A decade from now, the currency supply chain -- that complex string of activities required to account for and circulate cash from central banks to commercial banks' branch networks, ATM networks, and vault networks, and then to end-users and back again -- will probably appear as a fairly clean, mature and optimized business.
There will be, as there is in mature businesses, a mixture of outsourcing and in-sourcing; centralizing and decentralizing; privatization; and subsidies. There will be shared utilities and single-bank premium services, and pricing will be closer to market-based.
But today, the reality is much different. Today's currency supply chain is in a state of sustained change. How it unfolds will determine the participants and their profiles and functions going forward.
At Carreker, where our work in currency management takes us to hundreds of banks in many countries that operate multiple variations on the basic currency supply chain, our perspective on the shifting dynamics and economics of currency management leads inevitably to a serious set of conclusions:
- The currency management chain is being broken and re-forged by events internal and external to the banking industry.
- It is unlikely that any financial institution - regardless of size or geographic location - or its currency management activities will be unaffected.
- Most banks can still choose the currency management role that best serves their strategy, but that window will inevitably close as several organizations forego the comparative comfort of the status quo and seek to exploit inevitable change in the best interests of the organization and its customers.
The Federal Reserve Proposals
As a result of these cost pressures, the Federal Reserve has presented the U.S. banking industry with a two-part proposal designed to provide incentives to banks to use the least costly means of re-circulating currency to customers.
Part one, known as the Custodial Inventory (CI) program, provides for outsourcing the Fed cash depot function to private parties (e.g., commercial banks, armored carriers, etc.) while still permitting depositors to receive credit from the Fed for currency on deposit at the CI. The Fed will establish a set number of CIs nationally, which will be bid on, awarded to, and maintained by depository institutions and potentially other approved industry participants. Commercial banks may deposit and withdraw from these CIs much as they do today to and from the Fed sites.
Part two, known as Re-circulation Fees, is designed to reduce the 30 percent to 50 percent "churn" figure described above by charging banks for each bundle of notes (1,000 notes to a bundle) that are "cross-shipped" by a bank. The Fed defines cross-shipping as ordering a specific denomination within five days of having deposited it at the Fed. The proposed fee is $5 to $6 for each bundle cross-shipped, with the fee voided for the first 1,000 bundles for each bank each quarter.
Central Banks Driving Change
In the U.S., much of this change has a familiar source -- the Federal Reserve (the Fed). Like other central banks around the world, the Fed is seeking to manage down its costs by re-pricing, limiting or eliminating the cash handling services it has traditionally provided. Globally, some central banks are introducing changes aggressively, some more tentatively or incrementally.
Combined, they present a general trend toward minimizing the role as distributor, warehousing provider, and depository in the currency supply chain. In almost every instance, the net effect is to force commercial banks to do more or pay more to carry out their currency supply chain activities.
While the Fed changes announced to date are not as aggressive as those faced by our clients in several other countries, they are similar in direction. To the extent that this kind of change appears to be a gathering trend, in which the Fed's current proposals can be seen as a precursor to more, it may be instructive to review key changes around the world.
The proposed changes from the Fed, and the greater shift they foreshadow, will profoundly impact commercial banks and other currency-handling intermediaries. If the Fed is no longer the primary facility for depositing and distributing currency inventories, banks must look elsewhere for new processes, partnerships and strategies. That banks can rise to the challenge is not in doubt. Time after time, in recent decades, regulatory and legislative changes have put banks on notice in one way or another, eliminating various protections, withdrawing implicit subsidies and exposing them increasingly to unfettered market forces. This time the challenge is in an area ripe for architectural and technological change, the currency supply chain. No matter what direction the industry and individual banks choose to move, the payoffs can be high.