Mellon Turns to 'White-Labeling' To Replace Revenues

While banks are able to garner cost efficiencies from accounts receivables conversion (ARC), the movement toward check conversion (and away from paper checks) has some negative revenue implications. As a consequence, many institutions are being driven to seek other revenue streams for their cash management operations.

Some, for example, are promoting commercial card or purchasing card services, which factor into cash management's bottom line. According to a November 2004 survey by Visa, 40% of corporate finance executives plan to increase their use of purchasing cards.

Meanwhile, other banks are looking to more directly leverage the investments they are making in ARC, while at the same time building better economies of scale. Under the auspices of its Enterprise Cash Management business, Mellon Financial Corp. is "white-labeling" its own cash management services, like lockbox, for smaller banks. The effort expanded from offering data exchange and online balance reporting in the 1990s to wholesale lockbox. Retail lockbox services to other banks was added last year, according to Paul Whiteside, first vice president and manager of Mellon's enterprise business.

Of the 55 banks serviced by Mellon's enterprise unit, only two (as of January 2005) are customers of its retail lockbox service, and the bank's first white-label customer for its ARC service will only start piloting in the second quarter of 2005. But Whiteside sees a sweet spot in offering such services to banks in the $5 billion to $20 billion asset-range or larger that see the potential cost savings of ARC but lack the size (or the inclination) to justify building the capability in-house.

"Banks have been under extreme bottom-line pressure in recent years," he says. "One way to alleviate that pressure is to outsource." Mellon's Enterprise Cash Management unit has averaged 25% year-over-year growth for the past five years, according to Whiteside, who expects his unit's ARC service to grow even more quickly at first.

While some banks look for new forms of revenue, Richard Oliver, senior vice president of the Federal Reserve Bank of Atlanta, predicts that other institutions will rely on an old stand-by: charging fees for conventional, but increasingly costly services like the mailing of paper statements. "I think banks will have to find clever new ways to package their services" in order to make up for lost check processing revenues, he says.

— Karen Epper Hoffman