Reducing The Cost Of Cash
Although electronic transfers, debit cards and other payment instruments are slowly but steadily replacing cash notes and coins, it’s too soon to wax nostalgic about finding loose coins in the couch cushions and crumpled bills tucked in back pockets. In fact, cash continues to represent a huge number of transactions and a major cost for banks and merchants, even as its use dwindles.
Cash still accounts for 80% of Europe’s 230 billion payment transactions each year (EU9)1, but cash transactions – totalling about €2 trillion represent less than 4% of the total value of European payments. Europe’s commercial banks and merchants bear virtually all of the operating costs associated with these transactions (see Figure 1). In all, the 15 EU countries2 spend an estimated €55bn to €80bn annually for the whole economy – the equivalent of about €200 per capita a year or almost 1% of the EU’s GDP – to cover these costs.
For European banks (EU15), the cost of cash totals about €26bn a year, or about 8% of their combined operational cost base. For some banks, the costs are much higher. A large retail bank, for example, may spend as much as 15% of its operating cost base on cash-related operations – easily making cash the single most important element of its payment operations.
Obviously, reducing the use of cash – through more explicit pricing, for example – would help, but banks should also take a hard look at improving their own operations. Not since the 1980s, when there were important technological developments for ATMs and counting machines, has productivity in these basic cash operations measurably changed. Part of the problem is that the cost of cash is typically dispersed across the bank, with much of it ‘hidden in plain sight’ in the retail network’s branch operations (see Figure 2).
Many productivity improvement efforts search for processing efficiencies primarily in back-office operations and thus overlook or underestimate the end-to-end, front-office network costs (e.g. counting notes in the branches, filling ATMs) and the interface costs between different parts in the business system (e.g. reception procedures and controls). In fact, improving the productivity of cash operations now represents a significant opportunity precisely because so many banks have overlooked their cash operations for a long time or not focused on all the essential aspects.
Our experience shows that banks can save between 15% and 25% of the total operational cost base of cash; depending on their particular situation and the combination of levers they choose to apply. Reconfiguring cash collection, the first of these levers, can shave about 7-13% of the cost of cash. Creating lean structures and operations – primarily by adopting lean manufacturing techniques like those that transformed the automotive industry – typically leads to process improvements that reduce the bank’s cash cost by another 3-5%. And reconsidering the basic flow of currency in the branch network often reduces the cash cost by 5-7%. A fourth lever involves looking beyond the individual bank’s operations and considering how cash is handled across the entire banking system.
Unlike the money typically found amid couch cushions or in back pockets, the savings from these four levers are substantial. Better cash handling can bring about a 2-4% improvement in a bank’s cost/income ratio. With results like this, it is no wonder that retail bank CEOs are increasingly putting cash handling on their priority lists.
Banks seeking to reduce the cost of cash often look for additional opportunities to automate their cash transactions and services. While banks in many European countries have reached, or are close to reaching, the practical and economical limit of moving customers from tellers to automated channels for cash withdrawals, significant opportunity remains in changing how customers make deposits. Whether tellers or secured cash vaults are used, the logistics chain for cash deposits at most banks remains highly labour-intensive.
Although we have yet to see a successful model of a fully ‘cashless’ bank branch, recent technological and regulatory evolutions have created an opportunity to slowly migrate deposit operations to automated channels. Banks might deploy these ‘smart deposit machines’ as a first step towards fully automated ‘cashless’ branches. With ‘smart’ cash deposit machines, the basic economics depend on the impact of transforming a primarily variable cost (the handling of a cash deposit by a teller at the branch) into a primarily fixed one (the investment in the machine and its maintenance). A key element in the equation is the deposit volume that will shift from the teller to the machine, which would be calculated using the deposit volume in a specific branch and the expected ‘conversion rate’ to the automated channel. One western European retail bank achieved a 60% conversion rate during its large-scale rollout. With cash deposit transactions typically accounting for as much as 25% of a bank’s total cash cost base, this level of success has very positive P&L implications.
Our experience shows that further customer acceptance of automated cash transactions could reduce the cost base of a bank’s cash operations by 7-13%, depending on its network configuration and customer profile.
Cash processing is a co-production process, an intertwining of product and service that requires strong links between the front- and back-ends. Because this highly manual interface creates a lot of room for error and fraud, people involved in these
processes end up spending inordinate amounts of time preparing, checking and controlling operations, rather than executing transactions.
To increase a bank’s throughput and reduce costs, many bank executives are now embracing traditional lean manufacturing methodologies and tools that can reduce the time required for basic, highly repetitive actions. Often this involves redesigning the shop floor layout or rationally sequencing various process steps. Activities can also be
rebalanced to reduce downtime of critical staff and make FTE reductions possible.
Inspired by the highly efficient assembly lines that have become the norm in car manufacturing, one bank recently set out to redesign its cash-processing factory. It introduced a continuous flow layout to replace an inefficient activity-based process and then used its notes scanners, as other industries use their conveyor belts, to determine the speed for the overall process. The bank defined specific ‘min/max’ levels for its stocking areas – before it had restocked by gut – and rolled out a tight, shop-floor operational performance management process that transformed cash handling from a ‘push’ to a ‘pull’ system. While none of these measures are ‘rocket science’, they are standard for any manufacturing process – they nevertheless helped the bank drive down processing time and FTEs by 35%.
Lean approaches and methodologies can be implemented very rapidly (i.e. in a matter of six to eight weeks) and at very low – or no – cost. Efficiency improvements of 20-35% for the transformed ‘lean’ processes are common, which typically reduces a bank’s total cash cost base by an additional 3-5%.
Regulatory and technological evolutions in Europe, such as the European Central Bank’s regulations on the circulation of notes and coins, and the development of smaller, less expensive cash-telling machines, are creating new opportunities for banks to balance or ‘recycle’ their networks’ cash inflows and outflows. Often this involves optimizing the interactions of the separate flows to and from branches and on-premises bank ATMs. (This is a sizable opportunity for European banks because most simply place their ATMs ‘through the wall’ of a branch. Many bank executives are now embracing traditional lean manufacturing methodologies and tools that can reduce the time required for basic, highly repetitive actions. The situation is quite different in the US, where most ATMs are off-premises and independently operated.)
Currently, European bankers are employing several methods to manage their cash inflows and outflows. In some cases, inflows to fill branch-based ATMs are separate from the inflows to and outflows from the branch’s cashiers. In some instances, banks employ independent cash flow systems for their night vault cash deposits, which are typically made after the branch has closed and processed centrally. Optimally balancing or merging these flows can deliver substantial benefits.
Transportation costs can be 30-50% lower and the costs associated with administrative back-end handling activities can drop by 40%. The potential savings from these cost reductions could equal 5-7% of a bank’s current cash cost base.
In some cases, banks will need to look beyond their own operations for savings. With so many players involved in cash handling – commercial banks, central banks, transporters, cash centres, note printers and mints – banking executives can often identify innovative ways to improve the operations across these players.
Some may find opportunities related to the different operating models for supplying and recycling currency for European bank branches and ATM networks. For example, in France, Italy, and Germany, where the central banks have a very dense branch network of their own, regional cash centres for each retail bank process the cash shipments to and from their own branches. In the Netherlands and Belgium, the national bank, with support from private players, runs these operations. In both Norway and Austria, a joint venture between the national bank and commercial banks serves as a shared utility, while third-party specialist operators supply notes and coins in the UK.
While none of these models would be superior in all circumstances, we believe a thorough analysis of several factors – including the relative concentration of the banking sector, the geographical spread of the banking network, any wage differences among the central bank, commercial bank, and private sector personnel, and the availability of private sector alternatives – can be used to determine which model would perform optimally in each country.
Extrapolating from the experiences in certain countries, we estimate that a restructuring of a country’s cash centre operations could generate industry-wide cost savings of 9-12% as well as significant quality improvements, such as later cut-off hours for registering cash deposits on the central bank’s accounts. Additionally, our simulations reveal an opportunity to save 10-15% on cash transport costs by exploiting synergies across the overlapping transport networks. Substantial savings have been captured in Canada, for example, where the central bank now manages a nationwide computer-based inventory system that facilitates the circulation of money among commercial banks. As a result, transporting cash costs less and can be achieved with fewer central bank branches. Of course, for other countries, realizing similar results would require a fundamental revision of the commercial setup between banks, central banks, and cash transporters.
Banks often regard the cost of handling cash as a necessary evil in their overall cost structure. For many, the magnitude of these costs remains opaque, a reality that banks cannot really alter. Clearly, it is time for banks to change their perspectives on cash.
1Belgium, France, Germany, Italy, the Netherlands, Poland, Spain, Sweden, and the UK.
2All EU9 countries except Poland, plus Austria, Denmark, Finland, Greece, Ireland, Luxembourg and Portugal.