Forecasting cash to enhance profitability
Accurately forecasting cash has never been more important as banks and cash-in-transit companies respond to fluctuating demand due to the current pandemic. We talked with Tajan Joseph Kattacherry, Cash Forecasting Product Owner, to learn today’s key challenges, why forecasting cash is more essential than ever and how new technology can help. We also discuss some of the impressive benefits that companies can gain with advanced cash forecasting technology and get insights into the latest trends.
Tajan, what challenges are companies that process cash facing today? And in the future?
The biggest challenge today is making cash processing profitable. To cope, many commercial banks have outsourced their processing or joined forces to create consortiums. Both strategies lower costs through volume discounts. Cash-in-Transit (CIT) companies are also under cost pressure and must carefully negotiate pricing and routes.
Another challenge is that cash volumes are declining in some regions and increasing in others. That makes it difficult to predict future volumes, determine whether new processing centers will be needed, and set pricing over the life of the contract. CITs must ensure technology is up to date, and costs are as low as possible. We already see industry consolidation in certain regions, for example, Brink’s acquiring G4S. G+D is here to help our CIT partners stay competitive.
Why is cash forecasting so important?
Cash forecasting can significantly reduce costs. For example, ATM forecasting can dramatically decrease the number of stops the armored courier has to make. Traditionally, the courier travels a fixed route on a set day and is paid on the number of stops. However, based on forecasting supply and demand, there may not be a need to replenish some locations as frequently. In addition, accurate cash forecasting is essential within the branch and at the retailer. In a recent example, we found that a bank had over 50% of residual cash in the ATM, so there was no need to send a courier to that location as frequently. Eliminating unnecessary stops saves money. Local bank branch managers typically want an oversupply of cash, so their ATMs never run out, and they avoid customer complaints. However, we have found that if banks manage the cash supply from a central headquarters vs. the branch, it is much easier to optimize the amount and reduce the contingency. In almost all cases, that results in lower cash orders and significant savings. Accurate forecasting is what makes that possible!
Has the current COVID-19 crisis made cash forecasting more essential?
The pandemic has illuminated the importance of being able to model different scenarios. It has clearly shown that the past is not always a predictor of the future! On the one hand, many shops were closed, so there were fewer purchases. Also, some stores avoided accepting cash and moved toward more contactless payments. On the other hand, people withdrew more money as an emergency backup. As businesses reopen, forecasting can help predict when and where cash will be needed. Ironically if cash is used less, forecasting can be even more valuable. As an example, if I have a busy ATM that needs refilling every day, it is easier to predict the necessary cash for that machine. If it only needs refilling every ten days, it becomes critical to optimize the ATM and routes accordingly.
What new technologies are important for cash forecasting?
Within our solutions, artificial intelligence is vital, and we already have AI algorithms embedded in our forecasting engine. We are working with Ph.D.s in statistics to develop even faster algorithms, and we are focused on combining route optimization with forecasting.
What customers are already using cash forecasting, and what results have they seen?
For banks, it means less cash sitting idly in an ATM or vault. For CITs, cash forecasting can mean fewer stops, which equals lower costs. One of our CIT clients changed from a model paid by stops to a model where they were paid a monthly fee. They were incented to optimize routes to eliminate unnecessary stops by 50%. The CIT saved money by reducing hours and fuel consumption and still met all of their SLAs.
What is unique about this cash forecasting solution?
One of the unique features is our feedback loop that ensures the planned route was followed. If an order gets cancelled at the last minute, the system takes that into account for the next day. While this is a common feature in consumer parcel delivery systems, it is one of the advantages of our forecasting solutions that our competitors currently don’t offer in such an integrated way. Also, we determine the best algorithm based on the data set – regression or AI. Based on research, we found several forecasting techniques, both auto-regression and self-learning techniques.
Based on the available historical patterns, we decide, together with the customer, which algorithm to use. Over time this decision will be assessed and, if needed, another algorithm can be applied. Soon, the choice of the algorithm will become automated.
What new technologies do you predict will be most important for businesses and governments that process cash over the next 5 – 10 years? Are there regional differences?
In the future, I see more focus on data intelligence, the increased use of robotics, and smarter hardware to enable more automated processes. If you can automate more inside the cash center, then volumes can be increased. Compass Network Forecasting can help model this and compare cash flow before and after upgrades. I also expect that outsourcing will continue to be necessary. That will lead to larger cash centers. Regionally, the cost of labor impacts the payback for automation. However, the fewer people who handle cash, the lower the losses due to error and theft, so automation systems like NotaTracc®, for example, have value everywhere in the world. In a recent article “Show Me the Money”, my colleague Ross Knight, identified three technologies that I agree are important for the future: Route Optimization, Self-Service and Dynamic Scheduling.
Finally, I see cash forecasting software becoming more common and an integral part of managing cash.
What should businesses that process cash do to stay competitive?
Don’t focus on shiny trucks! That was important in the 1990s. Instead, focus on IT and automation and how you can help drive innovation to optimize cash cycle processes. As I mentioned, we have seen models that use a fixed fee per month (vs the number of stops) drive effectiveness. Remember that retailers are used to paying a % for electronic payments. Can you offer the same model for cash?
The end goal is to move away from selling stops and cash counting to helping retailers eliminate hassles with cash. If you can reduce manual handling, and make it easy, you can convince retailers that cash is a profitable payment type that they need to continue accepting.
Cash is an attractive means of payment. How does cash forecasting help to keep it that way?
Paper currency does not have to be more expensive than electronic payments. In many cases, it can be less expensive. Consumers still love cash. Technology such as smart safes ensures that payments can be credited to the business's account much faster with less manual effort. I predict that smart safes will become standard for many companies. The data flow from smart safes can be tracked and used as a part of our cash forecasting software. Many of the G+D compact or tabletop solutions like the BPS® C2 and BPS® C5 can validate, count, sort and strap cash quickly and reliably and eliminate many hours of manual processing, even for smaller volumes. Automation makes cash payments easier to handle and more attractive to retailers.
When should a bank or cash service provider start looking into forecasting?
Forecasting should always be part of the resource planning process. For CITs, it is a “must-have” capability to run the entire operation. For central banks, forecasting enables them to optimize cash orders from a printing company. We sometimes find printworks and treasuries who rely on a “single genius,” a brilliant and experienced individual who determines the amount of cash to be printed based on his or her years of experience and a special spreadsheet. If that individual retires or the situation changes suddenly and drastically, as has been the case with COVID-19, it can be challenging to adapt. Forecasting takes out the guesswork and lets decision-making become more data-driven.
What trends do you see when it comes to forecasting? What new solutions are ahead?
The most significant trend is to plan CIT routes using forecasting. Once armored couriers no longer get paid by stops, it changes the entire picture. We help our customers model different scenarios and see the outcomes. Forecasting is also helpful for planning cash centers. For example, I have a new customer with 500 ATMs – do I need a new cash center? What happens if their cash deposits drop by 50%? When do I need to close a cash center? This type of “what if” scenario planning helps CITs and cash centers plan for multiple contingencies over many years.
New solutions include our Compass Network Forecasting solution, which coincidentally aligns with the biggest biggest worldwide economic crisis in years. We can help our customers adapt to new situations and react appropriately to lower (or higher) orders.
Future projects include new engines for AI, new forecasting features, improved connections with Compass software, and enhanced order optimization. Our source of knowledge has grown exponentially with our expanded development team and our customer base, which now includes cash experts around the world.