The Cash Question: Currency Management for Central Banks

Central banks are facing unprecedented new pressures: on the one hand from the rising costs of banknote production and management and on the other, from the general drive towards digitalization and the “cash-less” society; and all in a pervading climate of public sector accountability. As a result, many are redefining their role in the cash cycle.

Globally cash cycle models at central banks are being reengineered. The impact of these changes is being felt across the board, from infrastructure through to currency department competencies and the roles of different partners and third parties across the value chain. In recent decades, three distinct currency management strategies – “central bank styles” – have emerged from “controlled/involved” to “utility/pooled” to “delegated/minimalist”, with some “hybrid” models. Even the central banks of countries with established “styles” are facing strategic dilemmas about the risk and cost of banknote cycles, which are inexorably drawing them away from their core competencies. Despite the growth of cashless payments, cash is far from an “outdated commodity”. On the contrary: physical cash volumes grow by 5% annually worldwide, while the global cash logistics market is predicted to grow at an annual rate of 10% in the next few years. Moreover, the stable provision of banknotes of sufficient quality is perceived to be a “public service”. Currency departments of central banks have been motivated to pursue a “war on the cost of cash”, which has led them to study what is happening in the commercial part of the cycle.

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By Barnabas Ferenczi

There is More to Currency Management than Meets the Eye: Leadership Challenges - an excerpt from the book Banknote Management for Central Banks.


The Rising Cost of Cash

Banknotes and coins require ever-greater protection against counterfeiting due to the falling cost of reproduction technologies. New sensor, data collection and automation solutions have raised the bar for product design, while other central bank departments like IT, audit and security have also increased the pressure on quality and control. Furthermore, the cost of infrastructure and labour has rapidly risen in certain parts of the globe. While central banks are not profit centers, the growing cost of currency management demands equal cost efficiency measures.

Automation has revolutionized banknote processing, from accepting (e.g. deposit and smart safes) to disbursement (ATM) and cash center processing. Design is getting more sophisticated as more security facets are introduced onto the surface area of the banknote, which must be fit for street handling as well as machine-handling. Notes must also be future-proofed to avoid costly readjustments to processing machines.

Central Banks react differently to the emerging commercial cash sector

Selecting a Cash Cycle Model

Central banks have reacted differently to these pressures. The “controlled” style central banks (e.g. Germany, Belgium and several eastern European countries) have reinforced their dominant role in the cycle by keeping processes in-house and negating the need for high-volume processing systems at commercial banks and Cash in Transit companies (CITs). At the other end of the spectrum, the “minimalist” central banks have withdrawn from the daily cash cycle entirely by delegating to the commercial sector. The “utility” and “hybrid” models sit in between these two poles, with varying degrees of process outsourcing, automation and digitalization.

Controlled Style: Strategies for Success

Under this model the speed, reliability, homogeneity and flexibility of the central bank’s internal operations is crucial. Highly centralized operational management is needed supported by strong IT and compliance tools and the currency department will have a “production management” profile. The risk factors will be internal: arising from modernization of infrastructure, automation of manual tasks and security; but failing to modernize can lead to suboptimal efficiencies. If the bank falls short, bottlenecks and quality deviations may occur but these can be remedied by implementing the following processes:

  • One touch logistics: end-to-end harmonization of cash handling units internally and with external counterparties (printing works, depositors etc.)

  • Paperless operations: more sophisticated IT tools and currency software which can even forecast currency movements and work steps.

  • Automation: replace low-value manual work with machines which can be networked to create a seamless production line.

Delegated Style: Commercial Thinking

The minimalist central banks (e.g. UK, Canada, India, Australia) will motivate their commercial partners to take over daily cash ops. Their big challenge is to control the cash cycle while remaining as “hands-off” as possible. Optimization measures may include direct regulation, market-sensitive transaction fees, balance sheet relief mechanisms and consolidation of the network. The private sector will develop innovative new strategies to offset these rising costs. The onus is then on the central bank to ensure these don’t lead to a deterioration in standards and an increase in risk. They may adopt the following practices:

  • Appropriate banknote design with a security architecture supporting automatic authentication of notes.

  • A banknote fitness framework defining the minimum quality that can be re-circulated.

  • Stringent but fair security, licensing and compliance rules for the commercial players involved in the storage, transport and processing of currency.

“Utility/Pooled” and “ Hybrid™ ” Models

In the utility model, the central bank pools its currency operations with its commercial banking partners. They typically concentrate on higher volume cash ops with or without a specific stake from the central bank (e.g. a balance-sheet relief mechanism). Sometimes these set-ups dominate the entire cycle (The Netherlands, Norway, South Africa, Saudi Arabia) but often in other countries they may cover only some commercial banks and a part of the cash cycle (Brazil, Mexico, Turkey).

Central Banks Must Lead the Change

All the aforementioned models are stable and good for the economy if they are implemented consistently. But central banks should assume responsibility for shaping the commercial part of their cash cycles if their leading role is to be maintained. The old adage applies here: “If we want things to stay as they are, things will have to change.”

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