Mellon Bank is hoping to cash in on the rapidly growing business of private-label cash management-and it has no qualms about taking on the big technology players in this highly competitive space in a bid to curry favor with small and mid-size banks.
Though Mellon, which claims 50 banks as clients, has been in the business 10 years, it recently launched a "wholetail" lockbox feature-combining wholesale and retail paper payments in a single lockbox service-and will offer a complete array of private-label services through Mellon Enterprise Cash Management, says Bob Stasik, evp and head of Mellon Global Cash Management. The wholetail lockbox service is most applicable for banks with business customers receiving 5,000 or more payments monthly (scannable and non-scannable remittance documents) and for business customers receiving single payments with multiple remittances, multiple checks with single remittances and payments that do not match the billed amounts. Mellon wouldn't disclose specific revenue figures, but says that revenue in the unit has grown 23 percent annually for the past four years; a 24 percent increase is expected in 2005.
Cash-management services are the sweet spot of outsourcing. Because it requires a good deal of scale and technology investment, it isn't viewed as a "core competency" for small and mid-size banks, which are unlikely to build a proprietary system, according to industry players and analysts. However, it's an especially prized service for banks to offer their small business and corporate clients, as more medium-sized banks and larger community banks look to deepen their relationships with these customers, says Susan Feinberg, an analyst at TowerGroup. Indeed, small-business demand accounted for 56 percent of cash-management products sold this year to banks, says Maggie Scarborough senior analyst at Financial Insights.
Feinberg sees tremendous growth potential in this industry as she expects a backlash among corporate customers that increasingly want a local institution to handle all their banking needs. Banks with between $1 billion and $20 billion in assets are driving this new growth, she says. Myriad third-party technology vendors offer cash-management services. But one name stands out: Mellon. Stasik notes Mellon's services can be bought in pieces, depending upon a bank's needs. Its remittance program has seven physical sites-Dallas, Atlanta, Boston, Chicago, Los Angeles, Philadelphia and Pittsburgh-and a bank can pick and choose which to use.
The main aspects of private-label cash management include three broad areas- on-line cash management, disbursements, and remittance processing. Most providers specialize in only one or two of those areas, Feinberg says. EDS and RemitCo., for example, are big competitors in remittance processing, while Digital Insights and Politzer & Haney are better known for their on-line capabilities, she says. The third area, disbursements, is the least crowded and shows the most room for growth.
Scarborough notes that S1 is positioning itself to compete head-to-head with Mellon. In November, it teamed with Wells Fargo to offer foreign-exchange services. That's the only case to her knowledge of a cash-management provider teaming with a bank, but she says she expects to see more couplings in the future, since vendor partnering is not unusual in the industry.
Providers have a growing customer base, whether they partner with each other or with a financial institution or-as in Mellon's case-market proprietary systems, Scarborough says. While the top 100 banks or so already have their own products to offer corporate clients, they are not offering the full spectrum of services to other banks like Mellon is doing. Feinberg says that other banks have offered some of these services before, mostly wire transfers, on a private-label basis, but Mellon was the first bank to make a business of it.
Christine Barry, senior analyst at Celent Communications, adds that Mellon's biggest challenge stems from its one unique identifier: it's a financial institution. As such, Mellon must appease potential bank clients that it will not use their client data to gain an unfair advantage for its own cash-management business line.
Stasik says this is not a problem, adding that Mellon has created an entirely separate division and hasn't faced any problems in convincing client banks that a "strong Chinese wall" exists. But competition remains fierce. Politzer & Haney alone claims more than 100 financial clients, Barry notes.
