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MAY 18, 2000

For Merrill, Small Is Bountiful

The giant is courting business owners--and gaining assets


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Who's afraid of Merrill Lynch? ( MER) Growing numbers, it seems, as the broker moves full tilt into a broad range of financial services. Traditional banks that finance small business, for instance, rate Merrill as the nonbank competitor they fear most, according to New York consultancy Towers Perrin.

Anxiety is likely to rise yet higher in mid-May, when Merrill unveils an aggressive online strategy to boost small-business deposits and eventually reap more personal-banking clients. The new program, called Cash Manager, will give small-business owners online information about their Merrill and non-Merrill accounts on one site, allow them to pay bills and payroll online--and then consolidate excess cash into high-yielding Merrill investment accounts daily.

Already, Merrill has made big inroads into small-business banking. Since 1995, for instance, it has increased its small-business assets to $165 billion from $50 billion. Small-business lending is expected to triple again in the next three years, says John Qua, head of Merrill's Business Financial Services.

RICH CIRCLE. And, with the help of Cash Manager, Merrill hopes to win an even bigger prize--the personal investment accounts of small-business owners. Nearly 70% of the rich customers Merrill covets, those with more than $5 million in assets, own businesses. Catering to their business needs could, in turn, win them over as personal customers. "We're trying to complete the circle" in Merrill's relationship with the wealthy, says Qua.

Traditional banks that have dominated the small-business market for years could be major losers. They are scrambling to hold on to accounts as investment banks, credit-card companies, and online startups all fight to attract their customers. Indeed, brick-and-mortar banks could be left with such labor-intensive and low-margin crumbs as dealing directly with deposits and check-processing--while the likes of Merrill scoop up an increased deposit base and a cheap source of funds.

Merrill will pitch the new account first to existing customers and through financial consultants in its 700 branches. Advertising later this year will aim to pull in new customers. Crucial to the new account is the use of Banklink, a Fiserv Inc. unit that culls account data from a network of banks daily and transfers it to Merrill. The new site asks customers to put in all their account numbers, including those from other institutions, and then designate how much cash they want left behind in those accounts each day. Most, the theory goes, will opt to leave the minimum account balance behind and put the rest into Merrill funds. Merrill will advise clients about investments ranging from money market funds to Treasuries and mutual funds. Returns vary--recently, Merrill's highly liquid money-market funds have earned 4.7% to 5.2%.

Hitherto, Banklink services have been available only to large corporate customers. But with the new online service, anyone with a Merrill business account, the Working Capital Management Account, will also be able to pay vendors and employees through direct deposit and monitor transactions, allowing different employees varying degrees of access to the system. The account carries a $125 annual fee, and the Cash Manager program will cost an additional $25 monthly. Of Merrill's 165,000 business accounts, only 20% so far are using its online services.

"INCREDIBLY CREATIVE." Merrill's plan to lure small-business owners with the promise of higher interest for all their excess cash is "incredibly creative," said Kathleen C. McClave, project manager at Towers Perrin. Small businesses generally are "sloppy" managers of their deposits, McClave says, leaving excess balances in accounts with several banks that could be consolidated and earn interest elsewhere.

Analysts say some of Merrill's bank rivals will fight back. Chase Manhattan Corp. (CMB), for one, is said to be working on a program that allows small-business customers to sweep checking deposits into investment accounts to earn high returns. They and other banks had best suit up quick, or they run the risk of getting trampled in the rush.

By Heather Timmons in New York


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