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From Cash Pile-Up to Strategic Efficiency: The CMS Advantage


Banks in the U.S. have made recent news as they continue to amass substantial cash reserves. This strategic move comes in response to a combination of factors including economic concerns, deposit outflows, and the looming specter of stricter liquidity regulations, particularly impacting mid-sized financial institutions.

The Cash Pile-Up Phenomenon

Reports of bank initiatives to build up cash reserves is a prudent response to a shifting economic landscape as U.S. lenders adopt a risk-averse stance to safeguard against potential downturns. The catalyst for this approach was triggered by a series of bank failures.

These collapses have sparked massive deposit withdrawals, raising concerns about the overall financial health of banks. This, in turn, has prompted financial institutions to substantially increase their cash holdings, with total cash assets reaching $3.26 trillion as of August 23, 2023, representing a significant 5.4% surge since the close of 2022.

The Liquidity Shield: Cash Management Services

In response to the escalating trend of accumulating cash reserves, financial institutions are exploring ways to optimize these holdings while adhering to operational and regulatory demands. This is where Cash Management Services (CMS) step in, offering a lifeline to banks navigating change.

Robert Lynch, SVP of Financial Business Development at Loomis, highlights the crucial role of balance.

"Banks are more likely to have higher cash reserves, but too much can cause a lack of investment opportunities,” he said, “which is why we recommend cash forecasting software to ensure appropriate inventory levels."

While the need for substantial cash reserves is undeniable in an unpredictable economic climate, cash pileups are not a long-term solution.

Enter cash forecasting software, a highly recommended tool that empowers banks to strike that elusive equilibrium, enabling them to make informed decisions amidst the chaos. Cash forecasting ensures cash demand is met at the lowest possible cost through the analysis of data.

Outsourced CMS Guiding Banks Through Uncertainty

Cash forecasting, among other tools and strategies, falls under the umbrella of Cash Management Services. Leveraging the economies of scale offered by CMS, financial institutions can effectively manage expenses.

“Uncertainty drives the behavior of having too much inventory of coin, which is one of the causes of the recent coin supply chain challenge that the U.S. experienced,” Lynch explains. “Using the right forecasting partner can ensure the correct levels of inventories without impacting the coin supply for the nation and maximizing the opportunities for the financial institution.”

Thomas Strauser, VP of Cash Management Services at Loomis, notes the growing appeal of outsourcing cash management as regulations tighten and real estate costs soar.

"Outsourcing eliminates fixed costs like facilities and equipment," Strauser explains. "Economies of scale make fluctuations in customer volumes a thing of the past, as staffing and capital expenditures are eliminated."

Additionally, CMS products streamline cash processes and reduce operational costs, enabling banks to adapt seamlessly to changing customer demand.

Vaulting Relationships and an Expanded Footprint

Expanding a bank's footprint is a strategic move that can position it to compete more effectively with regional and national banks. One approach to achieving this is by establishing vaulting relationships. A vaulting relationship involves a bank partnering with a cash logistics company to store physical cash and valuables.

In 2014, KeyBank outsourced 60% of their vault operations to Loomis. In less than two years, this financial institution saw a return on its investment.

By establishing vaulting relationships, banks can gain several advantages. Firstly, it allows them to securely store and manage physical cash reserves, which can be crucial during times of increased cash demand. Secondly, it enhances the bank's reputation as a trusted custodian of assets, attracting more commercial customers seeking secure deposit services.

The Evolving Role of CMS

Amid regulatory changes, the role of cash management services is poised for evolution. Outsourcing trends are anticipated to continue their ascent, offering flexibility and cost-efficiency in the implementation and management of regulatory adjustments.

The success stories of financial institutions partnering with CMS providers like Loomis to optimize their cash management operations are a testament to the benefits reaped. Enhanced cash cycle management, reduced inventory balances, and heightened cost-effectiveness are among the rewards for those who embrace CMS solutions.

The strategic accumulation of cash reserves stands as a cornerstone in today's banking landscape. Amidst challenges posed by economic uncertainty and stringent regulations, cash management services emerge as indispensable allies, helping banks strike the delicate balance between liquidity and investment opportunities.

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