The Battle for the Centre Ground
In currency management, the note/coin boundary and the calculation of where this should fall is critical to public acceptance and usage of banknotes and coins, to optimising inventory management, to minimising the costs of production and circulation and, as a result, to minimising the lifetime cost of ownership and maximising the income from notes and coins (ie seigniorage) for issuers.
Various models have been developed by issuers and suppliers for making this calculation, based on factors such as historical usage, rates of pay, mean lifecycle time, money supply and so on. Empirical theories and calculation aside, three of the key functional factors that are determining this boundary are longevity of notes, raw material price and security of coins.
The decision to issue a coin or banknote is generally straightforward at the low end or the high end of the denominational spectrum, but the decision on where to set the boundary between coin and note in  the middle denominations has never been more complex.  And it is becoming something of a battleground as banknote suppliers look to protect  their market share by making longer-lasting notes, while mints do likewise by developing more cost-effective and secure coins.
Cost is very much the driver  at the moment; substantial  increases in raw material prices are affecting printers and mints alike. Cotton prices have risen dramatically – by 350% in the last two years – and so banknote prices will rise or margins reduce. Where that increase will hurt most is in the low denomination notes that do not have  high margin  anti-counterfeiting features, where 40-50% of the cost of substrates is in the cotton (even before this 350% hike).
Narrowing the Gap
But passing on this increase in raw material cost to the customer is not always easy. Where banknote substrate suppliers can maintain profitability  is by increasing market  share – not only at the expense of one another, but by replacing  coins with notes at  the note/coin boundary. Their ability to do so is  limited by the greater longevity of coins, so narrowing this gap between the lifecycle costs of coins versus notes is their objective.
And this is what they are trying to do – pioneered by Securency  with polymer, and followed by the development of more durable cellulose substrates. Much of the competitive debate has been between the respective merits of polymer versus paper in terms of longevity and security. However, De La Rue, with its introduction of Flexycoin, has bypassed such debate. It has made no attempt to extol the merits of its own technology compared with any of its substrate competitors, instead making an overt pitch for the middle ground between conventional coins and paper.
This is an interesting new tactic, and represents a challenge to the coin industry, which has always maintained that longevity outweighs the initial cost of issue of a coin.
Base metal costs have also increased significantly recently. The raw material cost is even more of a problem for coin mints because metal makes up around 90% of the cost of the finished products.
Costs are already being addressed by the development of electro-plated materials. The issue is also being addressed by the substitution of bulky and heavy coin with smaller, lighter versions, which reduce not only the costs of production, but also transportation and circulation. The Swedish Riksbank is doing just this, and in the process has calculated that it will save itself a fortune, almost enough to finance the changeover of its notes and coins over a seven year period.
But the intractable issue of security remains, particularly since coin counterfeiting – never viewed as a significant issue before – is on the increase (for example, in the UK, some estimates put the level of counterfeit £1 coins at 4%, and by some estimates as many as 15% of the Swiss CHF 5 coin are counterfeit). As we also explain elsewhere in this issue, the change from homogenous to plated coins impacts on security since the recognition in coin acceptance devices is based, in part, on measuring the coins’ EMS, which for electroplated coins is not as effective as that of homogeneous metal alternatives.
This is not a problem for low value coins, as they are not subject to large scale counterfeiting. But it means that cheaper, plated coins are not recommended for higher value denominations. Instead, the industry is working on utilising taggants that will provide a more accurate and precise machine-readable signal. For these to be effective, however, the whole  infrastructure for processing and authenticating coins will need to be upgraded  in the same way as it is for notes.
And it is not just machine-readability that is an issue. Coins cannot carry the same level of visual authentication features as notes. But there is nevertheless substantial room for improvement in what is already available by way of bimetallic coins, micro-engraved latent images, complex raised and recessed features etc.
Education Needed for Impact
Again, the industry is working on new features. Similarly, however, the sort of education campaigns for the public and cash handlers that are a feature of banknote issue will need to be conducted for coins with enhanced security features, if these are to have any impact.
The battle lines for the coin/note boundary are drawn. To provide a political analogy, one politician in the UK remarked recently that when you are in opposition, you move to the centre ground. But when you are in government, you move the centre ground. The same can be said in the currency industry.
And to coincide with all of this, the coin industry now has a conference purely covering circulating coins. All of the above issues will be covered during this conference.
But which of the two sides of the industry – coin and notes –  is moving to the centre ground and which is changing its position remains to be seen.
