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For any financial institution, of any size, cash management is always one of the top priorities when running a cash operation. At the time of writing, the cost of cash is the highest it’s been in over 20 years in the US and across the globe. For credit unions, this brings about challenges and opportunities for network optimization throughout the entire cash operation.
In this blog series, we will explore how credit unions can leverage their unique size and scale to drive innovation and cost savings. Part One will explore the impact of the dynamic macroeconomic environment, specifically inflation and interest rates. Part Two will look at consolidation within the wider credit union markets and how collaboration can yield efficiency gains. Finally, in Part Three we will provide an all-important action plan designed to help you as credit unions realize cost savings throughout your operation.
As previously mentioned, cash management costs are the highest they’ve been in over two decades. This is primarily driven by interest rates and, indirectly, through inflation. Per the graph below, the latter has eased somewhat from its peak last summer; however, the former remains elevated at a 22-year high. But how did we get here?
Prior to the COVID-19 outbreak, inflation was fluctuating between the target rate of 2%. Then, after several months of lockdowns, the Federal Reserve deployed an expansionary monetary policy to stimulate growth through a period of economic turmoil. This, combined with global supply chain imbalances - and the geopolitical conflicts, drove inflation to 40-year highs in the summer of 2022. Fortunately, in December 2023 inflation fell to 3.4%, but the price increases over the two-year period are now built into society.
In their efforts to curb the inflationary pressure, the Federal Reserve has hiked interest rates 11 times since March 2022 to the current 5.25 – 5.5% range, as seen in the below graph. While these policy changes have successfully lowered inflation, the path forward is still uncertain.
During the Fed meeting in January, the chair insisted that the current rate is at its peak for this tightening cycle. The next meeting is scheduled for March. While a reduction seems unlikely at this stage, it is expected that these rates will begin to ease at some point this year.
The macroeconomic environment in the US shifted dramatically in just short of two years. Going from a period of record low interest rates, to the highest in two decades. These changes affect cash management in multiple ways, both directly and indirectly. For credit unions, the two main areas of impact are: direct cost impact through cost of cash and, more subtly, through changing consumer behaviors, rendering previous operational strategies sub-optimal, which is in turn increasing costs.
The change in interest rates has caused a shift in the cost structure for credit unions. Just two years ago, interest rates were at record lows, meaning the main cost of cash management was the armored carrier budget. Now, the consistent Fed hikes have tilted the cash management scales, causing the cost of cash to become the main burden.
This wasn’t always the case. In the immediate 8-years after the great recession and before the Fed began its current tightening cycle, interest rates were less than 0.25%. For institutions, this made cash management strategy very simple as this effectively voided one half of the cash management equation and drove a period of inertia within the space.
By doing this, operators were lulled into a false sense of security as the cost of an inefficient ATM and branch network were negligible. Institutions then overstocked their machines to minimize ATM cash outs. If operations were to remain consistent with these practices today, the cost of this inefficiency would be 22x greater.
Changes in the macroeconomic environment are also indirectly impacting cash management costs by current operational strategy both inefficient and outdated.
The role of cash is changing within society. Cash is being used less for transactional purposes and more as a store of value. Individuals are holding more cash and using it for exchange less. Since 2019, there has been a 10% decrease in the share of transactions carried out in cash. During the same period, the average American is holding 22% more cash on their person.
A direct consequence of this behavioral change is an increase in the average transaction value of an ATM withdrawal. In 2019, the average consumer withdrew $156 from an ATM, with this figure increasing by 27% to $198.
On a positive note, this movement signals a greater reliance on the ATM and a shift away from in-branch withdrawals. Operationally, this has the potential to drive unnecessary services and costs if not managed correctly.
In a multi-denominational ATM, the machine is typically considered to be out of cash when any one denomination is cash out. As ATV has increased, it’s likely that the largest denomination will be dispensed more often if ATM dispense strategy remains constant. This bill may now be over-utilized relative to its capacity constraint. If not addressed, this will drive the replenishment schedule, which directly increases balance sheet costs through the armored carrier and costs associated with machine downtime and faults.
With that said, withdrawal replenishments shouldn’t be the only concern. All too often we find credit unions neglecting their deposit schedule. As mentioned, individuals aren’t using cash as often, and therefore want to return it to their accounts via deposits. As a result, we have seen depository demand surge across the US.
This is increasingly a cause for concern for credit unions prioritizing member satisfaction. With deposit bins filling up quicker than ever, more instances of unsuccessful deposit transactions are occurring, leaving members unsatisfied with their service.
To dampen the effects of this behavioral change, institutions often react by increasing their deposit pulls, again increasing costs. To ensure holistic efficiency, credit unions must optimize their schedules with respect to both the cash-in and cash-out component of their ATMs.
With no sign of interest rates returning to pre-pandemic levels, the time for change is now. Institutions must adapt to the dynamic environment to optimize for the current climate. In the next edition of this blog series, we will discuss consolidation and the consequences it can have on a credit union. Finally, in Part 3 of this blog series, we will outline an action plan highlighting how you as credit unions can leverage your network size and scale to realize cost savings throughout your cash operation.
