Financial institutions (FIs), such as banks and credit unions, set limits on the maximum amount of cash they can carry in their branches and ATMs. These limits reflect cash needed to maintain insurability, regulatory compliance and risk management, and to meet fluctuating customer cash withdrawals. And that’s all well and good. But most cash is managed up to this maximum cash limit, and this is the biggest pitfall of branch cash management today.Holding to the maximum limit isn't branch cash management at all; it’s a disservice, an adverse adherence to a rule that hurts the bank or credit union’s profitability. Instead, banks must micro-manage their cash, analyze daily cash movements and variances at individual branches and ATMs, and track customer demand for cash relative to inventory.
But Too Much Vault Cash Hurts Bank Profits
That said, vault cash is a non-earning asset, and holding more vault cash (than average statistical demand) diminishes a financial institution’s profits. While foregone profits may not sound like too much on a one-day snapshot, multiply that by 365 days in the year, and you’re looking at tens of thousands in foregone profits, even for the smallest of banks.
In addition, that excess cash might not be the right type of currency for the branch. A bank or credit union could be well over their typical demand levels, but still run out of a specific denomination frequently. So the FI would have been better off if its excess cash on hand could have been deployed into the right currency.
Limits are Good
In today’s rising rate environment, bankers realize that the opportunity cost of holding on to too much cash is increasing. The institution of limits, a maximum cash level for branches and ATMs, is set so this cost does not get out of hand.
A cash limit is set to serve as an alarm threshold that alerts management to excessively high levels of cash. A branch routinely meeting or exceeding its cash limit is a warning sign that management is not managing cash levels and that management’s goal for limits has been lost. Typically, branches keep their cash levels at their limit or close to it. And, limits are not monitored as a “threshold of a maximum”, but as “keep your cash at this level or below.”
Equally important, while operating below the cash limit is good… it’s not good enough… because that in itself does not imply that the bank or credit union is optimizing its cash most effectively.
Managing Cash Today
Branch and ATM managers use limits as the singular reference point on how to manage their vault cash, and in so doing, unnecessarily hold onto a non-earning asset (cash) and significantly reduce a financial institution’s profit potential.
Cash should not be managed up to the maximum limit but instead, FIs should manage cash down to usage. Especially when readily-available branch cash management tools can solve for usage and historical trends for each branch's unique needs. Managing cash to usage allows branches to reduce cash levels to match actual demand, while ensuring each branch has enough cash for special events and high cash outflow days.
If every local branch and ATM deployed branch cash management tools – to manage cash down to actual usage – and reinvested the rest, banks and credit unions could see a sizable boost to their profits, without having to worry about branch runs or other risk factors.
Cash Inventory Needs to Be More Dynamic, Real-Time and Data Driven
For the most part, cash limits are set once a quarter or once every six months, as ball-park estimates, with almost no connection to how much cash the branch actually uses on a daily basis. Cash limits should be used as intended, as a maximum – “do not reach and do not exceed.” In addition, limits should be monitored so if a branch continues to manage to the maximum or within a certain threshold of the limit, management quickly addresses the situation and takes remedial action.
Next, these limits are only revisited every three to six months or longer, and that’s a lot of opportunity lost. Cash on hand should only be determined after analyzing real, daily cash inflows and outflows. Prudent bankers anticipate average withdrawal demand, add an allowance for unanticipated spikes in withdrawal based on past history, and compute reasonable cash levels to meet routine and non-routine cash demands. To maximize profits, FIs should identify patterns in their local cash demand by reviewing usage - such as spikes in cash to meet end-of-week business payroll; withdrawals on the second, third, or fourth Wednesday of each month when Social Security checks come in and seniors rush to take money out; gift-giving or heavy purchasing seasons such as the Fourth-of-July, Christmas and Thanksgiving, etc.
In addition, FIs must factor in the fluidity of cash demand at each branch and ATM, locally… one size does not fit all. Local branches should carefully measure, track, analyze and factor-in events such as county fairs, back-to-school, spring break, and other recurring times when demand for cash goes up locally.
In today’s world of big data intelligence, where we readily have computational tools to slice-and-dice oodles of data, the old world approach - of near-static cash limits - is completely inexcusable! And while a financial institution’s administrators and risk managers have time limitations, FIs serious about maximizing profits should outsource this manual and time consuming function to intelligent branch cash management tools that can easily synthesize cash flow data, and deliver daily or weekly cash holding targets.
With the U.S. economy on a steady and stable growth trajectory, the appetite for business and personal loans is strong, so bankers should do all they can to boost branch cash management, loans and investments, and, subsequently, profits.