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The cash circulating through society is supported by an elaborate and costly infrastructure, involving money processing and distribution operations as well as an intricate cash delivery network—ATMs, seal bag deposit systems, coin dispensers, tellers, lockboxes, etc. (see Exhibit 1).

The total European cost of providing this cash system is estimated to be €84 billion (US$115 billion) per year, of which 65 percent is borne by the banking sector (see Exhibit 2). These expenses are expected to grow in coming years, due to rising fuel prices, traffic congestion, and increasing safety standards.

The growing popularity of new forms of non-cash payment in many regions and countries only serves to amplify concerns over the cost of managing cash. E-commerce and prepaid cards are augmenting traditional credit/ debit cards to reduce dependence on physical currency, and mobile payments are also growing steadily. In Japan, for example, customers are using their DoCoMo cellphones to pay for taxis and for low-value items in convenience stores, and both MasterCard and Visa have developed similar payment solutions.

Non-cash transactions bring greater convenience and security, swifter

processing, and lower process costs. The speed with which different markets adopt such payments is influenced by factors such as the national banking and payments infrastructure, commercial practices, and consumer preferences and habits. In the Netherlands, for example, more than three-quarters of the payments larger than €10 no longer involve cash. As approximately 80 percent of the total cash costs are fixed, the cost per transaction will increase when cash volumes start declining.

To counter mounting costs, banks have sought a range of additional revenue streams from their cash operations. Stamps, train tickets, and prepaid cards have been sold successfully through ATMs in some southern European countries, although this approach has proved less popular elsewhere. Third-party advertising on ATMs (more common in markets such as the U.K. and the U.S.) produces modest additional revenues. Withdrawal charges are more controversial, as they often suffer the wrath of regulators, merchants, and consumers. Given the limitations of these various revenue-raising initiatives, it is unsurprising that banks are driving hard to improve their cash economics through cost efficiencies.

As approximately 80 percent of the total cash costs are fixed, the cost per transaction will increase when cash volumes start declining.

Booz & Company

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