It's no surprise that customers still love cash; transactions are fast, convenient, anonymous and almost invariably free.
However, while access to cash from the bank ATM or branch may be free for the consumer, making sure there is enough cash available whenever a customer demands it can be costly and challenging for banks. Not only must they meet fluctuating customer demand but they also have to minimize their cash management costs and meet changing regulatory requirements.
It is at the branch, as opposed to ATMs, where cash forecasting is most challenging. Any branch has both active cash and idle cash. The idle cash includes monies for all the till stocks, monies in reserve from the pay-in points and self service deposit units, customer pre-orders of bulk and so on.
Then there is more idle cash in what I call the "Dead Cash Loop" — cash being picked up by transit in the morning, and then transit delivering cash in the afternoon, which is mainly due to the branch returning money that needs sorting for fitness. All of this idle cash doesn't get included in cash forecasting, leading the branch to overstock.
It's natural for a branch manager to err on the side of caution (heaven forbid that they run out of cash!) But with central banks no longer providing free cash services and shifting processing costs onto institutions, operating a less than optimum active/idle cash ratio can be very costly. Added to this is the increasing number of branches and ATMs across which cash needs to be managed.
So what's the solution? Based on the challenges above, banks need to reduce the number of teller stocks and test deposits for fitness in order to reduce that Dead Cash Loop.
This doesn't have to mean using forecasting software, as such software invariably relies on the assumption that past experiences are replicated in the future, something that isn't always true.
The key action is to get a much more accurate, real-time view of cash-handling activities. For example, not just knowing how much cash each branch requires, but what specific notes are needed, and when.
If banks can do this, it means their cash forecasting and ordering — two of the key elements of cash handling that impact a branch's profitability — will be far more efficient and accurate.
They therefore stand a good chance of turning a lot of that idle cash in to active cash, which can then be counted in the forecast, used more efficiently and help reduce cost in both the branch and the supply chain.
Richard is a principal consultant at Glory Global Solutions, the experts in cash-handling technology. Richard has more than 20 years' experience in bank automation and technology, currency management and payment systems.