Published May 24, 2021
Cash and cash flow have always been difficult to manage for both financial institutions (FIs) and retailers. Managing these cash inflows and outflows to meet consumer needs and the solvency of the businesses is a balancing act—regardless of the country. And capital requirement rules—the amount of liquid capital FIs are required to have on hand—can be a complicating factor. In the U.S. they were relaxed during the pandemic, but that temporary reprieve recently expired. So U.S. banks must now meet the original regulatory compliance mandate—holding capital equal to three percent of the bank’s total assets. Here’s a list of capital requirements in each country in early 2020.
The pandemic increased the challenges of cash flow and cash management because the use of it became less predictable. In some places, fewer people wanted to touch physical cash due to COVID-19. In other regions of the globe, people began hoarding cash, leading to surges in withdrawals and cash in circulation.
Consider these recent cash and cash flow facts:
Related: Cash trends in a digital world
Amid all the uncertainty, it’s easy to see why getting cash back at a retail store is a reliable way for consumers to access cash when they need it. For example, consider a stressed mother grocery shopping, about to check out, when she realizes her child has a field trip the next day and she’ll need some cash for lunch. No big deal; she just selects the cashback option, gets $20 dispensed from the self-checkout and she’s on her way. The speed and convenience of not having to make a separate trip to the ATM is a nice perk—no wonder it’s popular.
But cashback has always had its pros and cons, especially for smaller retailers who grapple with having enough notes and coins on hand. “Going for a cash run” is a common headache for small business owners when they’re low on cash, it’s busy but they need to go to their nearest branch to replenish or, the more common issue, ensuring they get to the branch at the end of the day to deposit surplus cash.
And, just as important, based on the above statistics and other pandemic impacts, the cash landscape has changed significantly, moving the needle for both the pluses and minuses of cashback for both the banking and retail industries.
In the UK—one of the hardest-hit countries with strict lockdowns—access to cash has become an issue in some regions. So the UK government proposed plans late in 2020 to offer cashback to consumers without having to make a purchase.
“We know that cash is still really important for consumers and businesses. That’s why we promised to legislate to protect access for everyone who needs it,” said John Glen, Economic Secretary to the Treasury. “We want to harness the same creative thinking that has driven innovation in digital payments to maintain the UK’s cash system and make sure people can easily access cash in their local area.”
Although the UK legislation is yet to be implemented, the movement toward cashback with a credit card or debit card without making a purchase is set to protect the widespread access of cash for consumers. The transforming and challenging cash landscape has also put cash management issues front and center for FIs and retailers.
In the financial services industry, FIs have a fundamentally vested interest in expediting cash flow to foster healthy economic liquidity. The constant cash flow in and out of the hands of consumers and retailers is a key factor in economic growth, providing a “win-win” for all stakeholders.
But FIs also want to optimize the associated costs of providing cash flow and liquidity on several internal fronts, including acquisition, operations and cash management. Many are looking to introduce new transaction services without increasing labor costs. These efforts also help FIs achieve other important goals: growing their brand reach, expanding their customer programs and creating a great consumer experience that leads to high satisfaction and long-term loyalty.
Unfortunately, there are several common roadblocks to reaching those aspirations:
Many current solutions designed to help remedy these cash management issues are limited for four main reasons:
1. First, banking cash-out is automated; most cash-ins are over-the-counter in many markets
2. Retail cash-in outweighs cash out, driving bank visits
3. Technology evolves faster than new services can be deployed, and hardware and software are often poorly integrated
4. Finally, distributed IT systems have low connectivity, which drives additional labor costs for change management and maintenance
As previously mentioned, there are three main areas of cost concerns for FIs providing cash liquidity—cash management, system operations, acquisition and lifecycle. Let’s do a deeper dive into what’s involved with maintaining a cash ecosystem.
There are several expense categories for the management of cash for FIs:
A good quality cash optimization solution can significantly reduce the cost of managing cash by measuring usage across all cash points and then forecasting and optimizing cash movements and deliveries to and from FIs and retailers. As cash distribution becomes more diverse through additional cash back opportunities in retail and FIs deploying sophisticated cash recycling ATMs, cash optimization technology is becoming an essential resource
System operations: Servicing and support costs include cleaning, first- and second-line maintenance, and the inevitable expense of replacements due to vandalism and accidents. Software subscriptions and licenses, consumables and monitoring add to servicing and support costs. Transaction costs also fall into this category, such as settlement, switching, communications and infrastructure and dispute resolution.
Acquisition and lifecycle: Change and lifecycle costs include feature maintenance, obsolescence upgrades and certification. Typical acquisition and deployment expenses for FIs are equipment, depreciation, software, feature creation, integration, customization, obsolescence upgrades, development and certification. In the areas of placement, security and facilities, the associated costs might be site survey and rental, installation, branding, electrical, environmental, physical and logical security, loss and compliance.
So, when you add up all these existing costs of maintaining a cash ecosystem, it’s no wonder that FIs are taking a hard look at optimizing processes that minimize the financial impact of these cost centers (or eliminating some altogether). The focus is on digital transformation, automation and other new technology and solutions, such as ATM as a Service, to help in this essential mandate.
Digital transformation is a promising solution for striking the optimum cash flow balance of cash in and cash out and minimizing the costs detailed above. For the banking industry, automated merchant deposits could balance cash flows. On the retail side, instant deposit credits on an automation device could supply cash for financial transactions.
But, before we can successfully deploy solutions that facilitate cash ecosystem automation, some common limitations at many FIs must be addressed. These include technology constraints, such as the costs to upgrade legacy systems and introduce new systems. Fragmented systems and lifecycle and obsolete management add to those technology constraints.
Inherent inefficiencies can also be a limitation on the road to automation. FIs and retailers are investing heavily in cash automation devices that serve the unique needs of their staff, such as teller cash recyclers in branch, or back-office recyclers at retailers. These staff-specific devices add cash management endpoints that are far removed from the point of commerce where the customers' needs are being served. They also drive redundant operational costs for servicing, parts and transaction fees. These redundancies, combined with time-consuming and error-prone human tasks are typical roadblocks to optimizing cash management costs holistically.
The challenges the customer cashback option presents for retailers—as previously mentioned—include balancing the needs and preferences of consumers while making sure they have enough notes and coins in hand. Still, cashback does have several positives for retailers.
If their customers know they have a reliable cashback option, it’s likely to create more foot traffic. That’s especially true if they know they can use their debit card to withdraw cash without needing to buy something. Their customers could look at a retail store as a pseudo-ATM, which could increase customer satisfaction and, along the way, loyalty for retailers.
Although attracting customers by way of cashback without purchases doesn’t sound like a benefit to retailers, any time a person walks through the door, there’s a good chance they’ll buy something. It’s also a great way to attract new customers that just happen to be looking for a quick, easy way to get cash. Much like Kohl’s has set up a station for Amazon returns in the hope of luring customers, small businesses can use a similar tactic to boost revenues by offering cashback using a debit card with no purchase necessary.
Managing cash and cash flow, balancing the needs of retailers and improving access to cash for all during a pandemic will likely continue to be a tough challenge for FIs. In a perfect world, cash services would be widely available and predictable, and in rural regions, redundancy in the cash ecosystem would be minimized, operational costs would be low and customer satisfaction and trust would increase.
Regional proposals such as the UK movement to initiate cashback using a credit card or debit card without making a purchase is an example of a creative cash solution other countries can look to. But it’s digital transformation, automation, modern cloud-based cash management software and innovative ideas like shared automated devices that provide cash services to banking customers, retailers, and staff members alike that offer FIs a fast-track remedy to improving access to cash while lowering total cost of ownership.