DECLINE OF CASH CONCENTRATION SERVICES SIGNALS FUNDAMENTAL SHIFT IN CORPORATE BANKING PAYMENT PRACTICES

TowerGroup Research Examines Future of Cash Concentration and Implications for US Financial Institutions

NACHA PAYMENTS 2005 (San Antonio, TX), April 12, 2005 - While cash concentration is fundamental to the effective management of working capital, new TowerGroup research finds a combination of factors driving a major decline in cash concentration services - with significant implications for US financial institutions.

A traditional cash management product line used by corporations to consolidate balances maintained at multiple domestic banks, cash concentration services are on the wane. Corporate America is reducing its total number of banking relationships, while other trends like bank consolidation, the "electronification" of the check depositing process and shifting payment practices are driving down cash concentration volumes.

"Although it is difficult to quantify the precise decline in cash concentration volumes, the implications for US financial institutions are clear," said Susan Feinberg, senior analyst in the Wholesale Banking research service at TowerGroup and author of the research.
"TowerGroup is seeing a fundamental shift in how corporations select depository institutions, moving away from the convenience of local branch relationships toward a more centralized approach. Corporations are also looking increasingly to banks with leading-edge technology in the areas of check imaging and electronic payments."

Feinberg noted that these trends will have particular impact on smaller financial institutions. "As the need for cash concentration services declines, regional and community banks will see a growing loss of corporate depository business unless they too can leverage technology in emerging payments areas."

Highlights of the research include:

- While there will always be reasons for some corporations to maintain local depository accounts with multiple banks, the
number of those accounts is likely to be much smaller and their purpose much different than for depositing checks and cash.

- In the future (with the exception of companies reluctant to change), the means by which corporations move intracompany
funds will likely be managed centrally, rather than through traditional cash concentration services.

- For leading banks with large revenues from cash concentration products, the decline in volumes is one cause for an overall
decline in cash management revenues.

"The same financial institutions that are losing cash concentration revenues may benefit from increased revenues in other product areas, such as deposit processing and check imaging, or from liquidity management products where the bank earns net interest income. In the future, banks that focus their attention on enhancing customer convenience, on end-to-end integration, and on liquidity management services are more likely to win cash management business regardless of the size of their branch network or their ability to concentrate funds efficiently," she said.

Feinberg added that it is crucial for banks to view these trends not as problems to be resolved, but as opportunities to enhance customer value and increase revenues. "Banks that understand these opportunities and act on them will have a competitive advantage," she said.

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