Keeping Cash Flowing: The Complexities of Bank Cash Logistics

In recent years, the usage of physical cash (notes and coins) has been on a notable decline worldwide, with significant reductions projected for the near future. According to the "Global Payment Report 2014," cash usage in various countries is expected to see substantial drops by 2027 compared to 2019. For instance, India is anticipated to experience a 61% decrease in cash usage, Brazil 36%, Germany 21%, Mexico 37%, Japan 33%, and the UK 15%. Despite this trend towards digital payments, physical cash remains a crucial component of the global financial system.

Today, cash is the only form of public money (this might change when Central Bank Digital Currencies, or CBDCs, become available), meaning it does not require a private intermediary to guarantee and verify transactions. Unlike private money, which exists in bank deposit accounts, cash is legal tender, generally accepted, provides immediate security of payment, and is tangible, countable, and anonymous.
Additionally, central banks want to ensure that cash remains sufficiently available to serve as a backup in case of a major malfunction in electronic payment systems. For example, the Dutch National Bank considers it essential for every family to be able to withdraw €50 in cash during a major technical failure, allowing them to pay for necessary goods until the issue is resolved.

However, this backup function is at a critical tipping point. With cash usage declining annually, banks are reducing the number of ATMs and their refills, further accelerating the shift towards electronic payments as it becomes harder for people to access cash. Additionally, retailers increasingly discourage cash payments due to cost and security concerns, further accelerating this trend.

Banks play a pivotal role as the primary collectors and distributors of cash. However, they prefer to reduce cash as much as possible, given the complex and costly logistics of cash management. Consequently, banks are increasingly outsourcing this role to joint ventures (like Batopin and Jofico in Belgium) where multiple banks collaborate to offer ATMs for cash collection and distribution. This approach can lead to significant cost savings, as the physical distribution of money is a complex problem. Let us have a closer look at how this process is organized.

The process starts with the Central Bank producing notes and coins (cash production), which are then delivered to the banks. Upon delivery, the equivalent amount is withdrawn from the bank’s reserve deposit account at the Central Bank. This delivery requires secure transport, where cash is picked up from the Central Bank’s cash handling offices and moved to the bank’s headquarters or directly to branches and large retailers (the retailers' bank accounts being debited for the same amount).
The public can access cash through ATMs, bank counters, or retailers, bringing it into circulation. Retailers then deposit a significant portion of the received cash back at their banks, closing the loop.

Due to the sensitive nature of cash, various controls are vital, involving numerous checks and balances:

• Sorting & Counting: Cash received at a bank is sorted and counted, primarily through automated systems and with necessary control to prevent internal fraud.

• Quality Control: Banks ensure that notes and coins meet quality standards. Soiled, worn-out, and damaged cash is removed from circulation and sent to the Central Bank for replacement. The Central Bank credits the bank’s reserve deposit account with the corresponding amount and destroys the unfit cash.

• Authenticity Verification: Banks check all received cash for counterfeits using advanced detection technologies such as validating watermarks, security threads, microtext, holograms…​

• Anti-Money Laundering Checks: Due to the anonymity of cash, it is frequently used for criminal activities. Banks, therefore, need to execute extensive anti-money laundering (AML) controls when large amounts of cash are deposited or withdrawn. Additional verifications of the customer and origin/destination of the cash might be needed, and certain transactions might need to be reported to regulators.

• Cash Monitoring and Forecasting: Banks maintain precise records of cash amounts across multiple locations, using sophisticated systems to monitor cash levels in real-time and predict future cash needs accurately. This ensures the right amount of cash is available at any time — not too much, which poses a significant operational risk, but enough to cover customer demands.

• Audit trail: Each movement of cash requires meticulous recording for accountability. Amounts must be signed off at each stage, with any discrepancies investigated and resolved.

This means that effective cash management requires meticulous planning and coordination:

• Ordering and Delivery: Banks place orders with the Central Bank for new cash and inform them about deliveries of damaged cash. These orders need to be initiated and have a whole life-cycle (cancel, modify, approve, complete…​).

• Transport Organization: The physical movement of cash involves detailed route planning and coordination, with security as a top priority.

• Transport Optimization: Banks strive to limit the number of transports. This is done via internal transports and collaborations with other banks, allowing the movement of excess cash to locations with shortages. Additionally, routes are planned to minimize the risk of theft or loss.

Advanced technology plays a crucial role in managing all this complexity efficiently and securely. Automated systems for counting, sorting, and counterfeit detection, along with software for forecasting cash needs and transport optimization, are essential. Additionally, communication and follow-up between the bank’s headquarters, the Central Bank, branches, and security firms are managed through sophisticated software systems, allowing for full end-to-end tracking of the cash delivery lifecycle.

Despite the decline in cash usage, cash still has a crucial role in the financial landscape. As a result, banks must organize the complex cash management processes as efficiently as possible, ensuring the availability and security of physical cash for those who need it.

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