Prepare Now For Interest Rate Rises or Suffer Later

Just two weeks ago, on the 3rd of June, I spoke at ATMIA’s European ATMs conference in London, and published a blog, on the subject of rising interest rates and the impact this will have on the ATM industry.

Now, two weeks later, Mark Carney, the Governor of the Bank of England, has given his biggest hint yet that interest rate rises are likely to come sooner than many people expect. While all speculation was pointing towards no base rate rises until after next year’s general election, Carney’s latest statement, and the positive economic indicators that the UK has experienced, has led to thinking that this may not be the case, and could even come before Christmas. Furthermore, on the other side of the Atlantic, Federal Reserve Chair Janet Yellen faces a similar challenge. Following the latest Fed meeting on Wednesday, Yellen, in her speech, remained dovish but the median benchmark interest rate projections for 2015 were actually increased from 1.125% to 1.2%.

So, whilst no rate movements are expected for the remainder of this year, there is growing evidence that interest rate rises may come sooner than expected. This being the case, it is clear that the time we have to prepare for a strategic turning point in cash management has shortened and deployers could be caught off-guard by, what in effect, will be the industry’s ticking time-bomb. Optimisation will become vital as interest rate rises will lead to a paradigm shift in the balance between holding cash in ATMs & scheduling deliveries.

This paradigm shift will ultimately lead to an increase in costs and, if measures are not put in place to manage cash and the cash supply chain effectively, will be a risk to ongoing profitability. There are a number of essential steps you can take to prepare for this change and you need to be aware that there will be significant early mover advantages in these processes - so it’s important to act now.

Step 1: Get Your House in Order

Don’t sleep-walk yourself into trouble. While conditions are still benign, it is important that you don’t get lulled into a false sense of security. Immediately reacting when rates do rise is too late, it is best to optimise your cash management now - it will begin to pay dividends today and these will only become greater over time.

Step 2: Stress-test Your Cash Management Practices

While your cash management practices may be operating well as external conditions are relatively benign, it is important to see how they hold up in other conditions. Simulations can be used to forecast the impact of changing interest rate environments and other external scenarios on your cash management. Prepare yourself for a shock as relatively small increases in interest rates will have a negative multiplier effect on your bottom line!

Step 3: React… and Take Action

1. Ensure supplier contracts are flexible and efficient.

Too often, contract negotiations can lead to an inability to react effectively to scenarios such as interest rate changes. While price is important, ensure it does not come at the expense of operational efficiency. Furthermore there is often too little forethought on the future, SLAs are often too loose and escalation procedures too vague.

2. Negotiate long-term pricing structures.

If predictions are correct, all elements of the cost of cash will rise over the medium term. Hence, just like your mortgage, it makes sense to fix prices. Pressure on service quality due to increased demand will lead to tightening operational flexibility and so first movers will receive the best terms – make sure you’re one of them!

3. Prepare for the operational impact… don’t let it catch you by surprise.

Expect increased pressure on resources as you order more often. For example, in a number of economies hit by the financial crisis, the armoured car industry may not have the capacity they did in 2007 when interest rates were last at higher levels. Therefore, you should expect to see poorer supplier performance and experience a higher cost of failure - at least in the short term - as demand picks up. Automation of your decision making process is vital as your productivity levels will be challenged by increased workloads & weaker supply chain management. Finally, take a look at the benefits of outsourcing - it can make sense to outsource as you gain from economies of scale, knowledge, experience and concentration – factors which will become ever more beneficial when conditions are more threatening.

Due to the extent of the impact that increased interest rates will have, preparation becomes key. While, over the past six years, effective cash management has meant the difference between certain levels of profitability, in the near future it will determine whether you are profitable at all.