Transoft International, Inc.

CURRENCY MANAGEMENT AT BANK BRANCHES – CAN IT BE SUCCESSFUL?

Many banks around the world have attempted to centralize currency management and determine the optimal amount to be held at the individual bank branches.  The implementation has taken many forms, some of which have been highly successful and some that have not achieved their goals.

What are the steps to make centralized currency management successful?  What are the pitfalls which can derail a branch currency management project?  The aim of this study is to identify the best practices and the dangers of centralization projects and to examine the decision factors for a bank when considering branch cash management.

What is Currency Management?

Let’s start with what the term ‘Currency Management’ means in today’s banking environment.

As anyone in the banking industry knows, cash will not go away easily.  Although the demise of cash has been predicted for decades now, the statistics continue to point to the use of cash for purchases as a standard way of life.  In fact, there is more cash in circulation now than ever before, and year on year the volumes in circulation have continued to increase.  

Financial institutions have to manage this accumulation of cash on a daily basis to meet reserve requirements and to avoid cross-shipping with central banks.  How do they typically do it?  The answer is twofold: spreadsheets and experience.  

Experience

Many banks have continued to allow local branch employees to determine how much cash is necessary to service their walk-in customers.  For some branches, this is not a problem.  Employees who have been with the branch for many years, sometimes decades, can often easily make the calculation on how much cash is necessary to keep in the branch between courier runs.  Their years of experience have taught them the demand patterns at the bank.  But even these experienced employees are not told about the changes in the cost of cash or how much the bank is charged for those courier runs.  Employees are making the decision based solely on what they know to be the demand.  So where are the bank’s cost savings opportunities when the cost of cash goes up or a carrier contract renegotiation means that the per trip costs have risen?

Spreadsheets

For those banks who have attempted to monitor branch cash centrally, what started out as a simple task has grown out of control.  As the branch networks have grown organically, the demand-tracking spreadsheets that seemed simple to use 15 years ago are now unmanageable, prone to human error and take an inordinate amount of time.  Add to this the new compliance regulations, particularly Sarbanes-Oxley legislation, and banks are being forced to go beyond the spreadsheet to improve their cash management processes.

What are the goals of Currency Management?

When a bank makes the decision that it is time to centralize currency management, what is it trying to achieve?  The #1 answer is always cost savings.  No matter how much experience a bank’s employees have or how good the spreadsheets are, because they are focused on demand, neither of these things can effectively and permanently reduce the cost of maintaining cash in the branches.

Another goal might be to centralize the balance and demand information in one place.   All branches enter their end of day balance information into the bank’s core system.  This information is supplied to the general ledger.  But is there one system which collects and displays all of this information in one place?  Is there a system which provides access to all of the historical balance and demand information for all of a bank’s branches at once?  While it is certainly possible that a bank could build an in-house solution to include this information and some banks have succeeded in doing this, they are typically resource-heavy and limited in growth capacity.

Centralization of expertise may also be an objective for a currency management solution.  As mentioned previously, most banks currently have individual branch employees spread throughout the network making the cash decisions locally.  Some of these staff members may be quite good at estimating demand but some may not.  Along with the level of experience, how much time does it take for each of these individuals to perform the calculations and make the decision on how much to order or return?  For many banks, bringing a small group of people into the operations or retail area to analyze and focus on the amount of cash in the branches is well worth any FTE costs in time savings at the branches.  By providing this group with a solution that analyzes demand and holds cost information the analysts can gain a holistic view of the cash in the network, allowing not just for optimization but also key metrics reporting.  

Lastly, many banks use the currency management project as a chance to overhaul the ordering process as well.  Many banks – large and small – still place currency orders via telephone.  By implementing a currency management solution, the bank also gains the opportunity to implement an automated ordering process.  This can be done by either ‘auto-committing’ (automatically accepting the recommendation provided by the new currency management solution) or using a web-based interface within the currency management solution which combines the order recommendation along with the order mechanism.

With so many benefits, what can possibly go wrong?

Optimizing cash at the branch level seems like an obvious choice so why doesn’t it always work?  There are a few things that can make a branch say ‘This just doesn’t work for us.’ which then negatively impacts the benefits that can be derived from cash management.

Many banks have been allowing branches to make their own decisions for as long as they have been in existence.  This has given branches almost complete control of the amount of cash they hold.  Sure, the Treasury department or the Retail division might look at the cash ins and outs and set a limit over which the branch cannot go.  These limits are often set a bit higher than necessary to allow the branch to make adjustments.  Branches will then keep an amount on hand that allows them to feel confident that they will never run out.  The logic behind this doesn’t relate to cost optimization.  It reflects only the demand at the branch.  It is very easy for a branch to look at this new cash optimization solution and say ‘I’ve been fine for the last 10 years.  I don’t need a system to tell me what to do.’  Taking away that autonomy at the branch and making them feel that they no longer have control can be frightening and many branches will reject it outright.

Another area that can cause a problem for branch acceptance is not giving them enough information to understand where the recommendations are coming from.  Simply telling a branch ‘We have a great new system that will determine how much cash you need.  All you have to do is order/return what it says.’ isn’t going to do it.  Because branches have been doing this on their own for so long, they aren’t going to understand if the days and amounts of the recommendations don’t match what they would have done.  This produces an immediate response of ‘This thing is broken.  It doesn’t work.’  To respond to this, we will examine what information can be shared with the branches so they can see WHY the solution has provided the recommendation that it has.

The last thing -- and this can be extremely important at certain times of the year -- is a neglect to share information on local events.  Because branches have been autonomous for so long they often adjust their order/return amounts according to events that they know about in their immediate area.  For example, if the local church is holding a festival or the shopping mall is giving away gift certificates, the local branch may know about this but forget to tell the central cash management team.  The recommendation sent to the branch will then fail to reflect this information.  When the communication on events fails, a branch may not understand why the recommendation doesn’t include this information and the cash management team doesn’t understand why the branch is ordering so much extra cash.

Unfortunately, there are many things that can cause a branch to think that this optimization business is not for them.  The good news is that there are things that a bank can do to improve its chances for a successful implementation of optimization in the branches.  There are banks that HAVE done this successfully and they have achieved it by using a collection of tips, tricks and tools.  In the next section, we will examine these methods and processes and learn why they work.

How can we successfully optimize cash in Bank branches?

Let’s examine these one by one.  A bank does not need to use each of these but instead determine which of these will work best in their environment.

1)    Management buy-in

Without everyone in the management hierarchy within an organization supporting the cause of cash management, the project will be unlikely to succeed.  In banks that have successfully implemented a cash management solution in branches, management have not only supported the project but have also found ways to reinforce it.  

Once the recommendations have been proven – showing that the cash management solution WILL NOT let the branch run out of cash – the administration can require that a branch follow the recommendation or even go so far as to allow a central team to manage cash for the branches, rather than letting the branch override or decline a recommendation.  Some banks may penalize a branch when they override or decline or they may take a positive approach and provide incentives to branch managers who follow recommendations and successfully reduce the cash in their branches.

This management buy-in can go a long way toward driving success as long as the orders coming out of the cash management solution have been proven to the branch.  There are a couple of pitfalls to requiring a branch to comply or to taking the process completely out of the branch’s hands.  For example, what happens when a branch has a big event in the neighborhood that was not captured by the cash management solution?  It could be a simple oversight in communication between the branch and central team or it could be a new event that has never happened before.  In this case, the central team will send an amount that does not reflect the special demand at that branch for that time period.

Another example occurs when a bank is unable to provide denomination information by branch. It is extremely difficult for a branch to comply with the recommendation given by the cash management solution when accurate denomination data isn’t available.  Most cash management solutions will provide the option to recommend by denomination.  Many will allow the bank to define the denomination mix that they want, but without actual denomination data no solution can tell a branch exactly what they need.  In this situation, one solution is to provide an overall recommendation to the branch and then let them decide the denomination breakdown for that recommendation.  This gives them some decision-making capability and still provides overall savings for the bank.

2)     Branch buy-in

In addition to the management buy-in, some banks have chosen to forgo immediate optimization in order to ensure that the branches are comfortable with the new solution.  This means that it will take longer for the bank to achieve their return on investment (ROI) but it also means that they have a greater chance of ultimately achieving over and above the ROI.  

To do this, banks can set up the new solution to closely reflect the branch’s current ordering pattern – both timeframe and amounts.  While it directly competes with the idea of cost savings, it encourages acceptance of the orders from the start.  This allows the branch to think ‘Okay, this system seems to work pretty well.’

Over time, the bank can start to adjust the parameter settings and cost structures to achieve true savings after the branches have had a chance to agree that this new solution is a good one.  The adjustments should be done slowly -- for example, by reducing the buffers for a few weeks followed by improved cost parameter settings.  The end result is an accurate recommendation that truly optimizes the cash in the branch.

3)     Start small

It’s common knowledge that there are pros and cons to the big bang approach when rolling out a new application.  While it can be good to start fresh across the board, it can easily backfire.  The smallest problem can become huge when it affects multiple branches, especially if they are talking to each other about the issue.  The last thing a bank wants to do is create a negative image before the project is off the ground.

To combat this, many banks will choose a control group of branches – they could be small or large, have heavy deposit volume or heavy withdrawal volume, they could be good at managing cash or poor at doing so.  By using a subset of branches, the bank can perfect the settings and the process before rolling it out to the remaining branches.  In addition, by the time the pilot is completed, the bank has a group of branches willing to talk about the new solution’s usefulness.  It always helps to have a few branches willing to ‘sell’ the new process for you.

From this point, the bank can roll out the cash management solution in phases.  Whether they are grouped by region or by historical cash management success, rolling out in small groups is much easier than the big bang approach and increases the overall probability of success.

4)     Providing backup information

As we discussed above, one of the key difficulties in implementing a new cash management solution is that the branches have been in control of their own cash for their entire history.  They have an idea of how best to determine what cash is necessary to meet demand and it works for them.

When a new cash management solution is implemented, they now have a computer telling them what to do.  The branch cannot see the analysis that has gone in to the implementation, they cannot see the parameter settings for their individual branch and they do not know if the central cash team understands the particular quirks of their branch.  If, in the rollout, we set up the solution to simply say “Order $200,000” or “Return $150,000” to the branch and that branch would have done something different in the past, then they will immediately think that this solution does not work.

How to fight this?  Provide information.  The branch needs to know that the recommendation being sent to them was calculated based on history.  They need to see what the solution believes is going to happen in the future.  If they know that the solution is going to recommend two cash deliveries a week instead of the one delivery they have been receiving, they will know that the solution isn’t going to let them run out of cash even if the total amounts aren’t as high as what the branch would have done in the past.

Simply put, providing backup information for viewing by the branch can be the key to whether a cash management implementation is or is not successful.

5)    Give the branch an opportunity to provide input

Many banks would prefer to get to a point where all cash orders to and from the branch are determined and processed by a central team.  This is a great idea and is definitely a goal worth achieving in the long run.

Again referring back to the fact that branches have always placed their own cash orders, taking this autonomy away from them can be alarming.  One way to combat this is to give the branch the opportunity to make changes to the recommendation produced by the solution.  You may ask yourself, ‘How can I save money if I’m just going to let the branches change the recommendation to what they would normally do?’

The answer is, you won’t.  Giving the branch the opportunity to keep changing things without any oversight doesn’t work.  However, a good cash management solution will make it easy for the central team to manage these overrides by the branches.  By allowing the central team to see when a branch overrides, you give them to power to work with the branch to understand why they are doing so.  Not only does this give the central team the ability to make adjustments to the application to get better recommendations for the branch, but it also provides a training opportunity.  When the central team can explain WHY the application is suggesting what it is, the branch can better understand that the solution will not allow them to run out of cash.

The end goal is to have a cash management solution that provides recommendations which will achieve cost savings that a branch understands and accepts.

6)    Prove that it works

After all of this time deciding how much cash they need to have on hand at a branch, branches want proof that this new solution is really going to work for them.  Not all solutions can provide this clear picture showing that the application will not let them run out of cash.  However some can do so and they provide an invaluable simulation tool to display the full worth of the solution.  Simulations provide a comparison of what the branch has historically done alongside what the new solution would do given the same information.  In addition, the modeling functionality will provide a calculation of cost savings to show that not only will the solution provide the right levels of cash at the branch but they will also save money at the same time.

7)     Free flow of information

One of the key elements to success is having a consistent dialogue between the branches and the central team.  At the beginning of the branch rollout, the central team will work with the project team to set up the parameters for each branch such as denominations, business days and events.  While there will be communication with the branch through this process, inevitably some settings will be erroneous and some local events could be missed.

Without the communication flow between the central team and the branches, these will not get fixed and new information will not be exchanged.  The end result will be recommendations that won’t work.

It is imperative that a standard communication method be established and each party be encouraged, even required, to use it.  That communication method could take the form of e-mail or perhaps the new optimization solution will have an internal messaging system that can be utilized between team members.  Another option is to set up a form on the bank’s intranet that the branch can use to note issues and have it sent to the central team.  This form could be used to capture all relevant data and facilitate future phone discussions, if necessary.

8)    Getting the denominations right

One of the first questions that a bank will ask when reviewing options for cash management solutions is ‘Can you recommend orders/returns by denomination?’.  Most suppliers will say ‘Yes’.  But the question is ‘how’, and does it make sense to recommend by denomination for your bank?  

Instead of giving an unequivocal ‘Yes’ answer to this question, a supplier should be asking a question: ‘Can the bank provide historical data by denomination’?  If the answer is yes, then the bank can truly achieve accurate recommendations by denomination for each branch.

If the answer is no, then the bank has a few other options to consider for a successful branch rollout.  In keeping with the theme of granting control to the branches, the bank can set up the new optimization solution to provide recommendations as a total and then allow the branch to decide the denomination breakdown.  For example, if the total recommendation is to order $170,000, then the branch can decide what denominations should make up that total amount.  This works for the simple fact that the branches still get to make the final decision.

Another option is to calculate the recommendations based on the previous denomination breakdown of orders.  While this is not perfect, it is an option and is better than setting a breakdown based on a loose estimate.

Summary

Cash continues to be necessary in all of the global markets for consumer’s everyday purchases.  As long as cash continues to be used, the requirement for currency management at ATMs and branches will also persist.  Whether a bank is looking for cost savings, centralization of information and expertise or to re-engineer the ordering process, the bank must determine the best way to make this project a success.

In this whitepaper, we have reviewed eight different things that a bank can do to achieve their currency management goals.  A bank does not necessarily need to do all eight of these things, but instead, choose those which best fit the bank’s environment.  If the bank chooses not to require compliance with the optimization solution’s recommendations, then determine how best to communicate with the bank branches to encourage compliance.  If the bank does not have denomination information, then decide if it is best to allow the branch to override the recommendation or if it would be better to permit the branch to choose the denomination breakdown.  

The most important element in a successful branch currency management implementation is communication between the bank’s currency management team and the individual branches.  Allow the branches to provide input on what would help them understand the recommendation and incorporate that into the project plan.  By keeping communication as the overriding element in the project, the bank can collaborate on a successful project which will ultimately achieve the maximum cost savings for the bank.