Small Businesses Value Online Cash Management; Community Banks Should Explore Technology, Says Expert

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In this lengthy Technology Feature, Abound Resources executives explore the challenges, costs and considerations of online cash management (OCM) for community financial institutions trying to meet the needs of small-to-medium-sized businesses with a view that OCM will help them become the primary bank to that customer segment and improve net interest income. Presentation was at the Ind. Bankers Assn. of Texas annual meeting near Dallas.

Technology is making it easier – and more affordable – for community financial institutions (CFIs) to offer online cash management (OCM) to their small business markets, says a 15-year veteran of community bank technology.

“But it also requires good marketing and selling, plenty of operational and infrastructure changes, and there are new risks to be mitigated,” cautions Brad Smith, President of Abound Resources, Inc. of Austin, Texas, (Photo: http://www.aboundresources.com/smithpicture.jpg

The majority of small-to-medium-sized businesses (SMBs) use their primary bank for most of their cash management, Smith noted. “So if you’re not offering cash management, you’re probably not the primary bank for your SMB customers. Deposit services are the No.1 concern of the SMB market. If you’re leading with lending, you’re missing the boat.”

Smith and Sharon Sokol, VP-Product Development for Abound Resources, spoke Wednesday (Nov. 30) on “Increasing Non-interest Income: Cash Management in Community Banks” at the 31st Annual Convention of the Independent Bankers Association of Texas (IBAT). The meeting was held at Gaylord Texan Resort & Convention Center in Grapevine, Texas, Nov. 29-Dec. 1. Abound Resources, an IBAT member serving customers across the country, offers breakthrough technology support and information for CFIs.

Online cash management, or OCM, is an Internet banking system designed specifically for commercial customers that enables them to monitor their cash position and manage their cash consistent with their business goals. With the exception of bill payment, money in an Internet banking system generally moves within the financial institution. Online cash management typically enables the user to move large amounts of money outside the institution. That requires more robust security and controls.

Smith, the former head of Deloitte & Touche’s community bank technology consulting practice, warned community bankers about believing “you’ve got your SMBs locked up. Today’s small and medium-sized business – typically less than $20 million in annual revenues – need ready access to information to effectively manage its cash position, pay down credit lines or invest excess cash,” he noted.

“Most owners of small and medium-sized businesses wear many hats, and they appreciate the convenience of initiating transactions online and avoiding the trip to the bank. The move to electronic processing means businesses large and small see value in more sophisticated cash management functions.”

According to John Bresnahan, director at Edgar, Dunn & Company, a financial services and payments consultancy, “Nearly 60% of small businesses prefer to conduct their payments and cash management activity online. These findings…indicate a real opportunity for financial institutions to expand their view of the small business market beyond providing basic services.” (PRNewswire, June 6, 2005)

Outsource…Benefits…Features

Smith, a former project leader on more than 150 high-visibility bank technology projects, including planning, system design and implementation, vendor selection, merger integration, profitability analysis and process improvement, recommended that community banks begin by surveying their customers for what they want. Today’s OCM systems are more affordable. With expensive up-front fixed costs out the window in most cases, OCM is more attractive.

“If you do offer OCM, you can start out slowly and add more sophisticated products such as merchant capture, positive pay, lockbox and online investments as you grow comfortable with these offerings, and as your customers demand more sophisticated products,” Smith advised. “It is imperative, as you develop a three-year technology plan, to make sure you choose a provider who can deliver the features you will want or need in the future.”

He listed a bank’s potential OCM benefits as:

  • Additional non-interest income or fee income; (“Unlike retail customers, small businesses are willing to pay for the high value they derive from Internet banking.”)
  • Higher non-interest-bearing account balances; (“One $80 million institution with which we worked saw its DDA balance per customer almost triple once it started offering online cash management.”)
  • More accounts per customer; (Small businesses have 2.8 accounts with their financial institution vs. 1.7 for retail customers. Source: Tower Group.)
  • Cross Sales; (Small businesses are more receptive to cross-selling of products and services, and 60% consolidate their financial relationship with a single institution, reports Financial Insight.)
  • New Deposit Sources; (Online cash management can attract new customers.)
  • Improved Internal Processes; (“Automating manual tasks such as balance verification, check inquiries, book transfers, wire transfers, stop payments and requests for check images allows staffers to be more efficient and to address more value-added activities.”)
  • Improved Risk Management. (With customers initiating their own transactions, bank employee errors are less likely.)

Sokol, a 20-year executive level banker and former COO of Southwest Bank of Texas (now Amegy Bank), detailed the external benefits for small businesses. (Bio & Photo URL:

http://www.aboundresources.com/company_management-team.htm She cited better account information regarding liquidity; the ability to optimize cash resources, and current balance info for immediate short- and long-term financing. Companies also can enhance fraud prevention, reduce float and improve operational efficiencies with online cash management.

The functions and features to be considered for such a program fall into three categories -- “Must-have…nice-to-have…and bells and whistles you probably don’t need,” the speakers said, explaining each of the choices in great detail.

Online Cash Management Program Costs

Cash management systems once cost $1 million or more, and the ASP solutions of the “veteran” vendors still carry some hefty price tags, said Sokol, who has built the product lines and infrastructure for three community financial institutions including a de novo and one of the first Internet banks in the country

“Vendors, particularly veteran sellers, previously listed significant upfront fees for basic balance reporting plus monthly per user fees of $2.75 to $15.00. Other features, like image checks and the upfront fee could double and the minimum monthly per customer fee could be increased,” she said, citing specific price ranges. “Positive Pay also could increase the upfront costs, and custom interfaces from your core system to the cash management system, as well as interfaces to your image archive system to offer images of posted checks, could each add thousands of dollars more to the cost.”

“Most new vendors and existing core vendors, however, now offer much more affordable, much less expensive OCM solutions in the form of web-based products. Although many of these products do not have the flourishes offered by the cash management veterans, the landscape has changed since 2002,” Smith contends.

“To compete with the offerings of the larger banks, some of the core vendors have purchased cash management solutions and merged the new product into their Internet banking solution.

Vendors targeting community financial institutions forego huge upfront costs and offer cash management for an upfront fee of $5,000 to $15,000. Some have basic monthly fees starting at $750 with no per customer fee, allowing a bank to grow its base without huge overhead.

“There is usually an extra fee for Positive Pay and a per customer fee,” Smith added, “with some vendors charging a small per exception fee of $.10 -.15 per item. The new vendors also offer check images online for a much lower upfront fee, as little as one-tenth of veteran vendor systems. The new affordability and diverse benefits command careful consideration,” he emphasized.

Security Risk Procedures

When OCM is web-based, a bank’s risk management procedures should address a new set of security concerns, especially in this world of identity theft, “phishing and pharming,” Smith reminded attendees.

“Although consumers are protected from losses of unauthorized electronic funds transactions under Reg E , providing them zero liability, business funds come under the auspices of Article 4 of the Uniform Commercial Code (UCC), which requires banks to ‘use commercially reasonable and adequate security’ to protect users. Since technology is changing rapidly, adequate security is a ‘moving target’.”

On Oct. 12, the Federal Financial Institutions Examination Council (FFIEC) issued a guidance to all financial services institutions to move beyond user name and password and to implement an authentication methodology aligned to the level of risk associated with the customer, the transaction and sensitivity of the information being communicated. The full FFIEC report can be viewed at: http://www.ffiec.gov/pdf/authentication_guidance.pdf.

The FFIEC guidance urged bankers to conduct a risk assessment of their online banking products to determine where they are and to implement additional authentication methods or processes as warranted by Dec. 31, 2006.

Free Banker Resources:

Bankers and banking trade press editors and reporters can obtain Smith’s 10-page white paper on Online Cash Management by attending a no-cost webinar on Thursday, Dec. 15, from 1 p.m. to 2 p.m. (CST). Register by going to this URL: http://www.aboundresources.com/technology_cash_management_webinars.htm

Abound Resources also produces Optimize IT: Strategic Resource for Community Banks. The newsletter is a concise report on actionable information and monthly tips for optimizing technology at the CFI level. It also has developed a “Technology Optimization How-To Kit” for bankers only. It can be obtained by calling 512-231-1750, Ext. 1700 or by going to URL: http://www.aboundresources.com/technology-optimization-kit-offer.htm

About Abound Resources

Abound Resources, Inc. of Austin, Texas, offers the first affordable, unbiased technology support solution for community financial institutions. The firm helps community bankers maximize their existing technology, make the best purchase decisions, manage the IT regulatory burden, and save time and money. Its innovative, web-based technology support system allows it to provide strategic, customized support at an unparalleled price point. Breakthrough products include ClickSupport™ and ProjectSupport™. http://www.aboundresources.com

FOR MORE INFORMATION OR INTERVIEWS:

Brad Smith, President, Abound Resources, Inc., 13740 Research Blvd., Ste. 3, Bldg. S, Austin, TX 78750, 512-231-1750 ext. 1102

or Jacque Chrisman, The Chrisman Group, Austin TX, 512-345-8969

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Jacque Chrisman