The prognosticators in our industry have anticipated the decline of both brick-and-mortar branches and consumers’ use of cash for some time, but the reality of today’s market paints a very different picture. In fact, cash levels are on the rise. While the percentage of cash is lower than it was a decade ago, according to McKinsey & Co., cash was still used for approximately 29% of all U.S. retail payments in 2012. In response to these market dynamics, banks are challenged to better manage their largest non-earning asset.
Banks can effectively increase their bottom line by centralizing their cash management operations – redirecting dollars from physical branch locations and reinvesting in alternative investments and lending. By doing so, branch managers and tellers are freed up to uncover more opportunities to make loans, cross-sell and interact on a more personal level with their customers. In essence, cash management centralization enables a branch’s sales culture to flourish.
A Limiting Issue
The truth is that, for many financial institutions, the process of cash handling has not really changed in more than a decade; decisions are still limit-based and policies are rarely altered. A typical limit is an amount of cash that a bank’s management has set for a branch which cannot be exceeded. Cash limits are established to ensure excesses are not kept, insurability levels are maintained and overall risk practices are followed. Branches tend to have complete autonomy over their cash inventory, as long as they manage beneath that limit. However, that limit is typically examined at most twice a year, which leaves plenty of room for error. Just because a branch operates below its cash limit does not necessarily mean that its cash levels are being effectively managed.
High rates of staff turnover can lead to problems of branch inconsistencies or, worse, managing cash up to its artificial limit instead of managing it down to the branch’s usage. Factors such as bonding costs, insurability, risk management and capacity that the branch can physically hold, in addition to an annual review of cash positions to determine a viable cash range, are used to define a branch’s cash limit. Limits are also reviewed infrequently due to time constraints and a branch’s lack of resources. For example, risk management, finance and branch administration are resources that cannot be pooled to review cash more than once or twice a year.
Furthermore, if banks change their branch networks’ cash management practices, they will be much better positioned to adapt to market changes. According to the Federal Reserve Bank of St. Louis, for example, currency in circulation is projected to increase to a level of more than $1.2 trillion by 2015. Branches that streamline cash management processes will be better equipped to handle the consumer demand and this influx of cash. The Federal Reserve has pumped cash into the economy to stimulate growth with past rates reaching $75 billion per month. Even with the expectation of tapering this cash flow, currency circulation and market growth will continue to increase, enabling branches to capitalize on a strengthening economy and better leverage any interest rates changes.
From a regulatory standpoint, there are currently no external or regulatory examinations for banks regarding the control of their cash – as strange as it may seem regarding a bank’s largest non-earning asset. Banks are audited on whether or not their cash policy limit threshold is exceeded, not on their specific cash ordering or handling processes. Banks need to be more in tune with their branches’ cash, not reactive to outdated policies.
A bank’s absolute tolerance for cash is not an effective measurement or standard procedure. Identifying and analyzing the daily movement and handling of cash within individual branches (as opposed to viewing an aggregate over a period of time) enables banks to better identify variances over weekly, monthly, quarterly and even annual increments, as well as customer behavior relative to the branch’s true inventory on specific days.
Optimizing cash levels in order to meet customer needs not only eliminates the “back office” tasks of branch personnel, but it also frees them up to operate a branch in the way it was intended to always operate. In order for banks to increase their bottom line and quickly adapt to shifting market changes, individual branches or branch networks should:
- Identify operational requirements for handling daily cash demand from ATMs, cash dispensing machines, cash recyclers and vaults;
- Assess the minimum inventory requirements for cash based on the cash holders within a branch;
- Monitor the frequency money is delivered to branches, as well as understanding the cost to ship cash;
- Match the daily intake and outtake data of cash against a calendar to identify and communicate cash orders consistently, knowing that certain parts of the month are more busy than others;
- Know a branch’s insured cash limits and bonding costs; and
- Identify the opportunity cost for reinvestment of cash in a low interest rate versus a high interest rate environment.
As the economy strengthens, banks that analyze and reposition their cash flow cycle will be much better situated to quickly meet new market and customer demands.
Mr. Austin is vice president of Atlanta-based CetoLogic. He can be reached at firstname.lastname@example.org.