Technical and legal perspectives on cash recirculation

03/12/2022 Created by Jens Eberhardt and Petra Bernhardt

Public Sector Efficiency

The primary task of a regulated banknote recirculation is to ensure the integrity and preservation of banknotes in circulation in order to strengthen public trust in the national currency. The quality of banknotes in circulation must be maintained at a good level, as only banknotes in good condition can be reliably checked for authenticity. The recirculation guidelines regulate that counterfeits need to be handed over to competent national authorities. Deteriorate, worn, soiled or defective banknotes must be withdrawn from circulation and replaced by fresh or fit banknotes.

Prior to the introduction of banknote recirculation guideline, some National Central Banks (NCBs) restricted banknote recirculation for commercial cash handlers and closed an agreement with commercial banks whereby only banknotes processed by NCB should be dispensed via ATMs, to ensure that cash service providers did not distribute counterfeits to the general public. Such an agreement enabled NCBs to retain full control over banknotes in circulation, as there is a continuous backflow of banknotes to the NCB.

With the advent of ATMs with deposit and recycling function, NCBs were forced to implement counterfeit detection rules and minimum standards for sorting banknotes by fitness. This creates models in which commercial banks are allowed to recirculate banknotes to their customers that have been processed internally using qualified technique in accordance with legally regulated procedures.

These factors open up opportunities for implementing cost-effective cash cycle models for NCBs as well as for commercial cash players.

1. Efficient logistics processes to shorten the cash cycle for commercial players

It can be stated that there is already sufficient technology for cash processing, ATMs and logistics to meet required standards for cash recirculation. However, integration into an end-to-end process is usually not yet implemented in a way that achieves optimal efficiency. We need to start using technologies that are already available to avoid duplicate cash counting and thus unnecessary transports in the cash supply chain. The future cash infrastructure is highly aligned with cash flows at each recirculation stage of the cash cycle.

In first stage, recycling ATMs balance cash deposits and cash withdrawals in streets and towns, reducing in average cash inventories and cash replenishments. Depending on locations, operational savings of 30 percent are realistic.

In second stage, cash recirculation has a positive effect at branch level when cash flows from over-the-counter operations (OTC) and ATMs are linked to cash holdings in branch vaults.

In third stage, cash logistics within the entire branch and ATM network can be optimized on basis of the streamlined processes in stages one and two. Cash Center operations with multiple banks can offer and perform direct currency exchange between customers. Partnerships between cash positive and negative banks are beneficial, as both parties can reduce their cash orders and cash deposits at the NCB in terms of volume and frequency.

The benefits of technology deployment and logistics adaptation are obvious, reduced cash inventories and lower stop frequency leads to cost efficiencies of 25 up to 40 percent. Nevertheless, only leading commercial banks are able to utilize all effects. Despite the cost pressure, many market players are reluctant to transform their cash infrastructure and associated processes. In times of strongly fluctuating cash volumes, closing of ATMs and branches, and/ or outsourcing cash services to cash-in-transit companies (CiT) will not be sufficient in mid to long-term perspective unless they improve their technical and process performance, thereby creating confidence trust among commercial banks and NCB.

2. Efficient out-tasking of NCB services to commercial banks

 “Public sector efficiency” confronts NCBs with the responsibility to optimize their country-specific cash supply chain on regular basis. Central Banks’ strategy determines the out-tasking degree and the legal regulations for external cash handlers. One of the first points is the implementation of a banknote recirculation policy, which includes monitoring and controlling the performance of commercial banks and cash center service providers.

An appropriately adapted regulation on banknote recirculation also supports NCB’s clean banknote policy and is a first step toward delegating its services to commercial players in the form of Notes-Held-To-Order (NHTO) schemes.

Technical drivers for improved cash recirculation:

A banknote recirculation guideline of NCBs requires modern processing automation based on compliant fitness sensors and tracking and tracing of cash orders and respective cash shipments. But a one-to-one replacement of manual work by automation technique and robots will not automatically lead to higher efficiency. It requires a response to new process standards that are compatible with automation technique.    

In essence, high efficiency of logistics processes through automation goes hand in hand with:

• standards for logistic units in transport and storage which leads to less variety of transport boxes and seal bags
• standards for auto-identification and EDI along the cash supply chain.

The service portfolio associated with cash products/ articles and services must be aligned with packaging and identification standards, otherwise process complexity at inter-banking level will have a negative impact on the overall performance between the involved cash stakeholders.

In many EU countries the standardization along the cash cycle is driven by the NCBs over past 10 to 15 years. Although the business case for improved banknote recirculation processes has been proven and the technology is available, the speed for transformation within commercial banks and CiT companies is slow compared with industries outside cash sector. We have identified two obstacles: first, a lack of technical and logistical capabilities. Second, legal obstacles faced by the banking and CiT organizations.

Legal drivers for improved cash recirculation:

Only advanced cash cycle models consider consistent and efficient regulations for currency exchange between banks. And in these cases, the regulations are not adapted to automated storage and retrieval systems, so the parties struggle how to do inventory checks and regular audits. Furthermore, CiTs as outsourcing partner of banks can perform orders to transport cash between two banks or to transfer banknote and coin units between two physical vaults. But such transactions are mostly not defined for automated vaults, which prevents cash center operators from investing in modern automated storage systems. This is just one example, and there are many others.

To achieve optimum efficiency in cash cycle, cash must be pooled during processing and storage. A continuous processing of deposits from different customers at high-speed processing systems is only possible “under pooling conditions”. The storage and trading of cash from different customers is simplified under pooling conditions. However, the commingling of cash funds requires a financial service provider license of the responsible party. CiT companies usually cannot provide such license because they do not meet the application requirements.

Depending on the cash cycle model, CiT companies operate the cash depots on behalf of commercial banks or operate NHTO vaults within delegated NCB schemes. They act with an appropriate insurance under the coverage of a banking license vis-à-vis banks. In all cases, the out-tasking party remains responsible for a regular monitoring and control of the outsourced services as specified in the respective service agreements. At the NCB level, the bank must implement and control corresponding policies.

It must be clear that NCBs can out task Central Bank services, but not the responsibility for their original duties. The same applies to commercial banks when they outsource cash services to CiT companies. A qualified monitoring and control function remains within their area of responsibility. 

The challenges of the cash industry in moving towards greater cash cycle efficiency are not unique, other industries and government authorities have similar logistical processes, uses similar automation technique and systems, and therefore face similar regulatory and organizational obstacles.

Cash InfraPro uses its multi-disciplinary and cross-industry competences to adapt reliable cash processes based on accessible automation, IT and security technologies in the cash sector. We are able to transform regulatory requirement to secure all aspects of cash recirculation within the cash cycle.

Sources:
ECB banknote recirculation by credit institutions and other cash handlers;
Cash InfraPro analyses and studies.