Business Process Cost Elements relevant to Cash Management

The mission of retail banking business sector, within a large banking organization, is to address consumer customer, offering retail banking services, in accessible outlets, in proximity, across a geographical territory (re: country).

The physical access points of the consumer are the bank branches where manned services are offered, and the automatic cash handling machines –such as ATM’s, cash dispensers, automatic bill payment systems– in the context of self–service transactions portfolio offering.

The service level offered is directly related to the coverage, speed and easy access of consumed services. Thus, the number of branches and ATM’s network and the short waiting time in the branch tellers queue, are contributing decisively to the customer perceived service level.

Inevitably, those parameters –such as the number of branches, ATM’s and tellers readiness– across the territory, are primary cost elements influencing the profitability of the retail banking business. Their efficient operation is associated to a secondary set of cost elements, such as the CIT and Cash Processing services, and last but not least the cost of floating capital spread across the network, in–between the National Central Bank and the retail banking access points (branches and ATM’s).

Branch specific cost elements

Each one of the bank branches has its own cash handling profile. The parameters outlining this profile are depicted schematically below:

Figure 1: branch specific cost elements

Bank Domain – cost elements with global applicability

Upstream defined parameters are those related to corporate strategy, policy and, outsourcing contracts, affecting the downstream business execution. Those parameters relevant to cash management are depicted in the below diagram:

Figure 2: Upstream defined parameters

OpEx Minimization – Cost Savings Maximization

There is certainly an operating cost reflected in a given Retail Banking Unit structure and operating model. It is expected that next to the introduction of TCR’s technology across the branches network, this cost will be lower. This saving in OpEx is a key determining factor in bank’s management decision to plan and deploy such a project.

Figure 3: Cost Savings Delta

The cost savings assessment is an exercise based on the cost element parameters, as they were presented in the previous two paragraphs.

Should all the specific parameters, are uniquely defined, then they enable the set–up of a simulated operating model for the branch, in the "as–is" situation. In the day–to–day execution of this model, deposits and withdrawals over the counter and via the ATM are recorded, along with the required cash handling activities involving CIT services. All those activities are sized appropriately and the associated activity based cost is estimated with adequate accuracy.

This operating model is set–up and run once more, assuming the post–TCR deployment situation. The savings are estimated, as the delta between the two operating models OpEx calculation.

Last but not least, the ROI indices, such as IRR and NPV, are calculated for a single branch, single TCR, deployment project. They are based on the TCR equipment cost and annual maintenance fees, as well as the annual OpEx savings.

Conclusion and Epilogue

Retail banking investment in technology delivers in terms of productivity, quality of service and above all in customer satisfaction. However planning for a capital intensive project should reliably anticipate the return on the investment and the next day improved operating model.

In a retail banking environment with hundreds of branches, several thousand ATMs and a growing number of interlinked businesses, it is quite challenging to determine the optimal deployment plan.

The answer to this situation is reliable field data collection, analysis and determination of activity based costing model, and formulation of mathematical modeling and computer processing in identifying the optimal resolution; i.e. to what extend deploy next generation infrastructure technologies, and what would be the expected return on investing in such a project.