Towards a new cash cycle model in Belgium
The yearly cost of cash mounts up to about €300 million for Belgian banks, although considerable savings could be made via synergies.
The Belgian Cash Cycle
The path that cash follows throughout the economy varies from one country to another, depending on the structure of the local central bank, the strategy of the retail banks, cash-in-transit companies, local legislation and customer's payment habits. Figure 1 provides an overview of the Belgian Cash Cycle, which is backed by a costly infrastructure with a key role for both the Belgian National Bank and cash-in-transit companies G4S and Cobelguard.
Even though the total value of cash in circulation in Europe keeps rising and even doubled over the last 10 years to €1.041 billion in December 2014, cash retail transactions are declining in Belgium. Nonetheless Sia Partners foresees that customers will still continue to make significant use of cash, since the Euro is accepted almost everywhere as the European legal tender, it is trustworthy where electronic payments have sometimes failed, guarantees the protection of privacy and supports the black economy'.
Cash might also be a predominant payment instrument because of the Belgian ATM network, which is one of the densest in Europe, with 77 ATM's (with cash functionality) per 100.000 inhabitants. The related infrastructure, maintenance and security make this ATM network very costly for Belgian banks, and therefore an interesting aspect to analyze when looking at potential economies.
The cash strategy of the Belgian government is furthermore not clear. On the one hand it wants to decrease the use of cash because of its costly infrastructure and the shadow economy it creates. On the other hand the government wants to align with Europe and doesn't want to lose the significant sum of seigniorage - the government revenue from the creation of money.
Cash is costly for Belgian banks
An important stakeholder in this discussion is the commercial banking industry. They are participating actively in the cash cycle since they have no choice but to offer it to their clients in order to stay competitive. In terms of profits, cash deposits and withdrawals hardly generate any revenue for banks, making it a very expensive service. Yet although banks are well aware of the high costs, most banks struggle to properly quantify them.
Sia Partners estimates the yearly cost of cash for Belgian banks to at least €300 million. As a result of the efforts to make branches cash-free, most of the cash withdrawals and deposits happen through ATMs, but as we can see in the diagram below these machines also entail high costs. These include maintenance, filling the ATM's, renewal of ATM machines,... Transport is also a significant cost, amounting to about €65 million each year, explained by the numerous actors involved in the cash supply chain, the high security level and police escorts. Other cost categories are processing cost (preparing and counting the cash) and labour costs of the employees both in the front- and the back-office that take care of cash handling.
The opportunity cost of keeping idle cash in their retail network and in transit is, taking into account the historically low interest rates, less important. Nevertheless it is obvious that this variable cost can strongly influence the total cost of cash as soon as interest rates will increase.
Towards a new cash cycle model
Sia Partners believes that, given the high cost of cash, banks should review the existing Belgian cash cycle and consider a collaborative model.
Banks can first of all obtain gains in operational efficiency by implementing new technologies, integrated cash management software or cash recycling between branches. But it is our vision that banks have to go beyond their own improvement initiatives and assess the opportunity to go for a new and collaborative model. Two interesting and realistic models for the Belgian models were analyzed, based on foreign experiences and our domestic market conditions.
ATM Pooling Model
In the ATM Pooling model, banks pool their ATM estates into an outsourced partner in order to share infrastructure and achieve economies of scale. In the current model, each bank negotiates its own contracts with cash-in-transit companies, has its own hardware and software provider(s), servicing operators, maintenance and support, etc. When moving towards an ATM Pooling Model, as in figure 3, the cooperating banks choose a single outsourced partner together that owns or manages all ATM estates. Banks can now focus on their core business and simply define the objectives and guidelines the partner has to attain and comply to.
This model is particularly interesting for the Belgian market since banks don't actively compete on their ATM offering, the four largest Belgian retail banks have a large ATM network and the total number of ATM's per capita in our country is well above the European average.
Sia Partners estimates that by implementing this model, Belgian banks could save about €60 million per year in the cost linked to ATM management in Belgium.
Cash processing common outsourced partners
The second model we discuss is a common cash processing model, where the commercial banks and in some cases also the central bank outsource and pool their cash centers (where money is counted, cleaned, checked for counterfeit and fitness and prepared for reuse) into a single entity in order to achieve economies of scale. The scope of this model can be extended depending on the market participants and which activities they are willing to outsource.
Most of the banks have already outsourced their cash processing part to CIT companies, but a collaborative model where banks function as shareholders will open new opportunities to delegate more strategic yet not core activities. Given the numerous alternatives to implement such a collaborative model, it is hard and less relevant to estimate the economies that could be obtained, but it is obvious that this model can bring substantial cost reductions.
The main obstacle remains to bring all banks together to agree on a common vision. To conclude we must keep in mind that an evolution of the cash cycle will not only reduce the complexity and costs for the banks, but will also improve the quality and lead to lower tariffs linked to cash services for retail customers.
Download the full article on the new cash cycle model in Belgium here.