By Karen Krebsbach
3 May 2004
Web-based cash-management systems for businesses, those banks in a box that allow companies to handle most of their own banking needs, have gone mainstream-and upscale.
"As corporations evolve and more willingly embrace Internet banking, the cash- management solutions available to them are also receiving a makeover," says Celent Communications analyst Christine Barry in a recent report. "Businesses of all sizes are becoming more demanding and more sophisticated in their needs, thereby forcing the industry to change and vendors to enhance their products. As competition increases and customer loyalty remains low, banks must comply or risk losing valuable customers to their competitors."
Celent says U.S. banks spent $459 million on cash-management systems in 2003, while TowerGroup estimates that U.S. banks spent nearly $1.3 billion in 2002. In the next three years, Celent says banks will dish out another $1.7 billion on products as well, with most of the spending done by the large and mid-sized banks. Depending upon sophistication level, systems allow companies to use a single Web-based platform to automate checking accounts, pay bills and salaries, transfer funds, research whether a bill has been paid, do wire and ACH transfers, set up automatic payments, and do stop-payment transactions and account reconciliations.
Cash-management systems can conservatively generate an ROI of 30 percent to 50 percent and payback in less than one year through increased business process efficiencies and new revenue streams, says Dawna Paton, managing partner of the Gantry Group, whose estimates are based on vendor calculations, not final bank figures. The industry average for the cost of a teller-based branch transaction is $1.07, while the average cost of a telephone transaction is $5.
For banks, new revenue streams can be a gold mine, of course, but cost savings are the main allure. "When basic banking transactions like ACH origination, stop payments and funds transfer are made available on-line, the bank can significantly reduce manual processing costs," says Paton in a recent report. "By reducing the number of branch visits and phone-based transactions, banks can reduce headcount. On-line ACH origination lessens the volume of check processing a bank must execute, offering savings from the avoided costs. The increased productivity of bank employees enables banks to do more with less." Other savings can be reaped in reduced risk, liability, customer service, credit analysis and research-and improved compliance and security.
Barry says the top three products for mid- and top-tier banks-those with more than $5 billion in assets under management-include Politzer & Haney, FUNDtech and Metavante/S1 Corp. The top three products for small banks, those with less than $5 billion in assets, are BankLink, Digital Insight/S1 Corp. and Politzer & Haney. Other popular vendors include Bottomline, Enterprise, Financial Fusion, Enterprise Cash Management and Metavante. "Retail vendors are starting to enter the space," says Barry in an interview, pointing to Digital Insight, S1 and Corrillian.
"That's being fueled by a lot more demand on the corporate banking side, where there are more profitable customers."
Set-up costs, according to Paton in an interview, range from $100,000 annually for small banks to several millions of dollars for larger banks, depending upon the bank's size as well as whether software is licensed for in-house or off-site hosting.
Banks, which regulate only large corporate customers to the corporate side of the bank, have stepped up efforts to accommodate small business owners-who make up 12 percent of those doing on-line banking today-on the retail side by creating stand-alone units to handle their banking needs, says Barry. "Fees can be charged for commercial customers, but that's more difficult for small business owners," she says. "But because banks are so focused on the corporate side, the retail vendors are moving in."
She points to Digital Insight's acquisition last fall of Magnet Communications, aimed at helping the pair scale up a product to reach a wider array of clientele. She says the industry will probably see more mergers in the next year as smaller vendors are snapped up by larger competitors, and the partners won't be limited to traditional retail and business banking vendors, although she declined to name names.
Moreover, says Barry, browser-based products are now overtaking Windows-based products, which many companies say is easier to use for ACH transactions. She says nearly 100 percent of large banks will have a browser-based product by 2005, compared to 85 percent of mid-sized banks and 13 percent of small banks. By 2006, Celent says it believes banks using Windows-based solutions will be few and far between, says Barry.
Moreover, new offerings are now focused on features like check-imaging, alerts to notify customers of time-sensitive transactions like ACH approvals and wire transactions, international payments capabilities and fraud modules. And upcoming versions, Barry says, will address broader product sets like trade finance, loan origination, and foreign-exchange capabilities. Paton also praises products' newly available combinations of Internet geographic reach, availability of robust security, privacy-protection technologies and adoption of the J2EE/XML standards.
Banks can also use their brand on the Web-management system. "You can have their whole experience branded by your bank," says Paton. "This helps banks to competitively differentiate themselves in the market and allows them to more successfully cross-sell and up-sell." She also notes that good systems will help banks penetrate more deeply the small business market-now 25 million strong and growing from 4 percent to 10 annually over the next few years. "Many banks, regardless of size, have avoided targeting the small business market because of highly diverse and fragmented needs throughout the sector," she notes. "As the Internet drives down transaction costs, banks now have the opportunity to convert traditionally low-fee services into profitable revenue streams."
© Copyright 2004 Thomson Media Inc. All Rights Reserved.
http://www.thomsonmedia.com http://www.banktechnews.com