"Optimization" is the magic word in much of banking technology in early 2009, as even the healthiest banks look to ride out the recession by focusing on capital preservation and efficiency. In the treasury function, the latest optimization comes in the form of cash supply chain management and forecasting software that can dramatically lower the amount of cash needed to meet system requirements, as well as using deposit reclassification to lower FRB reserve requirements.

This technology has long been the province of money center and regional banks, and to great success. Several years ago, when the Fed funds rate was about six percent, financial services holding company Synovus, with more than 30 banks under its umbrella, wanted to reduce non-earning assets and optimize revenue, while reducing costs and managing the risks associated with cash. The now $35 billion asset institution bought into Fiserv's iCom cash supply chain management software, and after implementation reduced its cash requirement from $145 million to $102 million, says Rick Sorenson, svp of operations. (Cash demands have increased since then due to growth and seasonal factors.) And, with the reclassification of deposit accounts, Synovus was able to reduce its FRB reserve requirements from $185 million to less than $80 million, saving approximately $2.6 million at historic Fed funds rates. At the same time, Synovus began utilizing Wachovia for its cash demands and was able to shut down one of its vaults, eliminating several FTEs.

Synovus's experience is fairly typical, with institutions generally able to reduce cash levels between 20 and 40 percent, says Brian Jorgenson, director of product management for Fiserv's cash and logistics suite. Using a three-year rolling Fed funds rate, every million in reduced cash requirements translates to a savings of between $30k and $50k.

Case studies like Synovus's are driving smaller banks to consider making the switch from manual to automated cash supply chain management. Fiserv and its competitors in the market, Wincor Nixdorf, Diebold and others, say current demands for efficiency and the reduction of non-earning assets are pushing their product down market into institutions with as few as 100 cash points. For many institutions, the process until now has been entirely manual.

Another reason more institutions are considering outsourcing their cash supply chain management is the cost model. "We give some of the small institutions alternatives; they recognize that we actually change a capital investment into service operation costs," says Tom Cappelli, director of integrated services at Diebold, which is moving its focus beyond self-service devices into branch cash management.

Sorenson at Synovus has some advice for smaller banks considering investing in cash supply chain management or forecasting software. "With Fed funds at 25 bp, now's probably the time to start looking around, evaluating what's out there," he says. Because what comes down must go up, when Fed funds rates rise and it's not so cheap to keep ATMs and vaults inefficiently stocked, banks will have a solution in mind to counter the trend.

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