Conflict & Compromise – Why Using Armored Transport For Cash Forecasting Can Be Ineffective - US
January 20, 2023
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Financial institutions have been left questioning the effectiveness of their cash operations and scrambling for ways to react as the cost of cash skyrockets, with central banks increasing interest rates to keep global inflation under control.
Handing over responsibility for all cash management services to an armored carrier may be a topic on the agenda. In the panic of seeing interest rates rise by almost 20 times throughout 2022 and hearing post-pandemic concerns on the death of cash, it may even sound attractive. While the pricing benefits and potential reduction of suppliers being managed can be cited as short-term positives, the long-term effects and the lack of control you might have over your own cash operations should raise some red flags. Furthermore, armored transport carriers introduce a conflict of interest into your business and lack the independence and specialist insights needed to provide optimized cash management solutions.
Conflict of Interest
The first cause for concern on using armored carriers for cash management lies in the business model of armored transport in undermining your ability to become optimal and remain so. Firstly, in its simplest terms, cash management is the trade-off between the cost of delivering cash (the armored carrier’s service fees) and the cost of holding cash (the interest rate). In order to have truly optimal cash management, these costs need to be balanced while accounting for customer availability and risk parameters. Therefore, given that the primary remuneration for armored carriers is one of these costs – the fee you pay per service – a conflict of interest immediately arises.
Your aim is to ultimately reduce armored carrier services or the cost of interest while maintaining customer availability. Therefore, when given responsibility for cash management, the armored carrier has the choice of either hindering their own revenue source or compromising your optimization. This is a conflict.
The CMS Analytics Efficiency Curve
The CMS efficiency curve illustrates how an institution can move from a sub-optimal cash management position to an optimal one, by balancing site visits with cash holdings. The curve shows the relationship of how a move one way – leftwards, for example, while maintaining cash holdings, impacts delivery costs (reduces them). In a situation where cash holdings need to be increased to stay optimal, the armored transport carrier could ultimately cause revenue loss as the delivery costs reduce.
Will Pricing Benefits Last?
Many institutions are tempted to hand over cash management to an armored carrier as there are often initial pricing perks. However, with the longer-term decline of cash and the challenges that carriers have been through, it can’t be guaranteed that these pricing benefits will endure. According to the FIS Global Payments Report (2022), cash as a global POS payment method is projected to decline from 18% in 2021 to 10% by 2025, while digital mobile wallets are expected to increase in the same period from 29% to 39%. This rise of electronic payment methods will have a long-term impact on the decline of cash and therefore will further challenge armored businesses as they face a decline in demand. The cost infrastructure of armored carriers, with considerable fixed costs, means that any pricing benefits promised at the outset are not likely to last.
In the short term, armored carriers have also been facing a perfect storm of issues that have already led to price rises in contracts. Rising inflation has driven up the cost of fuel and labor, and with inflation still not under control going into 2023, the cost of running services is likely to increase further. Contributing to that are record labor shortages, which are yet to recover following the pandemic.
Locked in with Less Control
It’s also easy to consider it beneficial that by handing over cash management operations to an armored carrier, you would be reducing the number of vendors you manage. However, the nature of your relationship with the vendor would change significantly as they would now be responsible for cash management as well as armored transportation, and there would be a significant change of operational process.
If you were to experience performance issues with the vendor, it may become more difficult to hold them accountable. More services may need to be scheduled to make up for performance shortfalls or the carrier could manage their operations ad-hoc to secure the service. The first of these options would present a cost increase and the second could reduce the oversight and control you have on your network.
Lack of Optimization Strategy
Armored carriers are also not cash management optimization specialists – they are armored transport specialists and the view of optimization is often oversimplified – most likely purposefully due to the conflicts of interest. They may speak of optimization, but the action is simply forecasting – often one algorithm and a software-based approach that doesn’t account for the nuances across your network.
One algorithm is static, unresponsive and will lead to a sub-optimal cash management strategy. Forecasting needs to be dynamic, unique and respond to the changing customer needs across your network. Dynamic forecasting which leverages both human decision-making and a roster of forecasting algorithms, is essential for optimizing cash management operations. In our experience the tools used by armored transportation services tend to be too basic in nature to achieve this balance.
Stick to the Specialists
Cash management should always be independent of conflicts, otherwise your optimization will be compromised. Sticking to independent experts in the field will ensure that your cash management operations are always cost optimal, without having to compromise on customer availability or risk, while matching the requirements of your network.
CMS Analytics is the leading specialist providing dynamic cash management solutions to some of the biggest banks, credit unions and cash operators around the world. We help optimize cash operations to increase efficiency and reduce costs.
Get in touch today or explore our content to find out why we are the cash management experts.