Article

Why you can bet on the cost of cash rising (and why you should plan for it now)

It might be 'easy money' now, but smart ATM operators are looking to a future when cash isn't so cheap.

June 3, 2014

by Brendan Doyle
CEO, Cash Management Solutions

There are still mixed signals on the future of short term interest rates and with the European Central Bank due to loosen monetary policy this week, there may be a natural inclination to put planning for future interest rate increases to one side. While understandable, this attitude would be wrong.

ATM cash management has operated in uniquely benign conditions for six years now. We all know that the financial crisis resulted in unprecedentedly low interest rates that reduced the need to worry about excessive cash stocks.

Two consequential results from this have had an equally positive effect. But these may also unwind once interest rates rise.

Firstly, the demand for armored car services in the banking and retail sectors has fallen significantly as many high streets have seen occupancy levels drop below 90 percent. Armored car services are typically capital-intensive businesses with high fixed costs — hence excess capacity results in reduced pricing and improved service quality.

This has certainly been the experience in a number of Western economies in recent years. However, while the industry is generally able to cope well with short-term demand and supply mismatch, prolonged periods create systematic strain.

The industry has made great strides to reduce costs by investing in new technology and more flexible working, but ultimately there has had to be a reduction in capacity. This will be difficult to reverse, at least in the short term, if demand starts to increase again, which it will once end users realize the benefits of moving cash out of their estates rather than holding on to it.

Secondly, record low interest rates appear to be the main answer to central bankers' puzzle over the seeming dichotomy between declining cash transactions and increasing cash in circulation.

The British Retail Consortium this week reported a 14 percent reduction in the use of cash over the past five years. During the same period, cash in circulation has been growing at 6 percent per annum. This implies that cash is being hoarded. An aging population suggests long-term structural reasons for this, but cannot explain the sheer size of the difference.

The answer is simple, there's little incentive to keep short-term cash deposits in current accounts rather than under the bed, especially when you don't quite trust your bank's solvency!

It would therefore be sensible to assume that rising interest rates and the revival of trust in our banks will see at least some of this hoarding unwind. Cash withdrawals, which are already under attack from new technology, may therefore decline.

Why does this matter so much for cash management? Simply because high velocity of cash withdrawals brings natural cost efficiencies and, accordingly, a reduction in this velocity increases the cost per note dispensed.

In any typical ATM deployer cost model, cash management accounts for roughly 30 percent of costs. A rise in interest rates to 3 percent hardly suggests a crisis but, in reality, it would mean a sixfold increase in interest costs. This, coupled with rising armored car pricing, declining service quality and a reduction in the velocity of demand promises a "perfect storm".

There are plenty of ways to mitigate the impact, but these take time in preparation. Failing to do so could result in a severe shock to your P&L. So if you aren't thinking about improving cash management now, I suggest you do so.

graphic: alan kotok