peer 1, over two-thirds (68%) reported using handheld devices. In Peer 2, the prevalence of using handheld devices dropped to 48%, and in Peer 3 only 11% (one of nine banks) distributed handheld devices to their commercial customers. Overall, the percentage using handheld devices increased from 43% in the 2005 Survey to 49% this year. We asked the banks offering handheld devices if they were requiring their customers to use this technology, or if it was optional. Equalling the 2005 results, 83% of the banks providing handheld devices reported that their use was mandatory, at least for some functions such as moving funds.
Thirty-eight per cent of the banks (18 out of 47) answering our question about providing electronic bill presentment and payment services (EBPP) for corporations said they currently offer EBPP, down from the 40% recorded in the 2005 Survey. The percentage of banks with ‘no plans’ for EBPP increased slightly from 26% in 2005 to 30% in 2006. The remainder were either considering adding EBPP (30%) or planning to add this capability in the next 12 months (2%). In 2004, we added a new question on providing electronic invoice presentment and payment (EIPP) services. As was the case in 2004 and 2005, incidence of providing EIPP remained lower than bill presentment. A little over one-quarter (28%) of respondents said they currently offer EIPP, and another 26% said they were considering developing this service. The balance (46%) had no plans to do so. It should be noted that very few bank respondents reported any volume of bills or invoices presented in January (other than zero). Only five banks provided us with their volume of bills presented, and just seven banks reported their EIPP volume.