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Attacking The Cost of Cash
Attacking The Cost of Cash
Cards and mobile payments are gradually pushing the use of cash downward
across the globe, with cash as a share of total payments declining from
92 percent in 2006 to 84 percent in 2016. But cash is not going away. People
in diverse regions still rely on cash for a broad range of payments needs and
will continue to do so for the foreseeable future. What is more, cash costs,
accounting for five to ten percent of bank operating costs, are rising in absolute
terms in most markets, even as usage is on the decline. There are three main
levers banks can use to manage cash costs: making operations lean, right-
sizing networks, and national pooling of resources. These actions can result in
big payoffs both in markets where the use of cash is in steep decline as well as
in those where consumers and businesses continue to rely heavily on cash.
Jonathan Brugge The long war on cash Markets can be sorted into five clusters,
Olivier Denecker The greater part of humanity lives in based on level of cash usage and the rate of
Hamza Jawaid countries where at least 90 percent of trans- decline in cash usage (Exhibit 1, page 18):
actions are made in cash. Even in these
Andras Kovacs 1. Emerging markets where cash accounts
cash-intensive markets, however, cash is
Ibrahim Shami for at least 80 percent of transactions
gradually losing ground to other payments
and the annual rate of decline of cash (as
instruments.
a share of all transactions) is less than
Generally, consumers in wealthier econ- one percent. Growth in cash transaction
omies tend to favor noncash alternatives. volume and value coincides with growth
Cash usage in Sweden, Finland, the UK, the in branch and ATM networks (e.g., India,
Netherlands, Canada, France, and the United Indonesia, Morocco).
States has fallen well below 50 percent of
2. Initial transformation markets, where
total transaction volume. Germany, Japan,
the annual rate of decline is less than
and Austria stand apart as wealthy countries
three percent but recent trends in digital
where consumers maintain a strong pref-
payments alternatives suggest these coun-
erence for cash at the point of sale, despite
tries may join mature markets in a few
universal availability of electronic payments
years’ time (e.g., Poland, Saudi Arabia).
instruments and the broad adoption of elec-
tronic transfers for recurring payments. 3. Mature, cash-intensive markets with
highly developed branch and ATM net-
The vanguard in the war on cash is Northern
works. Cash transaction volumes are
Europe, where as few as one in every five
resilient, despite growth in electronic pay-
payments is made in cash and using cash may
ments. Extensive ATM networks testify to
even be difficult in stores and restaurants.
the commercial importance that cash still
has for local banks (e.g., Germany, Japan).
Payments markets fall into five clusters based on their progress in the
war on cash. Emerging markets
Initial transformation markets
Mature, cash-intensive markets
Mature markets
Markets at the vanguard
15
mobile payments”
20 Norway
“Card and
Denmark
Sweden
Luxembourg UK
France Finland
Netherlands
2016 cash usage proportion
40 Canada US
Australia Estonia
“Average cash users”
Belgium
Hong Kong Korea
Switzerland
Singapore
60 Germany Ireland
Japan Latvia Brazil
Slovenia Portugal Czech Republic
Austria
Spain Chile Lithuania Poland
Taiwan Slovakia Argentina
80 Russia Saudi Arabia
Hungary
“Cash heavy”
Source: BIS; central banks; ECB; Euromonitor: RBR; McKinsey Global Payments Map
4. Mature markets where cash has fallen No matter the country, cash will be around
to between 40 and 60 percent of total for a long time. Despite the general decline
transaction volumes. The value of cash in in usage and customers’ weakening appreci-
circulation may still be growing, and the ation for cash, consumers in many countries
over-abundance of ATMs lowers efficiency will insist on using cash for some time.
(e.g., Canada, France, US). Some prefer cash for reasons of privacy and
security. Others live in areas where poor
5. Markets at the vanguard, where the avail-
cellphone coverage and frequent electricity
ability of strong electronic instruments and
outages make cash the most reliable way to
concerted industry action have driven cash
pay. Consequently, banks need to maintain
usage below 40 percent. In these markets,
their cash services. If the costs of cash net-
cash is a mere commodity and banks face a
works do not decline with usage, the burden
constant challenge to reduce the fixed costs
per transaction will continue upward, mak-
of branch and ATM networks. Shared net-
ing the service less accessible for users in
works become a key lever for reducing costs
the long run.
(e.g., Norway, Denmark, Sweden).
Cash is declining, but cash costs are 1. Making cash operations lean (cash distri-
rising. Why? bution centers and branches)
While cash everywhere accounts for a shrink-
2. Optimizing bank-owned distribution net-
ing share of the payments pie, the costs of
works (ATMs and branches)
cash handling are rising practically every-
where. There are three main reasons for this: 3. Pooling resources with other banks to
form a shared cash-handling network (na-
As world GDP increases, the value of
tionwide utility)
cash in circulation is expanding to meet
demand. Notable exceptions include the Implemented together, these levers form
Nordics, the Netherlands, the UK, Estonia, a virtuous circle of cost savings, enabling
and Australia, where the rate of reduction the progressive augmentation of benefits
(over four percent per year) exceeds the (Exhibit 2, page 20).
growth in GDP. In fast-growing markets,
1. Make cash distribution centers and
banks incur additional costs as they extend
branches lean
their networks to underserved regions.
Many banks have already taken steps to
In mature markets where the decline in increase the efficiency of their cash opera-
cash relative to other instruments is slower tions, but these operations still account for
than in vanguard markets but faster than between five and ten percent of total bank
in most of the world, fixed costs (which operating costs (Exhibit 3, page 21). Most
account for a high proportion of total cash banks can reduce their cash costs by as much
operations costs) are difficult to eliminate. as 30 percent by applying lean principles to
Cash remains an area of bank operations eliminate waste and maximize productivity in
with high manual labor, especially in dis- distribution centers, inventory management,
tribution, maintenance, and processing. In and transportation.
regions with rising labor costs and in the Lean processes
context of the rapid digitization of bank
The lean approach aims to maximize output
operations, the share of cash costs be-
and reduce waste. The biggest improvement
comes increasingly relevant.
in efficiency comes from the elimination of
In both emerging and mature markets, banks repeated steps in the replenishment process,
must make careful choices as they right-size primarily in cash distribution centers, where
their networks. Specifically, they must decide 40 percent of steps are checks and controls
where to eliminate branches and ATMs while (for example, counting and recounting
continuing to address the cash needs of con- notes). In addition to streamlining work-
sumers and retailers. flows, some organizations have increased
capacity by up to 20 percent by redesigning
work areas to facilitate physical movement
1 2 3
and smooth transitions from one station to the network’s diverse applications. Using
the next, reprioritizing flows to reduce peaks, advanced analytical tools with the broadest
and aligning standard operating procedures possible set of data, it is now possible to in-
across all collection points. crease the accuracy of forecasts and recognize
diverse indicators that can serve as advance
Improvements to workflow in cash process-
warning of unanticipated changes in demand.
ing centers cascade across a bank’s network,
With improved cash needs forecasting, banks
bringing new levels of efficiency to trans-
could potentially reduce cash inventory by up
portation, branch cash operations, and ATM
to 30 percent (see sidebar, page 24).
network management.
Route optimization
Cash forecasting and
inventory management Optimizing routes for armored vehicles is
the hardest lever, especially in developing
Our research shows that nearly half of banks
markets. As they extend their networks into
rely on manual calculations (e.g., spread-
underserved areas, banks face additional
sheets) to forecast cash needs for branches
challenges due to outdated maps and the lack
and ATMs. While some banks have imple-
of historical data needed to forecast traffic
mented software applications to forecast cash
patterns. Other key data that established
needs, these tools are typically built for a par-
commercial solutions tend to use (with
ticular set of hardware (e.g., ATMs) and do not
the help of intensive heuristics) are largely
offer an integrated view of cash needs across
Cash operations still account for between five and ten percent of total
bank operating costs. Handling (cash transportation,
sorting, maintenance)
10% Holding (cost of funds, insurance)
X% Percentage of bank operating
costs related to cash
X% Cash usage as % of
50% 7% total payments
6%
43%
4%
67%
50% 75%
57%
33%
25%
unavailable. However, new mapping tools maintenance. In some markets, they also
enable dispatchers to forecast traffic pat- generate revenue from transaction fees. Es-
terns using methods similar to those used to timating the effect of adding or removing an
forecast inventory. Automated tools can also ATM to the network requires careful consid-
alert couriers and dispatchers to traffic prob- eration, as such changes have a direct impact
lems as they emerge, allowing time to choose on both the cost and revenue of nearby ATMs.
an alternate route. Several banks have used When determining how to improve the ef-
advanced analytics to cut their cash trans- ficiency of a network, banks should identify
portation (CIT) spending by between five and drivers for each identified cost element. Line
ten percent. items and associated drivers can typically be
categorized in four groups:
2. Right-sizing bank-owned
distribution networks Transaction-based costs (e.g., card and in-
Network right-sizing entails investment in terchange fees)
modern technology, including evening out ATM location-based costs (e.g., electricity)
the use levels of branches and ATMs across
ATM maintenance and replenishment
the bank’s footprint.
(e.g., restocking cost)
ATMs incur expenses, consisting mainly
Other (e.g., back-end IT systems)
of cash transport, IT hardware, and
Consolidate IT
Combining
5-10% development, fraud
bank activities
handling
Increase standardization
Standardization 10-15% of hardware, software,
security infrastructure
-20-35%
1
Not including the cost savings from pooling cash-counting facilities (e.g., the "sala conta" in Italy).
Source: McKinsey analysis
3. Optimizing cash distribution costs to consumers. As revenue falls with the num-
through a shared utility ber of transactions and providing access to
The third lever, creating a national ATM cash becomes a commodity with little oppor-
utility, is the logical extension of the second tunity for competitive distinction, banks may
and becomes increasingly relevant as cash find that the costs of maintaining a network
usage falls and fixed costs rise relative to total that fully covers a country become prohibi-
costs. Pooling resources in a consolidated or tively high. But even within these constraints,
joint network can ease the economic burden banks in some vanguard markets have contin-
of maintaining the last ATM in an isolated ued to eliminate significant costs by creating
locale where traffic is suboptimal. Shutting noncompetitive nationwide utilities. Banks
down a branch or ATM in a small town might in emerging markets can use the opportu-
not be significant as long as alternatives nity as a type of technological leapfrogging
remain, but shutting down the last ATM in if they recognize that this is one of the key
town could prompt severe public reaction. opportunities for cooperating, rather than
competing, with each other. In both mature
In countries with a very low share of cash
and emerging markets, the primary benefits
transactions, there is a requirement—legal,
to combining networks include (Exhibit 4):
commercial, or both—to keep cash accessible