Data shows that cash continues to prevail globally, despite the increasing share of digital payments. The portion of cash transactions varies between 90% in emerging markets to less than 40% in vanguard markets. Yet, even in markets where the share of cash is in decline, forecasts confirm that cash will be in use for many years ahead. Consequently, banks need to maintain their cash services.
The challenge facing the banking sector today is the rising cost of cash, mainly due to its distribution network. If the trend continues, the burden per transaction will increase, ultimately making cash services less accessible for users. To prevent this, banks should invest in optimizing the costs of cash and improving the efficiency of cash services to meet the customer needs.
There are three levers available to financial institutions to manage the costs of cash. Implemented together, these levers lead to the significant cost savings and other potential benefits.
Source: McKinsey & Company Financial Services
Make cash distribution centers and branches lean
Applying lean principles can reduce costs by 30% through the elimination of repeated steps, primarily in cash distribution centers. For even greater efficiency, the implementation of analytical tools can increase the accuracy of cash needs forecasts while monitoring demand fluctuations. Implementation of such tools can potentially lead to a 30% reduction of banks’ cash inventory. Similarly, distribution costs can drop by 5-10% when using new mapping tools, which alert couriers and dispatchers of traffic problems and allow time to choose alternate routes.
Optimization of ATM network footprint
ATM networks incur expenses such as cash transport, IT hardware and maintenance, but in some markets they can also generate revenue. To achieve an efficient and optimized distribution network, banks should assess four elements: transaction-based costs, location-based costs, ATM maintenance and replenishment and other costs (e.g., back-end IT systems).
Nationwide combined network
Noncompetitive nationwide utilities are implemented in some vanguard markets. The benefits of such consolidated or joint networks are:
Such consolidation of resources can contribute up to a 35% reduction of banks’ ATM costs. Currently, there are two models for sharing the costs of ATM networks: full implementation (as seen in Sweden and Finland), or partial implementation (Denmark and Norway).
The three above mentioned levers can be applied to financial institutions of all sizes. In fact, even though attacking the cost cash is particularly relevant for vanguard markets, emerging and mature economies could greatly benefit from these recommendations by applying approaches from the onset.