Article

ATM cash recycling clears regulatory hurdles

While cash recycling systems have been around for several years, regulations concerning the handling of counterfeit notes have held them back in some parts of the world. A key decision by the European Central Bank may create new opportunities.

June 2, 2003

It costs a lot to handle cash -- up to $100 per person annually in most countries, believes Gunnar Enroth, strategic development director for Swedish ATM manufacturerBANQIT. That includes the production of notes, distribution, storage and interest.

According to Enroth, banks bear approximately 40 percent of the cost and retailers 50 percent, with the remaining 10 percent covered by central banks and other governmental entities.

One way of reducing the costs is by automating the cash handling process as much as possible -- including at ATMs. BANQIT, along with a few other manufacturers, produces ATMs with cash recycling functionality.

Consumers deposit banknotes into the machines, which then count, sort and dispense them. This dramatically reduces -- in theory, even eliminates -- armored car visits to ATMs. Ditto for the back office counting and reconciling of cash collected from ATMs.

Peter Woeffen,Wincor Nixdorf'sproduct manager for cash recycling systems, said the costs of handling ATM cash drop by up to two-thirds following the installation of recycling systems.

Wincor was one of the first manufacturers to produce a self-service recycling system, in 1998. About 4,000 of its ProCash 3100 units are installed today, in more than 20 countries including Switzerland, Germany and China.

A first step

However, only about a third of them actually recycle cash -- dispensing the notes that are deposited into them. The rest simply accept deposits. Wincor Nixdorf hopes that number will grow, following key decisions by theEuropean Central Bank (ECB)and Germany'sBundesbank.

There is still some cost savings even without recycling, Woeffen said, because notes are counted and validated by the machine rather than by a teller. Customers can have funds immediately credited to their accounts rather than waiting the usual few days for the cash to clear.

Because of this function, Enroth said, recycling systems are especially appropriate in areas like shopping malls where they can fill in for night depositories. Merchants making deposits get quicker access to their money, and there is a ready supply of cash for consumers to withdraw and spend in stores.

BANQIT has installed 20 of its Q-CashRouter cash recycling systems at a European department store/supermarket chain that Enroth declined to name. Enroth said that retailers have been generally more open to the recycling concept than banks.

"Most banks are very traditional in how they look at cash handling, and they don't know how big their costs really are," Enroth said, noting that he believes that most banks spend an average of 20 percent of their overall budget on cash costs. "Retailers, on the other hand, know every penny they can save is important. They are world champions at calculating ROI (return on investment).

For banks, Woeffen said recycling systems are a logical component of new branch concepts like "attended" self-service, where employees concentrate on more complex transactions and selling, while routine tasks like cash handling are taken over by intelligent self-service systems.

Terry Riley, a senior product manager atDiebold, said that many of his company's customers utilize cash recyclers for deposits only, before migrating to the full recycling functionality.

"With many new technologies, ATM deployers like to take something normally handled by the teller and migrate it to the machine -- in this case, counting and validating notes -- to get comfortable with the technology in a controlled environment before they take a second leap of faith and introduce a totally new concept like recycling," Riley said.

Diebold introduced its Cash Recycler 3030 in China in early 2002 and has sold more than 260 of the ATMs there. A recent order was from the Bank of Communication.

China is a huge potential market for recycling systems, Riley said, because of the population's reliance on cash and banks' interest in moving many common financial transactions to self-service terminals. Riley said the recyclers are well suited for accepting large cash payments because of their ability to quickly process up to 200 notes per transaction.

Regulatory roadblocks

Based on its success in Switzerland and elsewhere, Wincor Nixdorf has high hopes for the ProCash 3100 in other European markets including its native Germany. After several years of wrangling with regulatory authorities, the manufacturer recently received the necessary approval from both the ECB and Bundesbank for the recycling technology to be used across the 12-country euro zone.

At issue was the handling of counterfeit and suspected counterfeit notes, Woeffen said. Because recycling systems originally returned all suspect notes, they ran afoul of requirements to withdraw known counterfeits from circulation. Wincor Nixdorf and other manufacturers had to ensure that banknotes that the machine recognized as counterfeits -- as well as suspected counterfeits -- would be retained, and that the depositor could be identified.

After the manufacturers met those requirements, Woeffen said, they were asked to address the issue of note quality by proving that the machine could detect notes deemed too unfit to be returned to circulation.

"We had to adapt our sensors so that they could detect notes with holes, tape and other flaws," he said. "They wanted to make sure we wouldn't allow more than 20 of these notes out of every 400. The first test, we had 21 go through, but the second time we had only 11."

Based on Wincor Nixdorf's experience to date, less than 1 percent of notes deposited into recyclers will be counterfeit or suspected counterfeit, Woeffen said.

With BANQIT's cash recycling system, counterfeit notes, suspected counterfeits, notes of poor quality and excess cash are placed in sealed plastic bags.

The handling of counterfeit and suspected counterfeit notes will remain a challenge for companies offering cash recycling, Riley said, but the European model will be one that other areas of the world may choose to emulate. "I think you'll see a number of countries looking at the ECB's policy for guidance."

A potentially bigger problem is note quality, especially in markets where unfit notes are not regularly removed from circulation by central banks. "In some countries, notes circulate until they fall apart," Woeffen said.

Up to 10 percent of notes in some countries may be considered unfit, Woeffen said, although deployers can lower that figure by educating users on the importance of depositing "clean" cash.

"In these countries the deployment of cash in- and recycling machines is quite a challenge, but it's possible. You can see that by the more than 1,000 ProCash 3100s Wincor Nixdorf has installed in China," he said.

Enroth said that BANQIT's Q-CashRouter places counterfeits, suspected counterfeits and unfit notes, along with any "good" notes that are not dispensed because the amount of cash in the machine exceeds demand for withdrawals, into separate, sealed plastic bags. When cash is collected from the machine, the bags are taken to the appropriate party, whether it's a law enforcement agency, a central bank or the bank that supplies the cash.

"Our system is truly a closed cash handling system," Enroth said. "This is important because few companies have true expertise in handling money. Central banks in Europe, for example, are more interested in the political and strategic aspects of handling money rather than the actual logistics."