The key to building a resilient cash cycle

When periods of great uncertainty hit economies, there is always one public reaction that is consistent and predictable: a surge in the demand for cash. That’s true of global disruptive events such as the COVID-19 pandemic, the 2008–2009 financial crisis, and the Y2K problem, as well as more local and regional catastrophes such as floods and earthquakes.¹

In these circumstances, a key role for every central bank is to ensure it is ready and able to keep the cash cycle operating effectively. Monetary authorities are also tasked with encouraging and supporting all the other key participants in the interconnected cash cycle, so they are capable of playing their part in sustaining a functioning and accessible public cash system.

Central bank crisis mitigations come in many very different forms – sometimes mundane, sometimes dramatic.

Hit by back-to-back crises, Lebanon, for example, has seen the volume of cash in circulation grow fourteenfold in just four years as trust in the banking system has been eroded – to the point in late 2022 where Lebanon effectively became a cash-only society. In that year alone the volume of Lebanese pounds in circulation grew by 75%.^2,3

At the other end of the spectrum, the Austrian National Bank in early 2023 recommended that households put aside an envelope of cash to the value of twice their weekly grocery bill (or about €100 per person) in low-denomination banknotes. The reason: as a crisis precaution in case electronic payment options were unavailable. As Eduard Schock, member of the bank’s governing board, explained at the announcement of the Bargeld für alle Fälle (Cash for All Eventualities) initiative: “Cash is the only means of payment that works always and everywhere. You don’t need any technology aids to make a payment with cash … [But] in order for this to work, a certain amount of precaution is advisable [because] in the event of a crisis – for example, a blackout or a large-scale hacker attack – it is probably too late and also difficult to get hold of cash.”⁴

So what structural approaches make a cash supply highly resilient and capable of adapting to fast-changing disruptive situations – whether anticipated or unforeseen? And what other evolving factors – such as the changing patterns of demand for cash, the cost of cash management, and society-wide pressures for greater sustainability – come into play when building resilience into today’s cash cycles?

The routes to a resilient cash cycle

The fundamentals of resilient organizations are widely recognized by economists and management theorists: robustness, adaptability, and an ability of recover swiftly from major challenges. When applied to cash cycle players this means ensuring they can reliably satisfy “the four As” of cash:

• Accessibility (of cash to all citizens and businesses, and in reachable locations)
• Availability (cash in the quantities and denominations required)
• Acceptance (cash as a universal means of payment)
• Authenticity (cash as a medium that is wholly trusted and always fit for use)

The geopolitical and economic upheavals of recent years show the need to bring greater resilience to the cash cycle. And central banks, commercial banks, cash-in-transit (CIT) companies, and others in the ecosystem have key roles to play in addressing several of the ongoing challenges that can achieve that – internally, industry-wide, and at a national level:

Visibility: It is critical that data architectures support a holistic view of the cash cycle, providing a window into stresses in the cash “nervous system” and generating alerts when specific stresses appear. As always, you can’t manage what you can’t measure, and it is essential that the cash cycle is data-aware at all points – from the scale and distribution of ATM activity to the volume of cash being moved in and out of bank vaults. That data needs to be up to date, available to all relevant parties, and monitored for certain critical thresholds. And to be effective, such an architecture demands high levels of collaboration across the cash sector.

Historical views are also key: data showing patterns during previous periods of uncertainty (cash distribution, demand for different banknote denominations, regional differences, and so on) is invaluable for understanding and defining the optimal approaches to coping with future disruptive events.

Cash infrastructure: At all points, cash infrastructure has to be not only fit for purpose, but also capable of dealing with the rapidly changing demands that will be put on it during a period of societal or economic disruption. As such, players need to have business models and systems that ensure the robustness of their own cash operations and support resilience across the wider cash cycle.

Roles and the interfaces: Roles, cooperation, and interoperability capabilities reaching across the whole cash cycle need to be well defined and understood. That is especially important for players with cash processing operations and centers, as well as those involved in the transportation of cash.

Risk analysis: Assessing and analyzing the many risks that may negatively impact the cash cycle in a crisis is the basis for any framework for resilience. That will help to minimize impacts or even avoid disruption in the cycle altogether. But it needs to be comprehensive, spanning the securing of cash centers and vulnerability testing through to well-rehearsed contingency and business continuity plans.

Alongside these focus areas, there are interplays within today’s cash cycles that need to be addressed to strengthen cash cycles, interplays involving efficiency and sustainability.

Interplay of resilience, costs, and sustainability

The good news for cash cycle players is that public demand for cash continues to rise in almost every country worldwide.⁵ That situation is not without its challenges, but cash cycle players are meeting those head-on through innovation.

The rising costs of cash management – and, in some countries, lower processing volumes – means players at key points in the cycle are carefully rebalancing the economics of their operations while still managing to raise different aspects of cash cycle resilience.

Management consultancy McKinsey⁶ points to three main levers that banks can use to manage cash costs: making their operations leaner and more efficient through automation; the pooling of resources; and, when necessary, the downsizing of their infrastructure.

There are plenty of examples where that cost management has been achieved while still preserving resilience. One relates to ATM access. As banks in many countries have reduced the number of ATMs that they operate, the ability for individuals to access cash easily (and at no cost) has been under threat.⁷ To address the impact of the downsizing of ATM networks, banks in countries such as Sweden and the Netherlands have pooled their ATM networks under a single operation. So, even if there are fewer clusters of ATMs in urban centers, their locations are now more balanced and cash remains accessible and fee-free.

Costs are just one key element: there is also interplay between sustainability and resilience.

Reducing the ecological footprint of cash production and management is one of the main challenges of the currency industry. These efforts touch on the whole life cycle of cash, from creating banknotes from organic cotton and eco-friendly inks through to the use of standardized trays, which reduce processing steps and eliminate single-use plastic for banknote packaging and transport. Such standardization has a positive impact, by creating a greener and more robust cash cycle.

In other ways, efforts to build greater resilience seem at odds with many sustainability agendas. Any resilient cash cycle depends on a robust technology infrastructure, where redundancies and backup systems are in place to ensure that operations can continue even in the event of a disruption. For example, a bank may have a “hot standby” data center running continuously at a remote location to ensure an instantaneous failover in the event of a major disruption. Similarly, it may have a row of large gasoline generators ready to kick in if its electricity supply fails – even when that is generated by renewables.

Triggers for innovation

These interplays, however, are proving to be fertile ground for innovation – in both technology and processes – opening up new opportunities for cash cycle players.

Greater resilience can result from the elimination of redundant infrastructure through the use of co-location models, such as multi-bank cash centers. The Bank of Canada, for example, has implemented a shared-vaults approach across the country’s banks. By using G+D’s Compass Vault Network management software, the bank can monitor and manage stock levels in those distributed vaults, enabling a more intelligent distribution of cash in normal as well as in uncertain times.

In a similar manner, many banks have turned to cash center outsourcing as way to both increase resilience and support sustainability. By reducing their capital expenditure on cash infrastructure, they reduce their carbon footprint while enhancing the reliability and scalability of that key element of the cycle. In short, a win-win-win for cash management, resilience, and sustainability.

Meanwhile, the application of greater levels of automation to enhance cash distribution is playing an increasingly large role at many CITs and banks. The use of advanced route-planning algorithms is optimizing the transportation of cash between centers and ATMs/retailers, supporting more efficient, more reliable, and greener cash logistics.

As those examples highlight, tackling the twin challenges of resilience and sustainability requires the formation of strong industry partnerships. “The collaboration of all stakeholders in the cash cycle will play a crucial role,” says Gurpal Singh, Head of Portfolio & Technology Management, Currency Management Solutions, at G+D, “as cooperation and information-sharing on different levels will be important for resilience as well as for sustainability.”