June 24, 1999
Dow Jones Newswires
Cash Sweep Accts Gain Momentum At
Nation's Small Banks
By DINAH WISENBERG BRIN
PHILADELPHIA -- Like other community banks, Sovereign Bancorp Inc.
(SVRN) used to watch too much money flow out of commercial accounts
and into brokerage houses because of laws barring them from paying interest
on commercial checking accounts.
Last fall, however, Sovereign moved aggressively to stanch the outflow. The
Philadelphia-based bank, which has 300 branches, started wooing corporate
clients with cash sweep accounts, which allow customers to place money in
non-bank investment vehicles - in this case money market mutual funds.
It was a timely strategy.
A staple of brokerages and big banks, cash sweeps, which link deposit and
investment accounts, have been steadily gaining momentum at community
banks, industry observers say. These local players are among many small- to
mid-sized banks nationwide vying to find new ways to compete with their
larger competitors in the financial services industry, which is undergoing rapid
changes.
"If we're going to compete with the brokerage houses it's something we have
to have," Sovereign's vice president for cash management services, Larry
Snow, told Dow Jones Newswires. "They were taking away deposits out of
existing clients and, to some extent, they were taking away existing clients
altogether."
Sovereign, with $23 billion in assets, adopted a sweep program, in part,
because it acquired 93 former CoreStates Financial Corp. branches and
decided not to disrupt any of that bigger bank's product offerings. But Snow
said the bank eventually would have established the program anyway.
"We've seen an influx of dollars back from those clients," he said. He said
didn't know how much money overall had left, but recognized that deposits
from accounts he had brought into the bank were being wired to brokerage
firms.
"It was significant dollars," Snow said. "I've seen the money come back, yes."
Sovereign typically targets businesses that keep $200,000 to $1 million in
sweeps. The money remains in the uninsured investment account until the
customer writes a check on the deposit account.
Some banks require their sweep clients to keep a specified amount in the
regular bank account, often in the range of $20,000 to $100,000. When the
account falls below the target, the bank automatically sweeps in enough
dollars from the investment account to reach the specified level.
First Victoria National Bank in Victoria, Texas, with more than $550 million
in assets, is in the third year of its cash sweep program. Some $13 million sits
in the money-market accounts, said Senior Vice President Grace Pantel.
"We used it basically as a defensive mechanism to keep customers with us,
plus our competition had a sweep cash management program in place," she
said. "We feel like it's been very successful."
First Victoria, held by FVNB Corp. (FVNB), hadn't been losing business,
she said, but was having trouble attracting new commercial customers. "We
were able to get quite a bit of new business because we were able to offer it."
Sweeps Seen As Way For Smaller Banks To Compete
Industry officials say some banks are starting to see the sweep accounts as a
marketing tool to lure new customers, not simply as a defensive mechanism.
"The reason it's important for community banks is it allows them to be more
competitive with the larger banks and non-banks for money market
investments," said Robin Gordon, a spokeswoman for the Corporation for
American Banking, a for-profit subsidiary of the American Bankers
Association.
"I think it starts out as a defensive measure, but then it ripens," she said.
Sweep accounts were the most profitable cash management product offered
to commercial clients last year, generating more than $2 billion in revenue at
small, medium and large banks, according to SEI Investments Co. (SEIC) of
Oaks, Pa., whose bank cash sweep program received the ABA's sole
endorsement.
A survey by Chicago research firm Treasury Strategies Inc., shows that assets
in commercial banking sweeps grew 77% in two years, to $246 billion last
year. That compared with just $21 billion in 1991. Small banks, those those
with less than $2 billion in total assets, accounted for an $66 billion of total
1998 sweep account assets - a five-fold increase in one year, according to
the survey.
More than 60% of banks offer commercial sweep accounts, with all of the
largest banks providing them, researchers found. (Treasury Strategies' survey
showed a smaller percentage of banks had sweep accounts in 1998 than in
1997, but attributed that to wider participation in the study).
Based on the survey, said Treasury Securities consultant Michelle Hoffmann,
the firm is confident that more banks are offering sweep accounts, and that
those already providing them are enjoying expanded business.
"Cash sweep programs have been basically recognized as one of the fastest if
not the fastest-growing cash management service offered by banks to
corporate clients," SEI Senior Vice President Jack May said.
"For the banks, it allows them to diversify their revenue stream," May said.
The accounts generate fees of $10 to $250 a month, as well as spread
income. "It's a way to attract balances back into the bank that may have left
the bank over the last several years," he said.
Banks would earn more if a $100,000 deposit just sat in a regular bank
account, rather being swept into an investment vehicle, "but banks have
recognized that rather than protecting the $100,000, let's go after the $2
million that's not in the bank. We might risk the $100,000, but we'll get the $2
million," May said.
Analyst Claire M. Percarpio of Janney Montgomery Scott Inc. said
community banks realize that to improve their deposit mix, they have to grow
low-cost consumer deposits or find a way to establish small-business deposit
relationships when they make commercial loans.
"I think it's important to making that customer relationship more profitable,"
she said of sweep accounts.
Sovereign offers commercial customers seven SEI money market accounts.
While not the only new offering, cash sweep is a critical component in the
bank's commercial product line, according to Snow.
"It's brought in new business," he said, "as well as brought back funds that we
lost to the brokerage firms."
-Dinah Wisenberg Brin; 215-656-8285 |
