ATM Cash Management: Prepare now for rises in interest rates

ATM Cash Management - It might not look like it, but now is the time to prepare for a rise in interest rates.

There are still mixed signals on the future of short term interest rates and with the ECB due to loosen monetary policy this week, there may be a natural inclination to put planning for future interest rate increases to one side. Whilst understandable, this attitude would be wrong.

ATM cash management has operated in uniquely benign conditions for six years now. We all know that the financial crisis resulted in unprecedentedly low interest rates that reduced the need to worry about excessive cash stocks. However, there have been two consequential impacts that have had an equally positive effect and these may also unwind once interest rates rise.

Firstly, the demand for armoured car services in the banking and retail sectors has reduced significantly as many high streets have seen occupancy levels drop below 90%. Armoured car services are typically capital intensive businesses with high fixed costs - hence excess capacity results in reduced pricing and improved service quality. This has certainly been the experience in a number of western economies in recent years. However, whilst the industry is generally able to cope well with short term demand and supply mismatch, prolonged periods create systematic strain. The industry has made great strides to reduce costs by investing in new technology and more flexible working, but ultimately there has had to be a reduction in capacity. This will be difficult to unwind, at least in the short term, if demand starts to increase again, which it will once end users realise the benefits of moving cash out of their estates rather than holding on to it.

Secondly, record low interest rates appear to be the main answer to central bankers' puzzle over the seeming dichotomy between reducing cash transactions and increasing cash in circulation. The British Retail Consortium this week reported a 14% reduction in the use of cash over the past five years. During the same period, cash in circulation has been growing at 6% per annum. So this implies that cash is being hoarded. An ageing population suggests long term structural reasons for this, but cannot explain the sheer size of the difference. The answer is simple, there's little incentive to keep short term cash deposits in current accounts rather than under the bed, especially when you don't quite trust your bank's solvency! It would therefore be sensible to assume that rising interest rates, and the regaining of trust in our banks, will see at least some of this hoarding unwind. Cash withdrawals, which are already under attack from new technology, may therefore decline. Why does this matter so much for cash management? Simply because high velocity of cash withdrawals brings natural cost efficiencies and a reduction in this velocity therefore increases the cost per note dispensed.

In any typical ATM deployer cost model, cash management accounts for roughly 30% of costs. A rise in interest rates to 3% hardly suggests a crisis but, in reality, it would mean a sixfold increase in interest costs. This, coupled with increased armoured car pricing, declining service quality and a reduction in the velocity of demand promises a "perfect storm". There are plenty of ways to mitigate the impact but these take time in preparation. Failing to do so could result in a severe shock to your P&L.

So if you aren't thinking about improving cash management now, I suggest you do so.