The Cash Cycle: How Does it Work?
1. What does “Cash Cycle” mean?
This term refers to the entire circulation route cash takes; in other words the path traveled by banknotes and coins in a national economy, from the start of their production to their final destruction. This path is predetermined, to a large extent:
Commercial banks order the quantity of cash they require from their central bank.
The central bank then has the banknotes printed at certified high-security printing plants, and has the coins minted.
Commercial banks issue the cash via their network of branches, ATMs, and retail trade.
Consumers use the cash to pay for all types of goods and services, mostly using low-denomination banknotes for small amounts. Higher nominal values, such as the €500 note, are primarily used as repositories of value.
The onward route for cash takes it back to central banks, via commercial banks and cash-in-transit companies. These inspect returned banknotes and coins for authenticity and fitness, and withdraw old, damaged, or counterfeit notes from circulation. These are then destroyed or – in the case of counterfeits – analyzed. Processed cash returns to circulation, alongside new money. Confidence in the stability and security of currency is essential to the proper functioning of the cash cycle.
2. How important is the cash cycle for a national economy?
The cash cycle operates like oil on the cogs of a national economy. If it were to collapse, economic activity would slow significantly, or even stop altogether. On the other hand, a functioning cash cycle in which consumers have confidence in the security and stability of the currency strengthens the national economy as a whole. In addition, the cash cycle itself is an economic parameter: participating companies achieve taxable revenues, create workplaces, and take on responsibility from both a national policy and sociopolitical perspective. A cash cycle that is working well helps to maintain citizens’ ability to pay for things even without a bank account, in crisis situations – for example after natural catastrophes in which the technical infrastructure of card payments has been restricted or destroyed.
3. What process steps does the cash cycle consist of?
Before cash can be issued to commercial banks by the national central bank, that cash needs to be produced. Banknote manufacture begins with the production of paper – also referred to as substrate – in a high-security factory. Most banknotes, including euro notes, are printed on purely cotton fiber paper; a low market share of less than 5% use alternative substrates such as polymer. Combined substrates such as “hybrid” from the G+D Currency Technology Louisenthal® subsidiary offer improved dirt-repellent and tear-proof properties, meaning that banknotes last longer and are therefore more cost-efficient. Many security features such as watermarks, security threads, and security foils based on hologram and/or micromirror technology are already integrated into advanced substrates.
The banknotes are printed and certified at high-security banknote printing plants such as those of G+D Currency Technology. The notes are processed using cutting-edge printing techniques in combination with special-effect inks as well as engraving and laser technology. Long before a banknote is printed, experienced designers develop its appearance and plan the integration of various security features, all perfectly coordinated to one another. In this process, banknotes become small works of art; reflecting the relevant national culture while also meeting the highest security requirements. Processing systems such as the BPS® X9 from G+D Currency Technology check each individual freshly printed banknote to ensure flawless quality.
Banknotes and coins are regularly “processed” by the multiple different actors in the cash cycle: They are counted, sorted, checked for authenticity, and banded. If they are damaged, torn, or soiled, they are withdrawn from circulation and destroyed. Companies such as G+D Currency Technology offer a wide range of cash counting and banknote processing systems for cash processing. The systems offered differ in terms of size, speed, number of delivery compartments, and functionality. The group of cash cycle participants that use them is equally diverse, ranging from small retailers that need to count their daily income, commercial banks, cash-in-transport companies, and casinos, through to central banks that issue banknotes.
Poor-quality notes and coins are no longer fit for use, so are withdrawn from circulation and then destroyed by the central bank. The respective quality criteria are specified by the central bank of the country in question. In the Eurozone around 30% of €20 notes are withdrawn per year.
4. Which players are heavily involved in the cash cycle?
National central banks have sole authorization to issue banknotes and coins. They are also responsible for ensuring that national cash cycles function properly, and for determining annual production volumes based on demand. Central banks also bring cash into circulation via the banking system as well as – to a small extent – via wholesalers and retailers. In addition, they withdraw damaged and counterfeit banknotes and coins from circulation.
Commercial banks form a core element of the cash cycle: they supply the economy with cash by issuing banknotes and coins via their branches and ATMs, as well as receiving deposits. During these processes, they use appropriate systems to check, on an ongoing basis, whether cash in circulation is authentic and still of sufficiently high quality to remain in circulation. Cash that is no longer needed is returned to the central banks.
Cash-in-transit companies are responsible for the logistical elements of cash supply. They deliver cash to commercial banks, wholesalers and retailers, and fill ATMs. Commercial banks often also outsource cash processing to cash-in-transit firms. These logistics companies comply with the strictest security precautions in order to guarantee secure transport.
In retail, consumers use coins and notes to pay for goods and services. In addition, retail customers can increasingly withdraw cash at cash registers using their cards. In order to enable the quick identification of simple counterfeits in notes and coins, cashiers are generally trained to check optical and haptic security features.
All players in the cash cycle work hand-in-hand to ensure that the cash cycle functions properly.
5. What is a cash center and how does it work?
Cash centers are internal or external service providers that process large quantities of cash on behalf of central and commercial banks. In cash centers, banknotes and coins are counted, checked for authenticity, and sorted with the aid of high-performance systems. Soiled or heavily damaged banknotes and coins are withdrawn from circulation on an automated basis.
Cash centers encompass up to seven core areas of activity that need to dovetail perfectly: Cash-in-transport companies deliver cash to the cash center via a security checkpoint. During order preparation and post-processing, banknotes and coins are prepared for processing and/or subsequently packed and made ready for shipping. Material transport ensures secure passage through the cash center. The actual cash processing is at the core of a cash center: banknotes and coins are checked for authenticity, counted, and sorted. They are then order picked. Additional stations include the safe, and banknote destruction. A cash center is only truly secure and efficient if all stations together form an ideal unit. All processes receive meticulous software support.
6. How can the cash cycle be made more efficient?
The smoother the cash cycle, the more efficient it is – which is why an increasing number of steps are being automated. In addition, a high volume of data can be collected, and – following intelligent analysis – used to reduce cash cycle costs, from production and processing through to destruction.
Banknotes can be produced efficiently if the reject rate in printing is kept as low as possible. Consequently, every note is checked individually during automated quality control. Software is used to analyze and evaluate the data obtained, with the objective of deriving further improvements for banknote printing. This task is performed with the aid of high-performance banknote processing systems such as the BPS® X9 from G+D Currency Technology.
Central banknote processing steps (counting, checking authenticity and condition, as well as sorting) can be fully automated using high-performance systems such as those from the BPS® M series from G+D Currency Technology. Further increases in efficiency can be achieved through the mechanical processing of particularly time-intensive processes such as banking and packing, or the handling of loose banknotes when filling a BPS® system, wherein systems such as NotaPack® and NotaTracc® from G+D Currency Technology respectively play their part. Even while banknotes are being processed, analytical systems collect information about the condition of the notes, report this back to the central banks, and in this way improve their medium- and long-term production planning.
7. How can the cash cycle be made more secure?
Security in the cash cycle can be improved using automation, software, and the regular issuing of new banknote series. Cash counting machines and banknote processing systems sort and count notes and coins significantly more accurately than people are able to. In addition, bundles issued by a BPS® are packaged by the NotaPack® 10, in shrink-wrap tamper-proof film that makes it significantly more difficult to steal individual notes, while also optimizing logistics. Last but not least, cash-relevant data such as deposit notifications and cash orders need to be exchanged securely, reliably, and quickly by electronic means.
8. What’s the difference between the cash cycle and the operating cash cycle in companies?
In managerial financial controlling, the operating cash cycle refers to the period of time for which capital is bound in the company, and is therefore not freely available. A shorter operating cash cycle means that the company’s liquidity and/or production management are more efficient. On the other hand, the economic cash cycle comprises significantly more players, and is defined as the path that coins and banknotes take from their production through to their destruction.