US Economy and Banking Industry
There are a number of key themes that have dominated the US economy and banking industry over the past year. The current account deficit, which recent figures estimate at over US$857bn, is increasing and has left the government vulnerable to volatility in global markets. The US economy has slowed and interest rates are 5.25%. The interest rate cycle has been negative for most banks for the past couple of years, and the yield curve is flat. The main effect of low interest rates on the treasury community has been that treasurers are moving excess liquidity into sweep accounts, which are attractive short-term investment vehicles. Money market funds (MMFs) are also a popular alternative investment for treasurers seeking higher yields. For more information on the current state of MMFs in the US, read Choosing a Money Market Fund: Is Yield the Only Consideration?, by Peter Crane.
Credit quality in US banks has deteriorated due to several factors – the main issue being the sub-prime mortgage crisis, which has caused several mortgage lenders to file for bankruptcy. This issue continues to grab the financial headlines as American Home Mortgage recently became the latest lender to fall foul of the early payment defaults.
There have been several mergers within the US domestic market – these include Bank of New York/Mellon, Capital One/Hybernia Bank/North Fork, and Am South/Regions Bank. The top five banks in the US now dominate the cash management industry with almost 60% of the market.
Despite concerns about the US’s current account deficit and the sub-prime mortgage crisis, there are nevertheless positive signs for corporates. According to David Spring, at Fitch Ratings in New York, underwriting for middle market corporates has been favourable. He told gtnews: “If commercial credit starts to weaken, banks will tighten the underwriting, making that less favourable for their customers. If they tighten too much we will see a credit crunch, but we’re not there yet.” The US economy is examined in more detail in the article Is the US Seeing a Sustainable Fiscal Improvement?, by Brian Coulton, at Fitch Ratings.
Many regulations and standards have been introduced in the US in recent years and are continuing to be prominent in accounting, treasury and corporate governance for US companies. There are few major developments expected on the regulatory horizon, although there is a growing school of thought that Sarbanes-Oxley has become a burden for companies and that its scope should be scaled back. KYC continues to be an issue for banks in the US, which are under pressure to keep up to date with technology to ensure security, KYC and anti-money laundering compliance. Meanwhile, the Federal Reserve recently decided that the top 10 or so banks in the US should adhere to the advanced standards of Basel II.
According to cash management experts Lawrence Foreman and Mike McFarlane, at Ernst & Young, the US cash management industry went through its own recession from 2002 to 2005, but it is now regaining the growth in profits that it enjoyed at the beginning of this decade. This return to revenue growth is driven by electronic payments and solutions, growth in positive pay and check imaging.
Other cash management functions that have increased in popularity in the past year include ACH, ARC, web-initiated payments, point-of-purchase (POP) payments, as well as purchase cards (p-cards). Wires have also seen about 10% growth in the past year, although it is not clear what is driving this. According to Forman, at Ernst & Young, this could be partly due to the growth in international trade and the immediacy of wire payments. Read more on trends in the cash management industry in Lawrence Forman’s US Cash Management Services Survey 2006.
Check 21, which was introduced in October 2005, has dramatically changed the behaviour of banks in the cash management industry. It has lead to rapid take-up of image exchange and remote deposit capture.
According to Danny Peltz, at Wells Fargo, over a quarter of all checks processed today in the US are processed through image exchange or substitute checks. He says: “In February this year, we received more electronic deposits or transactions from a collections perspective than we did paper transactions, and that’s continuing. Corporates would love to keep things electronic because it provides them with better control, in terms of both internal and external fraud. We’re seeing more banks being able to accept images, and more banks pushing images and wanting to settle that way. A third are still processed via paper (substitute checks). So while the percentage of images are going up on an absolute basis, the substitute checks are increasing as well.”
Susan Long, senior vice president at The Clearing House, agrees that it has been a breakthrough year for image exchange in the US. The number of check images processed each month by SVPCO has increased by 286% compared with the monthly average a year ago. For more information on check imaging, read the Q&A with Long, Q&A: Now is the Time for Check Image Exchange
Remote deposit capture (RDC) has been adopted by over a third of US financial institutions since the introduction of Check 21 legislation two years ago. The largest US banks now offer RDC solutions and, according to Bob Meara, senior analyst at Celent, this is partially due to early interest from the treasury management community. However, banks have stiff competition from third-party providers and, furthermore, corporates themselves have been slow to enter this market. In his article The State of Remote Deposit Capture: Entering the Mainstream, Meara states: “Only 2% of US businesses are using RDC, and most banks have yet to launch comprehensive sales and marketing campaigns designed to capture their fair share of this burgeoning market. If banks are not vigilant, they risk losing significant core deposits as the market matures.”
Back-office conversion (BOC), the conversion of business-to-business checks to an electronic image, was introduced in March this year, but it hasn’t been adopted as quickly as the industry expected. Peltz, at Wells Fargo, says: “We’re still in a piloting mode but our customers are very interested. From a consumer perspective, you have to notify the consumers that their check is going to be converted into an electronic transaction, so there are some behavioural changes.” Forman, at Ernst & Young, ascribes the slow adoption of BOC to the fact that many companies have decentralised back-offices, making a single process more difficult to coordinate.
Competition in the US banking industry is undoubtedly intensifying, as technology and less lucrative check processes are putting pressure on banks to find profit elsewhere. According to Nancy Atkinson, senior analyst at Aite Group, mid-sized firms are a small but lucrative group of potential customers for banks. She says: “As competition intensifies in the banking industry, deposit-gathering becomes more difficult and expensive. In addition, as services to large corporations are commoditized, banks of all sizes find the middle-market segment of greater interest.” In her article US Middle-Market Companies: A Transitional Financial Services Segment Atkinson notes that middle market companies are selecting their financial service providers predominantly based on customer service and also for their online cash management capabilities.
Advances in technology and the increasing globalisation of trade are changing the nature of cash management in the US. According to Wells Fargo’s Peltz, an increasing number of the bank’s customers now have international requirements such as sending payments abroad, or trade finance in developing countries. Developments in communications technology is also driving the increasing mobilisation of the cash management industry, and many corporate treasurers now expect to access financial data and cash management tools via iPhones and BlackBerries, and to give approval for wire transfers and other cash management functions, e.g. sending check images. Online lockbox is starting to gain traction. Some banks are introducing their own mobile solutions for treasurers and CFOs.
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