Case Study: the South African Cash Circulation Model – at the Forefront of Innovation

Since last year, Currency News has been running a series on cash circulation models around the world, and has so far looked at three countries: Norway, Israel and China. In Israel and Norway, the central bank has removed itself – either partially or entirely – from the cash circulation process (Norway has even outsourced the destruction of banknotes). In China, on the other hand, the central bank continues to maintain direct control over cash circulation, up until the cash reaches the commercial banks. The focus now turns to South Africa, an early adopter of global cash management technology which has one of the most forward-thinking cash industries in the world.

South Africa’s currency, the Rand, is produced by South African Bank Note Company and the South African Mint, both subsidiaries of South African Reserve Bank (SARB). The currency was introduced in 1961 and takes its name from Witwatersrand, the ridge upon which Johannesburg is built and where most of South Africa’s gold deposits were found.  South Africa is part of the Common Monetary Area along with Lesotho and Swaziland. The Rand is legal tender in Lesotho and Namibia alongside their national currencies. It is also used unofficially in Swaziland and Zimbabwe as well.

The Rand is denominated in banknotes of R 200, 100, 50, 20 and 10, and in coins of R5, 2 and 1, and 50, 20, 10 and 5 cents.  Last year the value of money in circulation was around R75 billion – nearly double the value in 2003.  As of 2010, there were nearly 2,700 bank branches in South Africa and 20,000 ATMs. The cash market is dominated by four commercial banks – Standard Banks, ABSA, Nedbank and First National Bank (FNB) – which between them account for 99% of bulk cash volumes.

Shared Services

South Africa’s proactive approach to cash circulation can be seen in the creation of centralised, shared services. The country’s first step towards centralising its cash industry was made already in 1986, and spearheaded by three of the country’s main commercial banks. They formed a company called SBV Services, a shared utility for transporting cash to and from branches.

Once this utility had proven to work, the South African Reserve Bank (SARB) placed its Notes Held To Order (NHTO) inventories on SBV sites, allowing banks direct access to the cash supply. Then, in 2000, faced with an ever-growing volume of cash in circulation, the Bank took a major step in the outsourcing of its cash operations by delegating its entire cash processing function to SBV. The Bank’s only direct involvement in the cash supply chain at this point was in the production, issue and destruction of banknotes and coins.

However, this move may have proven too hasty, because in 2003 SARB reversed its decision by taking back the note-sorting activity in most provinces. This was because of a growing concern over the sub-standard quality of banknotes in circulation, as well as abuse by the industry of a free service – withdrawn cash was often returned to SARB in its original, unbroken packaging (in the practice referred to as ‘churning’)! The situation was to eventually balance itself out, two years later, when SARB announced it would only need to receive 1 in 3 notes. This is still the case today, with the SARB limiting its activities through its seven branches to issuing cash, accepting bulk deposits only, processing these and destroying unfit notes.

Standards Challenge

According to Mr Mbusi Dlamini, Executive Head of Cash Operations at SBV, a major challenge in ensuring the quality of banknotes in circulation lies not only in adhering to high standards during the recycling process but in persuading retailers to honour those same standards with the banknotes they handle.

Most of the retailers recycle money to avoid high cash deposit fees from the commercial banks, and consequently sort and validate the cash on approved note counters before recycling. Much of this is recycled through the checkout tills, which in South Africa often double up as cash dispensers (it being cheaper and more convenient for customers to withdraw money this way than using external ATMs). Three of the four commercial banks, meanwhile, have their own retail cash centre infrastructure, and process/recycle 60% of all cash themselves before clearing to SBV’s wholesale centres.

The quality of notes dispensed via ATMs (which account for 70% of all cash centre money) and via checkout tills should, therefore, be of the same quality – although in practice those handed out from the tills can be of an inferior quality. Mr Dlamini believes that only when this issue is resolved will there be a marked improvement in the quality of notes circulating around the country.

Supply Chain Optimisation

Today, SBV is at the centre of the South African cash supply chain, in its capacity as an independent commercial company equally owned by the – now four – commercial banks. Its functions include transporting 95% of wholesale cash between SARB and either the ‘communal’ NHTO vaults, or the individual bank vaults; carrying out most of the banknote sorting and recycling; having the sole mandate for NHTO vault management; acting as SARB disaster recovery sites; and co-managing coin production planning, handling and distribution. It is also now active in retail cash services as well, having about 30% of the retail processing market, although only 1% of the retail CIT market.

As a result, SBV centralises and optimises the entire supply chain – cash in storage, cash being recycled and cash being moved – on behalf of both SARB and the commercial banks.

Centralised Technology

For such a centralised management process to work, there needs to be an underlying technological platform. For the recording of all wholesale cash transactions and nationwide inventory levels, the South African cash industry uses a platform called the Integrated Cash Management System (ICMS), which was initiated by SARB in cooperation with the four banks some five years ago. Each wholesale cash order from each bank passes through the ICMS, thereby automating the entire wholesale cash supply chain at a national level.

The system improves the visibility of cash across the country by showing what volumes of cash are being held where. This allows better cash forecasting and reduces the amount of excess cash being held in any one place. It also removes duplicated functions, thereby lowering the cost of cash as a payment instrument.

But the ICMS does not have visibility on cash in transit. There is no national platform in place to manage CIT, although CIT companies are required to implement their own track and trace systems.

The track and trace system used by SBV and Protea Coin Security Group – another major CIT company, particularly in the retail market where it has grown rapidly and now has a 60% market share – is provided by Transtrack International, a specialist in cash management software and market  leader for CIT track and trace solutions.

Says Theo de Oliveira, Sales Director of Transtrack: ‘we have automated Protea Coin and SBV from front-end to back-office. This includes identifying cash batches for each customer, date of delivery and collection, the van and driver used, and the route the van took. Each CIT crew member has a handheld device linked to the system, allowing instantaneous reaction to customer orders. And the system’s web portal lets commercial banks and retail clients track their orders online, making the whole process very transparent and efficient’.

Cash Web Community

And now, the technology being used to automate CIT is expanding to other members of the cash supply chain, to create a Cash Web Community (CWC). Currently three countries worldwide – Holland, Germany, and now South Africa – have a CWC, which was launched a little more than a year ago. Mr. de Oliveira expects this number to double within the next two years:

‘Think of the efficiencies gained if an entire cash supply chain – including banks, cash centres, the central bank, CIT companies and retailers – could share the same database and communication channels,’ he says. ‘Such integration has begun in South Africa, with the first major commercial bank – ABSA – now connected to the CIT companies’ databases, on which it has full visibility’.

According to Gawie du Preez, ABSA’s Cash Solutions Managing Executive, ‘CWC has  enhanced our ability to integrate and manage the end-to-end cash value chain across previously disparate entities’.

The CWC is complementary to the ICMS. The ICMS records the cash orders and inventory levels of each cash centre, bank branch – and even ATM. The CWC completes the picture with its real-time capability and web enquiry interface. In this way, the banks can make even more accurate cash forecasts and plan their resources better.

Alternative Solution

Meanwhile G4S – the third major cash player in South Africa – is also shortly about to offer clients its own web-based cash management and track and trace solution – eViper. The system uses using barcodes, scanners and bluetooth printers to monitor cash consignments. The recorded value of each consignment allows accurate monitoring of vehicle, vault and department holdings. It also calculates routes and cash requirements on a daily basis. A consignment container’s movements can be viewed at any point by inserting its unique barcode into the system and viewing its history. Once used on the system, the barcode number can never be used again.

eViper also includes a built-in audit trail and the system can be adapted to different languages. Crew members carry hand-held devices whose software records progress and hand-overs, issuing printed receipts via a bluetooth printer attached to their belt.

The first company to use eViper was G4S Cyprus, which volunteered to test and implement it using the euro changeover at the end of 2006 as the test ground. The system is now being rolled out around the world, including in South Africa where, following feasibility studies, deployment is likely to start taking place in 2011.

No Legacy

In terms of the early adoption of modern cash management structures and technology, South Africa is clearly at the forefront, surpassing many developed countries. However, this is probably because the country was in an easier position to start with. The players in the industry agree that South Africa has one of the most mature cash management systems in the world, because it has no legacy. Other countries are slowed down by a system that is hundreds of years old and resistant to change. This advantage has allowed the South African cash industry to make giant leaps towards a centralised, automated and web-based system, in a business that is traditionally fragmented and manually run.

QUICK FACTS

Population: approx 49 million (26^th largest population)

Area: 1.2 million km²

GDP per capita: approx US$ 10,000 (ranked 25^th in the world)

Largest economy in Africa

Currency: Rand (1 US$ = 7.1 SAR – January 2011)

Cash in circulation: R75 billion (compared to R40 billion in 2003)

SBV owns and manages 20 multibank cash centres nationwide, 13 of which provide Notes Held To Order (NHTO) arrangements. The commercial banks own about 18 retail cash centers, G4S has 26 retail cash centres and Protea Coin has six.

Definition of NHTO: arrangement between the central bank and certain financial institutions to hold currency at selected locations (usually secure centralised vaults) in the name of the central bank