Know Your True Member Cycles for Cash

By David Austin10.27.2014

A key component of providing excellent customer service is a credit union’s ability to always meet its members’ cash needs. Most credit union executives acknowledge that there are recurring patterns throughout the year related to consumers’ withdrawal and use of cash, but their assumptions about these cash cycles—and when they actually occur—are often misunderstood or misdiagnosed.

For instance, credit unions often expect (and plan around) a significant increase in cash demand during the Christmas holiday season, but in reality, only about 40 percent of all financial institutions experience an increase in total cash demand during this time. What they likely will see is an increased demand for denominations, $100s or $1s (and even $2s), as many people give these denominations as gifts. Concurrently, branches may even see a corresponding decrease in the demand for $10s, $20s and $50s during the holidays. The branch’s total cash demand has not changed—just an influx in change at the denominational level.

So if the holidays aren’t peak cash usage times, when are they? Contrary to popular belief, total cash demand typically increases in February and the first part of March. This is driven by members who file their federal income taxes with a 1040EZ form and begin to cash out their tax returns. Furthermore, not only does total cash demand typically increase in February, but the use of $20s does as well, since many members opt to cash out their refunds through the ATM channel. Another example affecting a branch’s seasonality is geography. Depending on the foot print of a credit union’s branch locations, the start of summer or a school year can dramatically increase or decrease the level of demand for cash. Harvesting season can also be expected to drive an increase in cash demand on credit unions near farmers.

To manage these cycles and ensure the availability of cash throughout the year, branches respond by increasing their cash threshold. This is a mistake however, as the branch is now simply managing its cash levels to an unnecessarily high absolute limit. As the credit union’s largest non-earning asset, there is the missed opportunity of redirecting this unused cash from the individual branches and reinvesting it through alternative investments and lending.

Many credit unions take a limits-based approach to cash management, determining a cash threshold based on last year’s total order amounts, which is a flawed method, as it does not anticipate any form of growth. Even if a branch’s member base grows as little as 10 percent, cash demand can be impacted in a meaningful way.

Looking at a specific case example: as of June 2014, a $990-million credit union experienced an overall annual growth of 17 percent in cash usage compared to June 2013. The credit union has also seen a 20 percent increase in the use of $50s and a 69 percent increase in the use of $100s. If the credit union had set its absolute limit based on last year’s amount, it would not have been prepared for this increase in cash demand and denominational demand changes.

To prepare for these changes, the key is to leverage a sophisticated cash management tool that evaluates seasonality, max amounts and changes in denominational demand. Managing cash levels is really no different conceptually than managing inventory, so it requires a mathematical approach that is very specific to each branch.

Many cash management methodologies simply consider a high level assessment of the credit union’s tolerance for risks, general thoughts on cash level needs based on limited historical data, or usage and potential insurance or bonding elements. The methodology should incorporate mathematical statistics such as predictive modeling, volatility, safety stock and cash replenishment cycles, which more effectively determine anticipated cash demand and handle change to ensure appropriate inventory levels.

Implementing standard inventory management practices into a credit union’s cash management processes empowers the institution to better anticipate member needs, generate new opportunities for income and free up resources, enabling the credit union’s branch staff to redirect their focus on providing excellent member service.

David Austin is vice president of Atlanta-based CetoLogic, a provider of software and analytics solutions for financial institutions and retailers. David can be reached at 678-648-5158 ex. 233 or