Few companies were hit as hard by the Sept. 11 terrorist attacks as American Airlines. The damage to its credit ratings thrust American into greater dependence on bank borrowings and ultimately will result in a realignment of its cash management business this year. It's an extreme case of a major trend in cash management.
"Until now, we would shop for the best cash management services," explains Tony Matteo, manager of domestic banking at the Fort Worth, Texas-based carrier. "If two banks were equally able and efficient, we might favor the bank in our credit group. Sept. 11 changed all that. It shook up our entire industry and changed our corporate culture. We'll be changing cash management banks in 2002 to reward the banks that stuck with us on credit."
More than ever before in cash management, the basis for doing business these days is quid pro quo. From the corporate side, the questions are: What has your bank done for my company lately? When we had that problem recently did you back us up or back away? From banks, the offer still is this: We'll give you a credit facility if you pretty much guarantee us your cash management business. In Treasury & Risk Management's 2002 cash management survey, nine of the top 25 cash management banks now owe 75% to 100% of their cash management business to credit relationships, while another 12 get 50% to 75% of their business from captive borrowers. None of the top 25 banks gets more than 75% of its cash management business independently. "Cash management has gone from being a stand-alone, fee-based business to being part of a package of services that is based on credit," observes Ann Givens, group senior vice president for cash management sales at ABN Amro Bank. "It's the biggest change I've seen in years."
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Although banks have been connecting extensions of credit with fee businesses for years, it's hardly shocking that the last 12 months of corporate implosions, the nation's brush with recession and the obliteration of New York City's World Trade Center would amplify the view of cash management as a bargaining chip. When you are extending or being given credit these days, everyone feels the need to attach a few more strings than before. For example, American probably will keep J.P. Morgan Chase as its concentration bank since J.P. Morgan also is co-lead of American's credit syndicate, Matteo says. But the fate of the airline's other major cash management banks–Bank of America, Bank of New York, Bank One, SunTrust and Wells Fargo–is less certain.
Mateo doesn't feel as if American loses any advantage as far as technology by choosing based on loyalty rather than product offerings. "Our credit banks have good technology," he says. "We've used them for non-credit services before and know what they can do. The pain will be in the transition. We'll have to run duplicate systems for a while, but over time we'll get back to our smooth operation."
The diminishing role that technology is playing in the selection of cash management banks should also come as no surprise, given the fact that banks themselves are easing off on introductions of new programs. "We flooded the market with more initiatives in 2000 and 2001 than either we or our customers could absorb," says Francine Miltenberger, executive vice president for treasury management at Pittsburgh-based PNC Bank. "Now, it's time to step back and assess what's working."
Tweaking the Systems
Cash management experts agree that 2002 will be a year of fine-tuning, particularly since R&D budgets are tight. Innovations this year, they say, will be calculated to improve efficiency, not change the world. "With the continual downsizing of treasury staffs, the emphasis has been on getting the job done quicker, cheaper and better, but with robust security," reports Jim Dean, Cleveland-based KeyBank's senior vice president and manager of the large corporate market segment. For example, Parker Hannafin Corp., also of Cleveland, got Key to build a way to take foreign-currency wires out of special handling as FX transactions and merge them with other wires so the company can send one file and have the bank execute all wires, foreign and domestic, denominated in any currency, he reports.
"We're seeing a lot of collaboration between treasury and accounting staffs to drive down overhead and speed up the sales-to-cash cycle," notes PNC's Miltenberger. "Everybody is looking for process improvements."
The emphasis has shifted to working out the communication kinks, so that legacy systems will talk to each other. "The push this year is to integrate systems and offer straight-through processing to customers," reports Irv Cohen, head of J.P. Morgan Treasury Technologies Corp., based in Tampa, Fla.
Susan Skerritt, partner in the New York office of Treasury Strategies Inc., says that this focus makes a great deal of sense for the banks: Systems integration and straight-through processing reduce overhead and bind clients to the banking relationship. Once the work is done to link bank and corporate systems, nobody wants to have to do it over again, she points out. It is also a further incentive to shrink the number of primary cash management banks down to one, she adds.
Given non-existent R&D budgets and the financial pressures on the banking industry from potentially bad debt, lending banks that don't have the scale to offer some cash management services cost-effectively are talking with big cash management banks that may have limited capacity or appetite for lending. "No announcements have appeared yet, but you'd be surprised at the size of the banks and the scope of the negotiations," Miltenberger hints. Miltonberger declined to name any of the banks, since discussions are still preliminary
Still, there is at least one arena in which the banks seem willing to spend a buck–electronic bill presentment and payment (EBPP). Progress has lagged behind expectations, but enthusiasm among big payers in recent months has sparked interest among the banks to sink more investment into the product line, making plausible a major breakthrough in market penetration this year. T&RM's Buyer's Guide shows that 10 of the top 25 banks already have customers using a business-to-business EBPP offering, while another 10 are in the process of developing and testing the service. Only five are sitting this one out.
Those in the business have essentially been peddling a biller-centric product: The bank sells a biller on sending an invoice file to the bank, which posts it on a Web site where payers can come to review pending invoices from that supplier and authorize payment. The more robust applications permit payers to dispute invoices, using reason codes, to approve partial payments when there is a dispute and to schedule payments for a future date.
But as many banks are discovering, the business may be with the payers and not the billers. For example, Citibank has been selling EBPP aggressively to billers with less-than-stunning results: Just four billers, with 60 registered payers, use its service to present between 5,000 and 10,000 invoices a month, says Jose-Luis Brown, vice president and business management director for Citibank e-billing. And only about 10% of those are actually paid through the service, he concedes, making it more presentment than payment.
Then, over the last year, banks have been having experiences like Citi had recently with a Fortune 500 air transport company, which was one of its registered payers. The transport company–exactly the kind of payer that usually frowns on EBPP because it's wedded to its own accounting and A/P systems–has discovered that it can use the Citi service to cull instances where the supplier's invoice does not match its own purchase order, instead of being forced to wait for a paper invoice to discover the mismatch. According to Brown, that payer now is negotiating contracts with many of its major suppliers that require them to present their invoices through Citi's EBPP and is planning to use the service to make payments.
Despite the lack of expansion in cash management overall, this year could prove pivotal in terms of which financial organizations are able to remain sizable players in the niche. Ultimately, as Treasury Strategies' Skerritt points out, once straight-through processing systems and other integrations are completed, it probably will be much more difficult, not to mention expensive, to get companies to jump ship.
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