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Automating cash management

For obvious reasons, managing cash is an important element of any ATM program. Yet many deployers rely heavily on spreadsheets and guesswork.

September 4, 2003

No cash, no customers, no transactions.

For obvious reasons, managing cash is an important element of any ATM program. Yet many deployers rely heavily on spreadsheets and guesswork -- eschewing software that can automate the process of ordering money for their machines, scheduling replenishment, maintaining appropriate cash levels, balancing and reconciling their funds.

"Our biggest competitor is Excel. It's the number-one cash management software out there today," said Ken Karant, chief executive of software provider Morphis Inc.

Tom Meurer, president of software provider e-ClassicSystems, said that a top-tier bank client used 3,800 spreadsheets -- one for every ATM in its network -- before converting to eClassic's ATMManager Pro, which includes a cash management module, in 2002's fourth quarter.

The bottom line
 
The use of cash management software is growing, however, as more deployers are focusing on cutting ATM costs. It's an obvious area for improvement, since it's one of the single largest expenses for financial institutions and ISOs with turnkey ATMs.

Consultant Peter Kulik, author of an Accelera Research report called "Managing ATM Cash: Best Practices," said that, worldwide, an average of 31 percent of ATM expenses are related to managing cash.

Brian Lee, vice president of marketing for software provider Transoft International, said his company believes that the cost of managing cash may be even higher, as much as 40 percent of the total cost of ATM management. "If you can take 20 percent out of that, that's a significant chunk of your bottom line," he said.

One of the biggest costs is the cash itself. The cost of vault cash is tied to the national prime-lending rate. Ron Schuldt, president of vault cash provider Columbus Data Services, said most deployers pay 1 percent to 2 percent above prime, although fees can vary.

So, for example, if the prime rate is 9 percent and there is $10,000 cash outstanding, the cost of cash is determined by multiplying the prime rate plus one percent (9 + 1 = 10) by $10,000. Since 10 percent of $10,000 is $1,000, that's the annual rate. Divide by 360 to get a daily rate, $2.77 in this example, and multiply by the number of days in the month.

Vault cash providers charge from when the cash leaves the bank until it is deposited or settled back to the bank, Schuldt said, which gives deployers an incentive to settle funds as quickly as possible.

ISO adoption

Meurer said that ISOs have been the fastest adopters of cash management software because, in contrast to most banks, they work with multiple vault cash providers, armored carriers and transaction processors. Retail ATMs also tend to yield more transaction disputes and reversals, which complicate the reconciliation process.

ATMs must compete with other channels for capital investments at banks, Meurer said, noting that sales cycles for eClassic's ISO clients average two months versus two years for its bank clients.

Software also helps ISOs better manage their revenue splits with merchants, sales agents and others. Karant said that some of Morphis' ISO clients split their revenue among up to five parties.

Several vault cash providers that cater to the ISO market, including Palm Desert National Bank, Columbus Data Services and Cash Connect, have developed proprietary cash management software to help their clients manage their ATM funds.

Bank buy-in

Financial institutions became more interested in managing ATM cash as they deployed more non-branch ATMs, said Randy Gidcumb, director of business operations, cash management for Diebold. The manufacturer uses Morphis software to provide outsourced cash management in the United States and several international markets.

Transaction volumes are more predictable at branches, which makes it easier to maintain appropriate cash levels. In many cases, branch personnel can fill ATMs, which simplifies cash ordering, replenishment and balancing. But when banks left the comfort zone of branches, they faced many of the same cash supply challenges as ISOs, Gidcumb said.

Lee said that central banks in many markets outside the U.S. drove the need for more sophisticated cash management by lowering -- or in some cases, eliminating -- cash reserve requirements and requiring banks to take a more active role in circulating currency.

In the U.S., Lee said the Federal Reserve Bank's 1994 approval of an accounting procedure which allowed financial institutions to move or "sweep" reservable transaction balances to shadow money market accounts, which are non-reserveable, spurred interest in cash management.

The accounting change gave financial institutions an economic incentive to reduce excess currency in their networks. The tricky part, Lee said, is reducing cash in ATMs, branches and vaults without disrupting ATM availability or branch operations.

Learning from history

Keeping cash levels at a minimum without running out is called optimization. While some reserves are necessary to avoid ATM downtime, deployers ideally will maintain a reserve of no more than 15 percent, Meurer said.

However, reserves as high as 40 percent are not uncommon -- especially in the banking world. Gidcumb said bankers are so fearful of ATMs running out of cash that they tend to keep them filled to capacity.

Most ATM cash management software contains a forecasting algorithm that helps deployers predict how much cash they need in ATMs, based on previous transaction history and factoring in holidays and other special events that drive up ATM usage and drain cash from the machine.

Effective forecasting is nearly impossible in an Excel environment, Karant said. "With a spreadsheet, you're never going to be able to harness the power of algorithms that can predict cash needs on an industrial-strength basis."

Forecasting tools prove accurate for most -- though not all -- ATMs, Meurer said. "(Forecasting) covers 95 percent to 98 percent of your terminals, but you're always going to have some that will behave more erratically. The good thing is, software can help users identify the terminals that they need to give special attention."

Software can compare daily transaction reports to cash forecasts to help users determine if the forecasts are on target and, if not, re-project when the machine will run out of cash. Revised forecasts can help deployers reduce expensive "emergency" cash runs to ATMs, Karant said.

His company's software also allows users to override software-driven forecasts with their own and compare the two to determine which is more accurate. "Our system can 'learn' from that," he said.

Software can fine tune delivery schedules so that cash is replenished just before weekends and other busy periods for maximum savings on the cost of funds, Lee said. When deliveries are scheduled manually, he said, they tend to occur on the same days time after time with little regard for fluctuations.

While many deployers are not as concerned about excess reserves in their ATMs because of the current low interest rates, Karant believes it's not wise to wait until interest rates rise to introduce cash management software. "It's like life insurance," he said. "If you wait until you need it, it's too late and you lose."

Moved by savings

In addition to reducing the cost of cash, Lee said that software offers savings in other areas. "You can't move (cash) for free," he said, noting that regularly scheduled armored car runs generally cost at least $50. The price is far higher for unscheduled "emergency" runs.

With low interest rates, Lee said, it makes sense to keep more cash in ATMs and schedule fewer trips. Software can help deployers evaluate the costs of cash versus the costs of transportation and reduce the number of runs if desired.

"You can't take advantage of this kind of opportunity unless you have the intelligence to evaluate it," said Tom Stevenson, president of Cash Connect, a division of WSFS Bank that provides vault cash for some 4,700 ATMs.

Stevenson said that software can also identify "unusual combinations of circumstances" that may signal possible ATM fraud, such as an increase in cash orders and a delay of "swaps," when all existing cash is removed and replaced with new cash, at an already-overloaded machine.

Up with automation

An important element of some cash management software systems is the ability to import and export information from customers and, in some cases, armored carriers.  So, for example, a customer can submit a cash order in a variety of message formats -- including Excel.  It will be imported into the cash management system and then exported to the appropriate carrier. Settlement data from the carrier can also be imported into the cash management system, then reconciled and exported back to the customer.

Automating the process as much as possible not only shrinks the cost of labor -- which rises when data is manually re-entered several times -- but also reduces opportunities for errors, said Sandra Hartfield, president and chief executive of the electronic banking division of Palm Desert National Bank, which provides about $250 million a year in vault cash for some 11,000 ATMs.

Software-driven automation also helps segregate exceptions that need special attention from other settlement data, Hartfield said. "You want to work the terminals that need attention right away; you don't want to spend your time working the ones that don't need attention."

The ability to collect data in a central site where it is easily accessible saves time and effort, Gidcumb said. "In our experience, with home-grown applications, there is a 'report guru,' one very smart person that keeps track of all the cash management information. If that person is no longer there, for whatever reason, that information is often not readily available."

No free lunch

Most software providers agree that cost is probably the biggest deterrent to broader adoption of cash management software. Deployers pay an initial license fee, which is usually pegged to the number of ATMs, and an annual maintenance fee that covers the cost of technical support and any new software releases.

A deployer with fewer than 100 terminals can license eClassic's cash management and location/transaction management modules -- which Meurer said are sold together, although the other four modules are optional -- for less than $20,000. However, six-figure license fees are more common, and the cost can be as much as several million dollars.

Some financial institutions and ISOs rely solely on the proprietary software used by their vault cash providers, which is usually available to them at little or no added cost.

Deployers with more than 100 terminals can more easily justify the costs of added cash management software because of their more complex back-office operations, Stevenson said. "They're going to see a bigger benefit from the automation if they can afford it."

Financial institutions may enjoy greater bang for their buck by using the same system for branch, ATM and sometimes even vault cash. Some cash management systems, including e-Classics and Morphis, also allow deployers to track and manipulate other ATM-related data, such as uptime/downtime and upgrade needs and schedules.