Brainstorming Cash Cycle Resilience

At the Currency Conference in May 54 members of the International Association of Currency Affairs (IACA) met to discuss how to build a resilient cash infrastructure, a highly topical subject.

Four groups discussed key topics within the subject and fed back their thoughts to the room. The topics were:

• Unpredictable development and knowledge of cash usage

• Volatility of cash demand and infrastructure needs

• Rising cost of cash operations

• Making the whole cash cycle more sustainable.

• Unpredictable development and knowledge of cash usage.

Given the sometimes volatile and unpredictable changes in cash requirements and movements, central banks need good data and understanding of what drives cash in their economy. What are the drivers for transactions and use of cash as a store of value? What role are interest rates playing at the moment? How are alternative payment methods changing cash usage?

Attendees were asked to talk about how they are addressing these challenges, whether ‘cash visibility’/Interoperability of data is on their agendas and how they are collaborating with industry suppliers to address the challenge.

The first group reported that ways to get information is limited. The starting point is, of course, that central banks know what cash they take in and what they put out. Surveys are a useful tool, but concern was raised that these can only sample a small proportion of the population and are respondents being truthful?

Central banks need data from the commercial market. Some banks are experiencing cash staying out in circulation longer, resulting in the quality of notes declining in some markets. The group wanted to know how they can bridge the gaps and bring together that knowledge.

While there was concern about what is the incentive for commercial entities to give information, there were some suggestions. For example, getting data from cash handling equipment in the commercial market so that central banks know what is where and can ensure cash is in the right place at the right time.

Should there be a mandate for commercial entities to share information? Although it is intrusive, one bank already requires this based on legislation. If central banks can get this data, how should it the manage the information, who supports it, processes it etc.? If legislation is not possible, what incentives can a central bank offer the industry to encourage the sharing of information?

Legally what can and should be shared and what should not be shared?

In summary, there should be collaboration in the industry to share information and get data insights. Perhaps a model of central bank ‘sponsorship’ is the key to building collaboration in the market. Central banks and market players need to be clear how the data will benefit all, how it improves the market, and how it improves accessibility to cash and other payments systems.

Volatility of cash demand and infrastructure needs

Forecasting cash demand has never been harder. Despite that, central banks need to ensure that their cash infrastructure can deliver accessibility, resilience, efficiency and sustainability. How useful would standardisation between stakeholders be, across physical and digital infrastructure?

How is redundancy to deliver resilience balanced off against efficiency and cost? How can the infrastructure across all the cash cycle stakeholders be co-ordinated, managed and guided? How can collaboration between stakeholders best be achieved?

Forecasting was easy at one time. Seasonable volatility could be adjusted for and growth of notes in circulation was predictable, but after the pandemic forecasting became difficult. Key problems have been: 

• Shocks to the system, financial crisis

• Change in behaviour – people wanting to save more, hoarding cash

• Denominational needs were not the same- in some countries high denomination volumes grew and in others not. Central banks have needed special adaptations to forecasting by denominations

• Competition to cash has increased with the growth of digital payments and digital currencies.

In the context of these challenges, the group felt there is the need for research in new areas (academia, econometrics) to find ways to more accurately forecast demand in light of the above factors.

This group felt that central banks should not be promoting cash as it was, but to offer resilient cash payments infrastructure that include several types of payment instruments.

Rising cost of cash operations

One part of rising costs in some countries is that the cash cycle has large-fixed costs but a declining cash environment.

The group was asked to consider what drives cash costs for different stakeholders and what is the point at which the cost of cash becomes unsustainable. Are there trade-offs to reduce the cost of cash such as reducing accessibility, availability or authentication? What is being, or could be, done to reduce the fixed costs of cash, for example, standardisation, increased collaboration between and with industry stakeholders etc.?

Distribution was felt to be the most significant cost, although the group did not have good information about retailers. The group spent some time discussing how the cost of cash is moving from capital to operational spending, and why.

If the cost of cash drives retailers to move to digital payments, that is when cash is unsustainable. However, the group was unclear whether consumers were choosing less cash or being forced away from cash.

The group was very clear that reducing accessibility, availability or authenticity would cause more problems than they would solve. The answer was a lean cash cycle, particularly in the retail layer. The Swiss referendum on cash was cited as an interesting approach.

The group favoured simplicity across the cash cycle, but pointed out that ideas such as standardisation are easy to talk about but hard to do. More recirculation close to the point of use is an opportunity to reduce cash cycle costs.

Making the whole cash cycle more environmentally sustainable

Are central banks including environmental sustainability in tenders? Can central banks influence planning and investment across the cash cycle and changes to ways of doing business to increase efficiency and lower environmental impacts?

Luckily, efficiency and lower environmental impacts usually go hand in hand. Including it in tenders is at an early stage with relatively few central banks doing more than making it a non-price element, but this is just beginning to change.

The group felt that focusing on reducing transportation and transportation costs would have the biggest impact. Central banks should talk to banks and organisations running ATM networks about moving to renewable energy sources, even pooling ATMs. Central banks have a role helping all stakeholders focus on this topic and to share best practice from other industries and other countries.