Time for Cash Departments to Think Radically?

The role of Currency Issue Director is great preparation for high office in a central bank. Ask Andrew Bailey, Governor of the Bank of England, or Michelle Bullock, soon to be Governor of the Reserve Bank of Australia, both of whom have managed currency in their banks. What makes it such good preparation?

First, the purchase of cash is, for most central banks, their largest discretionary expenditure item. Procurement on this scale is great experience.

Second, the cash department is a complex, large operational department, unique in a central bank. It forecasts cash demand, procures, stores and issues cash, works with third parties using a mixture of regulation and influence to achieve policy goals, has responsibility for managing large volumes of returning cash, including destroying it, and faces the constant threat of counterfeiters. The cash department usually has the largest headcount of any department, with people from every walk of life with a wide range of education.

Third, if there is a problem with the nation’s cash, it is all over the front page of the papers. Cash is highly visible, and an emotional item in the nation’s psyche.

Visit a central bank website and very high up in the list of things they do will be a phrase such as, ‘…we produce banknotes (cash)…’, Bank of England, or the Reserve Bank of India’s website preamble, ‘to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency …system of the country to its advantage.’ 

Running a cash department is, therefore, a big job requiring high calibre people. It tests them in ways that no other role in a central bank does. If you can do this well, then perhaps you are capable of much, much more. However, times are changing.

Who will pay for cash and the cash cycle?

With the dash from cash and the dive towards digital payments, cash volumes are starting to fall and the assumptions underlying the cash cycle are being tested. Is there an opportunity to develop a radical new approach to cash?

Commercial organisations participate in the cash cycle because it is profitable but, as volumes fall, it is increasingly hard to earn the returns desired. Commercial bank branches ceasing to handle cash, more independently operated fee earning ATMs, and fewer ATMs overall, countries such as the Netherlands and Belgium moving to a utility model of cash provision etc. are all a result of this change.

But is that enough? Can we reduce the cost of cash faster than the fall in volumes? A time will come when the question of who will pay for the cash cycle when cash volumes hit the floor has to be answered.

Time to let go?

Why does a central bank have to issue and manage currency? The Hong Kong Monetary Authority (HKMA) allows three commercial banks to issue their own banknotes. The Bank of England regulates the issue of three separate series of banknotes in Scotland and three in Northern Ireland.

In the case of the UK, the commercial banks design their own notes, procure, store, issue, manage the circulation and destroy their own notes. All of these are the functions of a central bank.

Some of the commercial banks run their own cash centres, some outsource this. They provide notes to organisations that don’t necessarily bank with them.

The UK’s Bank Act 2009 is the legal underpinning behind this system. It gives the Bank of England the power to issue regulations that ensure that the value of the notes is appropriately guaranteed, that they are produced, stored, issue, circulated and accounted for in real time and to the highest standards. The Bank of England, therefore, maintains control while giving the commercial banks responsibility. In return, the seigniorage and income associated with the banknotes belongs to the commercial banks.

HKMA runs a similar system but manages it differently. For example, Hong Kong banknotes are designed with the same feature set to a standardised template in order to make public education easier. But the commercial banks are free to design within those constraints.

Follow the money

At the moment commercial banks have little incentive to promote, let alone love, cash. Change the rules of the game and allow them to benefit from seigniorage and fees, and everything changes. Suddenly it is worth investing in the cash cycle, encouraging cash automation and Smartsafes at retailers, innovating with cash in transit companies to increase access to cash and promoting the use and acceptance of cash.

Prior to the 2008/9 financial crisis, when interest rates were last relatively high, the Scottish banks competed for cash issue market share in order to maximise their seigniorage, so we know this is more than theory.

This may seem radical, but most central banks outsource the management of retail payments (not Real Time Gross Settlement). Why not cash? If we are to have a less cash world, perhaps this is a model which can make cash relevant and sustainable for the future.

Currency issue director as a regulator

The role of Currency Issue Director will change to being primarily that of a regulator. It will be no less arduous, requiring very different skills compared with those needed today, but still a wonderful platform to be a future Governor.