After almost 10 years of policy execution the latest information is that there is no end to cash remaining dominant part of financial transactions, not only in Nigeria but across the world. Consequently, cash management in Nigeria should become a major part of monetary policy actions in line with global best practices. In this interview, Charles Nwodo Jnr, the Chairman of Integrated Cash Management Services Limited, (ICMS), Nigeria’s leading cash management organisation gives more insight into the value chain and the challenges.
What services does ICMS render?
The cash industry in Nigeria is relatively new and therefore just evolving and the CBN deserves credit for this development which aligns Nigeria with global best practice in currency operations. What we call the cash industry was part of what used to be called Branch and Currency Operations until it was excised and made a full Department of Currency Operations as part of the strategic and continuous efforts of the CBN to modernize the Nigeria Financial Industry. This move was both in recognition of the importance of cash and also to give vent and expression to the need to attract investments into the nascent cash industry.
The cash industry ecosystem is made up of cash-in-transit (CIT) companies, of which there are nine licensed companies and two cash processing companies of which ICMS is one. The CIT companies essentially distribute cash from point to point, city to city, bank branch to bank branch, bank branch to CBN and retailers to banks etc .
Before the CBN licencing, Nigerian banks used to distribute cash themselves, using their own vehicles mostly regular Pick Up trucks that exposed the passengers and the cargo to armed robbery attacks that were rampant. Similarly most banks processed their own cash and in doing so the banks operated according to no standards in terms of CIT and Cash processing operations and were answerable to no authority since they were licenced to provide banking services and not cash handling services.
So you could say that there was total chaos and disorder before and this must have informed the CBN action to give effect to the creation of a regulated cash management sub sector under the Currency Operations Department of the CBN. By licensing ICMS and the other operators the CBN has a responsibility to engender a conducive operating environment for the licencees to avoid the past trends where operators in this sector folded up due to poor operating environment and hostile regulatory disposition.
For example, the CBN has rolled out policies and operating guidelines that expressly disallow banks from distributing and processing their own cash or apply to be licenced as such if they wish to operate these services. But, the CBN has not been able or willing to enforce this policy as we still have several banks distributing cash with poorly equipped vehicles and processing their own cash. This is one of the challenges we are having to contend with as an industry.
The cash industry value chain is made up of the following players; the retailers that generate a lot of cash, such as Shoprite, petrol stations, Spar, markets, gambling casinos, churches and mosques. And of course you have the CIT companies and Cash Processing companies, Banks and then the CBN.
Today, part of the challenge we face is persuading the CBN to enforce its own guidelines. What that has done is that it has created a situation where certain practices that are against official policies and guidelines and even our country’s laws are continuing unchecked. Some of these practices are the spraying of money at events, as well as hawking of new naira notes openly. Nigeria is the only country where such happens.
Now, there is a CBN policy that prohibits banks from issuing notes that have not been processed. The reason is because if they are not processed, the state of the notes cannot be determined. If they are not processed, you don’t even know whether they are counterfeits. If they are not processed, they continue to be recycled with the implication of rapidly polluting the rest of the notes that are fit for circulation.
Presently, we are under pressure by the CBN to expand our capacity to be able to meet the expectations of this industry. People must understand that cash is going nowhere. Indeed for now and for the rest of our life time, cash remains the most important and largest store of value. I can tell you authoritatively that the volume of cash in circulation worldwide and in Nigeria is not decreasing as many people seem to believe.
The reason why CBN initiated the cashless policy was not necessarily so that overnight all the cash in circulation would disappear. The cashless policy was necessary because the volume of cash in circulation and the attraction for cash transactions was growing at an alarming rate and threatening national security in some ways.
What does your company actually save the banks if they don’t have to render this service you render?
The central element of our value proposition is the inherent principle in shared services. This means that if I use the same resources or platform to service multiple clients efficiently, each of the clients spends less and I grow in scale and improve in efficiency continuously. This model is simple, trusted and validated by the success of several companies and industries in many parts of the world.
However we have had some poor records in Nigeria in this respect. Nigerian banks had in the past set up institutions that didn’t succeed in the end. You probably have heard about a collaboration between Nigerian banks that resulted in a company called the Pioneer Sorting Company Limited. It was set up in the 80s and 90s by some banks – First Bank, United Bank for Africa, and some others. They floated it then under the guidance of the CBN, but it failed. You know Nigerian banks famously don’t cooperate with each other.
They also set up another one called ATM Consortium. The purpose of the ATM Consortium was to create a shared platform to process industry wide ATM fit notes and perhaps even manage the roll out and maintenance of ATMs on behalf of Nigerian banks. This, again failed.
So, there is a recognition that a shared services platform is typically the right model for most industries but the devil is usually in the details – structure, governance, regulatory support, industry compliance and enforcement etc. Typically, currency operations constitute between 25 to 40 per cent of the cost of operations for most Nigerian banks depending upon the respective efficiency levels and geographic dispersion.
Our bullion vans are stationed and operate around clusters like Victoria Island and Ikeja for example. And because we use these same bullion vans to service multiple banks, we are able to service both Fidelity Bank Ikeja that needs to evacuate excess cash and First Bank Ikeja that needs cash quickly and efficiently using technology and advanced operational techniques. What does that do, it reduces the cost to Fidelity and First Bank respectively. And because we are using same vehicle to do this, we are able to render this service cheaper than either of them can do and hopefully, these savings can be passed on to bank customers in the form of reduced bank charges or interest rate.
We also operate 24/7 cycles because that is our core business. This model replicates itself in the case of our cash processing offerings. We use same cash processing infrastructure, operating in a factory-like situation with about three shifts. So, in terms of efficiency, and costs we save the banks tremendous values because by the time the bank branches open in the morning, the night shift in our facility has finished processing, the CIT team has delivered the cash and the bank branch just operates as if nothing happened.
In terms of cost optimisation, because same cash we are processing for Fidelity, we are processing for First Bank, Union Bank, Wema and others, using same platform, same personnel and technology, it is easy and cheaper for each of them in the short, medium and long term. What each of them pays is only a fraction of what it would cost them to buy those same machines, set them up in their hubs and operate at highly expensive operating costs which, unfortunately, the banks pass on to hapless customers in the form of high borrowing rates, high transaction charges and some inexplicable bank charges.
So, our intervention as a sub-sector of the industry was designed by the CBN to achieve sustainable cost optimization for banks as well as efficiency improvement all of which the banks are able to pass on to the customers in the form of reduced costs of borrowing and transaction charges.
You talked about some of the banks still operating in violation of the CBN guidelines that allows you to be the some companies that handle cash distribution and processing. Can you give us an idea of the percentage of compliance in the industry?
We have more banks in violation of this CBN policy. We are probably servicing about 30 per cent of the available market size. I sympathise with the CBN on this because the capacity constraint exists among licenced CIT and Cash processing companies like ourselves. And the CBN has a responsibility to maintain an orderly and safe financial system.
So, the challenge is for us to ramp up capacity quickly in order to be able to strengthen the regulator’s hands to enforce compliance with the extant policies and guidelines without endangering the stability of the banking system.
The truth is that because the banking industry in Nigeria is highly profitable, a lot of Nigerian banks don’t care about cost optimisation. There are several easy ways that banks make money in Nigeria. But hopefully, with the COVID-19 pandemic and its consequences which will inevitably impact the revenue profile of banks, I am sure many of them are going to start rethinking their mode of operation. Many of them invest too much in cash management infrastructure – they have tellers, managers, security men, cash sorting machines, huge vaults, bullion vans, escort vehicles etc and a lot of others. But, that is not the business of a bank. A bank’s business is simply to do banking – collect deposits, lend money, make a profit from doing these. So, the banks by continuing to distribute and process cash for themselves are effectively cannibalising the business of licenced CIT and cash processing operators.
So, what do you want the regulator to do?
To be honest, what the regulator should do is similar to what they do for banks. You know that whenever a Wonder Bank or unlicenced finance house starts to operate, the CBN always issue warnings to members of the public against them and the CBN even works directly with the Nigeria Police and other security agencies to forcefully shut down such premises and arrest the illegal operators. The CBN doesn’t allow the Wonder Bank to operate because they have licensed commercial, merchant, mortgage, community banks to operate. So, if the CBN has licensed us as CIT and cash processing companies to operate in the cash management value chain, the same CBN should protect our business by forcefully and aggressively enforcing the guidelines.
With that, the banks would be forced to work with us and there are several non disruptive options of working with the banks to achieve the goal envisaged by the CBN in enabling the creation of the cash operations sub sector. The problem is that the banks have infrastructure and operations that they are not licensed to undertake. And the licenced CIT and cash operations companies do not have the infrastructure to service the market as desired by the CBN. So, the CBN ought to mediate the situation by encouraging the banks to surrender the huge CIT and cash processing infrastructure at their disposal in obedience to the dictates of extant policies and guidelines and also in realization of the need to focus on their core business and reduce the substantial operational expense that goes into the CIT and cash processing infrastructure. This is a very simple and uncomplicated issue in my opinion.
When we started this business in 2008, we had a South African Technical Partner called SBV Services. SBV Services is owned by the four biggest banks in South Africa. It was set up in the late 80s or 90s, essentially because the South African economy was at this stage we are now at that time. SBV Services was set up in South Africa to provide a shared services platform. So, our prescription is not rocket science. We operated with SBV Services as joint venture partners at ICMS until two years ago when we bought over their shares and they left Nigeria.
So, global best practice is that central banks don’t get involved with the distribution and processing of cash. Central banks only get involved in the issuance of currency and destruction of unfit notes. Other things like distribution and processing are handled by entities like us.
Another point is that a bank branch is not supposed to be constructed like a fortress, which is the challenge Nigerian banks have. That is why it is very expensive to set up bank branches in Nigeria; because if you set up a bank branch, you have to deploy resources to provide several non-core CIT and cash operations infrastructure and personnel which are non-core to the business of the bank and all these costs are passed on to the customers.
Earlier, you said cash is going nowhere, why did you say so?
We belong to an international association which sponsors research into various segments of the payments space including cash in circulation in various countries and across the world.
In the last few years the statistics show that in European Common Market area, and Asia particularly the cash in circulation has been growing steadily and in places like Africa the growth is even more on a year to year basis. And this is inspite of the rise in digital and card payments. So, people were surprised because simultaneous to this, e-Payment was rising, cheque payment was declining and internet payment was also rising.
One explanation for the continuous popularity of cash as a medium of exchange and value storage is that there is a correlation between crisis/tension and rise in cash volumes. People tend to seek to hold cash in times of uncertainty and crisis and as the world continues to witness one crisis after another in different continents, it is no wonder that the volume of cash in circulation has continued to rise. Most Central Banks across the world know this and understand the trend very well.
So till tomorrow, cash is still the greatest store of value. If gold was available to carry safely in small pieces, maybe it would be competing with cash. Now with the COVID-19 pandemic one expects this trend to endure into the long term. Statistically, if you look at the CBN reports on cash in circulation, it remains high though the CBN has in recent years taken laudable steps to control the rise. That is because at the end of every transaction chain, whether it is e-payment or Point-of-Sale (PoS), there is always cash at the end of it. So, the frequency of cash payment may reduce, but the ultimate value of cash remains a constant and this is one of the issues that engages the expert attention of Central Banks around the world. Even in the United States of America with all the advances in e-payment and card transactions, significant cash transaction volumes exist. In fact the second largest cash processing company in the world is based in the USA and has several hundred CIT vehicles and cash sorting centres in the USA and Canada. That is America that is easily identified as an almost cashless society!
What is the medium to long-term vision of ICMS?
Our plan is to support the industry growth aspiration of the CBN by solving the problem of cash distribution and cash processing capacity constraint so that ICMS and other licenced operators in the sector can benefit from a more aggressive enforcement of extant policies and guidelines by the CBN.
To this end, we plan to have nine additional cash processing centres across Nigeria in the next 12 to 18 months and expand our CIT fleet of armoured vehicles substantially. Our ultimate goal is to be listed on the Nigerian Stock Exchange in the medium to long term and we are working hard and actively on these plans at this time. We understand the business, we are the only licensed operator that attracted a foreign joint venture partner in this sub sector and the partnership with the foreign company earned us the undisputed knowledge leaders in the Nigeria market and we still have that technical partnership. We see what they are doing in South Africa and the kind of value they are adding to the financial ecosystem in South Africa. That is exactly what we aspire to replicate in Nigeria. That is what is driving our expansion plan.