More and more businesses in the US have stopped taking cash. Unfortunately, this trend is being capitalized on by the likes of Square, Paypal, Visa and others when it should be prime consulting territory for treasury management department at banks. Cash handling usually costs between 5% and 12% of expenses plus slows down the number of processed customers. In places like Sweden, only 20% of the retail shops still take cash, and the US will be following suit. In this article, we look at the current cashless trend, the profitability of moving our customers to a cashless platform and how banks can take a leadership position to further assist their customers.
Cash and Cashless Trends
Cash traditionally makes people feel secure, and security is the number one reason while most US consumers choose to pay with cash. However, that attitude is changing as cash is statistically much less secure than electronic payments. While the public hears about ID theft and debit/credit card fraud, it rarely hears about all that cash that is stolen, lost, destroyed, counterfeited or unknowingly received as a result of criminal activity.
The US Fraud Survey of 91 retailers projects that the total cash lost due to shrinkage is over $60B per year. Compare that to a 2010 study by the Federal Reserve Kansas City, puts all card losses at $3.7B per year.
From a government standpoint, according to leading taxpayer groups, $400B to $600B of transactions go unreported annually. Moving away from cash would dramatically decrease illegal taxless transactions lowering the cost of taxes for all legal transactions.
A recent 2017 study by ING Bank of almost 15,000 customers shows that 34% of US consumers try not to use any cash - a percentage more than double from 2015. Also, 78% of survey respondents report that they plan to use less cash in the next 12 months.
A half-century ago it used to be common to pay utilities, rent, hotel rooms and your mortgage in cash. Now that is rarely done. In the last several years, places like gift stores, grocery stores, drug stores, department stores, gas stations, airlines, and restaurants now take a majority of their payments cashless for the first time in history.
In the next several years, parking meters, person-to-person payments, public transportation, toll roads, taxis, fast food and many retail shops will have a majority of their payments come in cashless form.
Benefits For The Business
While few businesses like paying credit card and interchange fees, most businesses don’t take the time to understand the cost of cash. Counting, reconciling, managing and banking cash all takes time and resources. A chart from a recent study below breaks this down.
While it varies by size and percentage of cash, our analysis shows that it takes 20% of the total labor hours to deal with cash. For example, for an average grocery store, the IHG Group estimates that it takes a total of 193 hours per month per store just to handle cash.
Transactions without cash are faster saving a minimum of seven seconds and an average of 22 seconds. That is no big deal for a doctor’s office, but for a coffee shop, that savings and customer convenience alone could be a material benefit.
Finally, we point out that the average transaction tends to be approximately 12% higher when going cashless compared to cash which is a significant revenue enhancement. Add to that the loss from cash theft, the enhanced safety of the employee of not dealing with cash and the economics tilt even more in favor of going cashless (Except for stores in Massachusetts where stores are mandated to take cash).
Benefits For The Bank
Banks, of course, spend a ridiculous amount of time moving and managing cash. While cash isn’t likely to go away soon, it is already in the process of being dramatically reduced. Banks are not only in the perfect position to add relationship value to their clients but almost need to do this to help their survival.
The rule of thumb is banks spend approximately 15 basis points of their deposits handling cash. For a $1B bank in New York, for example, that is $1.3mm per year or 4.2% of total expenses. Banks that have developed cash management consulting expertise have reduced that amount an estimated 20% by just helping customers reduce their cash need. By moving commercial and small business to a cashless operation, savings is estimated to be closer to 40%.
As more commercial customers go cashless, the fixed cost of handling cash increases for everyone making it uneconomical overtime. Banks that are slow to understand and execute on this trend will find themselves on the losing end of this value proposition in the next decade.
Ways To Add Value – Optimizing Cash and Beyond
Banks without a long-term strategic plan will falter here which is another reason to increase your strategic horizon to ten years. Just as all banks need a plan for how they are dealing with the phase-out of processed items over the next five years, all banks will need a strategic plan on how to deal with the phase-out of cash over the next ten years.
Bars, restaurants, specialty stores, and fast food locations are excellent places to start since they remain some of the biggest cash traffickers.
How to go about doing this? Below find some areas where banks can develop in-house expertise to become trusted advisors to commercial clients. These steps all form a transitional action plan to reducing current cash needs while moving customers to a cashless execution over ten years.
Cashless Payment Options: Of course, the first place to start is to make sure commercial and small business customers are utilizing cashless options such as person-to-person (P2P) applications; business-to-person (B2P) functionality, including one-to-many electronic payment distribution; credit; debit; and, ACH solutions. Banks, for example, have been amazingly slow at marketing Same Day ACH despite the potential cost savings and benefits for all parties.
Software and Consulting: While large retailers have this taken care of, middle-sized and smaller retailers can benefit from cash optimization consulting. There is a broad category of software solutions that banks can either provide or develop expertise in helping customers better leverage their use of cash. These applications analyze the flow of cash and suggest cash levels per location gave a variety of factors including sales trends, seasonality, and correlative factors. This reduces the level of cash and the frequency of cash-in-transit. It saves costs for the business, reduces the cost for the bank and lowers risk for everyone. Another class of software application and consulting revolves around cash reporting, audit and workflow optimization. This functionality enables businesses to have an accurate inventory of all cash, monitors fraud, cash shrinkage and fees in addition to making recommendations on cash/cashier staffing, layout, and trends. Many of these applications connect into point-of-sale terminals to make integration relatively easy.
Recycling Solutions: Many customers waste time and bank fees moving cash back and forth between their store locations and the bank. Helping customers understand how a cash recycler can save time, reduce risk, cut fraud and optimize cash is an easy solution that banks often overlook. Just as all branches should be considering a cash recycler for their retail platform, a majority of our customers should be doing the same. Recyclers can automate the counting of cash, create opening cash drawers and reconcile closing drawers. These solutions come in a variety of sizing helping almost any business from a doctor’s office to a large grocery store operation.
Smart Safes: These safes are networked to the bank and allow for the running total of deposits providing real-time reporting and on-premise vault services. Banks get to reduce their vault cash reserve, generate fees, optimize armored carrier pick up while saving everyone time. Combine with a cash recycler and cash balances can easily be optimized instantaneously reducing cash usage by 10% to 40%.
Point of Sale Systems and Self-checkout: Banks can work with a variety of vendors to help their commercial customers utilize a variety of cashless point of sale systems and self-checkout kiosks that reduce cash, speed transactions, and cut labor costs.
Putting This Into Action
Banks that struggle with finding a value proposition can easily develop expertise in cash optimization to help the retail establishments in the community reduce both cost and risk. This skill set not only helps set your bank apart but helps drive down costs for all while driving up bank profitability. Optimized cash for the business means more cash balances for the bank.
Going cashless doesn’t happen overnight so having a longer-term strategic plan can help point the bank in the right direction in order to develop the products, skill set and business organization to help clients first optimize their cash management and then move them to a cashless operation. Treasury management is one of the most profitable product lines in a bank and the key to winning valuable corporate business. In the future, treasury management services will be even more important and banks that can add value now will have a higher probability of being around to see that future.
To learn more about global payment trends behind one day being cashless, please find a recently released BIS study on the topic.
Submitted by Chris Nichols on May 02, 2018