REMOTE CASH CAPTURE 2017 MARKET UPDATE TAKE-TWO FOR THE INDUSTRY

Bob Meara 09 October 2017

This authorized reprint contains material excerpted from a recent Celent report and was not sponsored by FireKing in any way.

For more information on the full report, please contact Celent (www.celent.com or info@celent.com).

CONTENTS

Executive Summary ............................................................................................................ 1 Key Research Questions ................................................................................................. 1 Why a Take-Two for the Industry? .................................................................................. 2

The State of Cash and Cash Logistics ................................................................................ 4 Cash Cycle Management .................................................................................................... 7

Financial Institution Cash Logistics ................................................................................. 8 Merchant Cash Logistics ............................................................................................... 10

Understanding Remote Cash Capture .............................................................................. 15 Merchant Value Proposition .......................................................................................... 18 Financial Institution Value Proposition .......................................................................... 20 Adoption Drivers ............................................................................................................ 22

Solution Delivery Alternatives ........................................................................................... 25 Manufacturer-Led Solutions .......................................................................................... 25 Fully Managed Solutions ............................................................................................... 26

Outlook and Opportunities ................................................................................................ 29 Opportunity for Banks .................................................................................................... 30

Appendix: Vendor Profiles................................................................................................. 33 Hardware Manufacturers ............................................................................................... 33

Leveraging Celent’s Expertise .......................................................................................... 37 Support for Financial Institutions ................................................................................... 37 Support for Vendors ...................................................................................................... 37

Related Celent Research .................................................................................................. 38

EXECUTIVE SUMMARY

This report updates two previous reports on the topic, Remote Cash Capture: An Idea Whose Time Has Come, March 2009 and Remote Cash Capture 2012 Market Update: Big Changes in a Growing Market, March 2012. In addition to refreshing market information, this report provides an analysis of several significant changes in the market that Celent believes will lead to increased merchant adoption of cash automation solutions and increased opportunity for banks and solution providers that participate in the value chain. In particular, there is a step-change in the opportunity for banks to stand up bank-led solutions rather than being simply a provider of provisional credit – offering a ten-fold revenue advantage.

KEY RESEARCH QUESTIONS

1 How relevant is cash given the growth in electronic payments?

2 What is Remote Cash Capture (RCC)? 3 What is leading to

the growing adoption of RCC?

Cash remains as relevant in retail as it has ever been. Although slowly declining as a percentage of point of sale transactions, the amount of cash in circulation continues to grow in the US. Managing this growing volume of cash remains problematic. Most US banks have invested in its automation through virtual vaults and branch-based recycling devices. Not so for most retail merchants.

Remote cash capture (RCC) is the deployment of secure, validating currency-accepting and recycling equipment (aka smart safes) at merchant locations coupled with remote management, information reporting and provisional credit mechanisms. Rudimentary versions of RCC have been in use for 20 years in the US as a means to improve merchant cash cycle control. The advent of bank-offered provisional credit based on validated currency residing at the merchant location is a more recent phenomenon, with the first implementations in 2004. Its emergence caused a surge in interest and adoption of these devices. The offering of provisional credit by participating financial institutions has significantly improved the merchant business case for remote cash capture. But, the float benefits involved are secondary, particularly in our current low interest rate environment. The primary benefit of provisional credit is its enablement of wholesale reengineering of the cash cycle within merchants and between merchants, armored couriers, and banks cash vault networks. In the process, RCC removes the substantial cash handling burden historically carried by bank branch personnel. In short, RCC is a win-win-win wherever the merchant business case warrants.

RCC is noteworthy for the collaborative service delivery required to bring it about. Historically working in isolation, banks, safe manufacturers, and cash logistics providers are now collaborating to add considerable efficiency to what until recently had been an antiquated and error-prone cash cycle in many businesses. But RCC adoption has not set records. Both economic and systemic barriers have limited its adoption — but all that is changing. With US retail merchant utilization of just 10%, now is a perfect opportunity for banks to revisit their involvement in RCC.

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WHY A TAKE-TWO FOR THE INDUSTRY? Many technologies follow a somewhat predictable adoption curve in which the rate of adoption increases as the market “crosses the chasm” from early-adoption into the fast-follower stage. This is now occurring for Remote Cash Capture. But the dynamics driving this change are many and profound. Together, they create a take-two opportunity for banks seeking additional treasury management revenue and improved customer relationships among key retail merchant customers. Said another way, the historic stranglehold on the RCC market by the major cash-in-transit carriers (CiT) using proprietary solutions has been effectively neutered. Banks should rethink their RCC strategy in light of the following concurrent dynamics affecting the market:

Open Systems Environment The solution landscape has moved from a CiT-dominated closed-loop system to a bifurcated one. Now, alongside proprietary CiT-led solutions are open system alternatives with the advent of third party, hardware and CiT agnostic software solutions. At present, proprietary CiT solutions account for roughly half the market. The ability for banks and hardware providers to offer retailers enterprisewide cash visibility and management independent of CiT is itself a game-changer.

Hardware First generation hardware has given way to integrated hardware and software-based solutions that are more capable, more reliable and less expensive. Additionally:

• Small footprint, lower-cost validating safes are now available that improve the RCC business case among smaller format merchants.

• Recyclers are now able to better accommodate provisional credit and streamline CiT servicing through software integration and the use of segregated deposit cassettes.

• Broadly available remote monitoring and management capabilities improve device reliability and significantly reduce servicing costs. Said simply, most smart safes are no longer the headache first generation devices were known to be.

• Competition is growing among manufacturers. Traditional depository smart safe manufacturers are investing in recycling platforms and traditional recycler powerhouses are investing in depository safes. Increased competition along with economies of manufacturing scale is manifest in declining prices, boosting demand — a virtuous cycle.

Software Once largely proprietary, modern software solutions for cash management and remote device monitoring and management are increasingly open — exactly what retailers have wanted from the start. Additionally:

• CiT and hardware agnostic monitoring platforms emerge with varying capabilities from vendors such as: Balance Innovations, Fiserv, International Financial Services (IFS), Logicpath, Namsys, and Safelogy.

• Banks now have a cost-effective path to market in white-labelled, cloud-based portals that integrate cash management, remote device management, alerts and reporting.

Managed Services Options Until now, banks wishing to stand up their own RCC solution required substantial up-front investment and a long-term commitment. Not surprisingly, few banks took this route. Now, providers such as Cash Connect, Fiserv, G4S, and Superior Press offer banks a variety of go-to-market options. The combination of open systems solutions and fully managed delivery options radically changes the attractiveness of bank-led solutions.

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Retail Business Climate With the continued growth in digital commerce, retailers of all sizes are under pressure to improve same-store sales and reduce costs. In this climate, the value proposition of RCC is resonating with Store Operations, Loss Prevention, and Treasury alike. Moreover, even as cash accounts for a declining share of point of sale transactions, traditional approaches to its handling expose retailers to loss and their employees to harm.

Figure 1 summarizes these multiple change agents.

Figure 1: Agents of Change Driving RCC’s Accelerating Adoption

Source: Celent

This report excerpt results from interviews among several retailers, ten financial institutions and eighteen solution providers. The report begins with a snapshot of the current state of cash payments in the US followed by a background in relevant cash logistics at both banks and merchants. The report then explores remote cash capture along with the value propositions for retailers and banks. Finally we compare solution alternatives and offer recommendations. A FireKing Vendor Profile appears in an Appendix.

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THE STATE OF CASH AND CASH LOGISTICS

Consumer payment preferences change continually. While increases in debit and credit usage are undeniable, cash usage as a percentage of the payments mix remains stubbornly resilient. In fact, use of cash in the US continues to increase despite the rapid growth in electronic payments. The US Federal Reserve reports that the dollar amount of currency in circulation worldwide has grown dramatically in the past 10 years from US$564 billion in 2000 to $1.5 trillion in 2017. While much of US currency circulates outside of the US, use of cash within the US remains strong, with no indication of a “cashless society” any time soon (Figure 2).

Figure 2: Currency in Circulation Continues to Grow

Source: US Federal Reserve

Another view looks at cash usage as a share of gross domestic product, GDP. A historical analysis of over-the-counter and ATM cash withdrawals provided by Cardtronics in its Global Cash Index Report suggests cash usage, while declining as a share of GDP, has remained remarkably resilient. From its high of 15.5% of GDP in 2003, cash has declined to 13.1% in 2015 — an annualized decline of just 0.5% CAGR (Figure 3). This is remarkable considering the competition among electronic payment methods.

Figure 3: Cash Usage Remains Remarkably Resilient

Source: Global Cash Index — United States Analysis, March 2017. Used with permission.

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A number of sources keep track of US consumer payment preferences. One source is the Diary of Consumer Payment Choice, published by the US Federal Reserve — most recently in 2016. According to the FRB diary, cash usage declined from 40% of all retail transactions (including bill payments) in 2012 to 32% in 2015 — suggesting cash remains the most frequently used consumer payment instrument (Figure 4).

Figure 4: Cash Remains a Popular Payment Choice

Source: FRB Diary of Consumer Payment Choice, 2016

The eroding share of retail payments made by cash shown in Figure 4 reflects averages across a wide range of transactions and merchants. Consumer payment preference varies considerably among retail segments. Consumer payment preference studies have documented both the gradual decline in cash usage (as a percentage of transactions) and the variability across retail segments. Historically, high-cash segments map to lower average transaction values (consumers are more likely to buy a burger with cash than a flat screen television) and to environments sensitive to transaction times (e.g., quick service restaurants). Figure 5 shows this sensitivity. The environment has changed over the past several years, however, with continued growth in credit and debit card acceptance as well as targeted electronic payment initiatives (e.g., transit). In particular, cash usage in the transit and fast food segments has declined markedly in response to card acceptance. Venmo, Zelle, and other P2P payment mechanisms will surely further erode the relative dominance of cash for low-value transactions.

Figure 5: Cash is Preferred for Low-Value Transactions

Source: FRB Diary of Consumer Payment Choice, 2016

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Undeniably, as merchant card acceptance continues to rise and Internet commerce continues to grow, cash usage will erode further. But, merchant interest in cash management solutions is not limited to retail segments with comparatively high cash usage. Discount and department stores are users of automated cash management tools even though cash is relatively underutilized in those segments. Cash volume and the total cost of cash handling drive cash automation technology spending, not the proportion of cash in the POS transaction mix.

Key Research Question

1

How relevant is cash given the growth in electronic payments?

Cash remains the most popular retail payment mechanism in the US, accounting for nearly a third

of all transactions in 2015.

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CASH CYCLE MANAGEMENT

With the likely continued growth in currency processed in the US, we turn our attention to the logistics of cash handling, within and between banks, merchants, and CiT. The review is meant to provide context for the introduction of remote cash capture and show its role as both a deposit-taking mechanism and a tool to automate the cash control cycle.

The cash control cycle’s multiple actors (banks, merchants, armored couriers, Federal Reserve Banks) have all acted independently. The result (See Figure 6) remains inefficient, labor-intensive, and costly.

Figure 6: The Cash Control Cycle Invites Improvement

Source:

Historically, actors have each invested in mechanisms designed to marginally improve aspects of the cash control cycle within their own purview. For example:

• The Federal Reserve revised its recirculation policy in 2006 to impose cross-shipping fines among financial institutions designed to “enforce” the Federal Reserve’s chosen, limited role in cash logistics.

• Financial institutions have invested in cash management software applications to better control enterprise-wide cash logistics, reducing CiT costs and minimizing nonworking capital. Others have invested in cash dispensers and recyclers to further reduce the cost of cash handling in the branch environment.

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• Financial institutions have leveraged virtual vaults offered by armored couriers to lower cash handling costs. Originally, banks used virtual vaults in fringe markets, but their use has steadily grown in the past ten years.

• Larger retailers have invested in cash room automation equipment to reduce errors and lower the cost of cash acceptance.

But each of these initiatives impacted the cash control cycle surgically. Banks, for example, have not had an ability to offer merchants much in the way of meaningful improvements. Remote cash capture itself is an improvement, but, as the next section shows, has been largely provided by armored couriers, with most banks playing a minor role in solution delivery. While effective from a market development perspective (couriers have lots of merchant clients), CiT providers have no vested interest in overall cash cycle improvement. After all, it is the armored couriers who, for the most part, transport cash among the industry actors — often unnecessarily so.

Celent observes a significant opportunity to create a step-change improvement in the cash cycle with available technology. This could occur as a result of information systems connecting and gathering data across all parts of the cash cycle. Similar to what a minority of banks and retail merchants currently use to improve cash logistics within their respective operations, a cash cycle-wide system would provide analytics, forecasting, ordering, and reporting. Increasingly, bank and courier systems are already connected through virtual vault efforts. It would not be a stretch to expand connectivity across multiple merchants. The value proposition would extend beyond current cash logistics systems (Integrated Currency Manager by Fiserv or Logicpath’s C3 Financial) which provide information. Instead, the value proposition would be to take control of the cash control cycle on behalf of banks or merchants, managing to agreed-to key performance metrics, rather than charging for discrete activities (e.g., ATM replenishment, cash orders, etc.). Overall efficiency improvements would be in the hands of the solution provider who would offer services at lower cost than possible with actors behaving independently.

This is close to becoming available. In the interim, actors work somewhat independently to minimize the cost of cash within their own purview. We look separately at financial institutions and retailers.

FINANCIAL INSTITUTION CASH LOGISTICS Our examination of the cash cycle begins where cash is presented at the retail branch and ATM. For all the cash that is deposited and withdrawn at retail branches across the US, much of the cash handling is performed manually. For example, most US ATMs are not well-suited for large volume cash and coin transactions. As a result, most merchants bypass ATMs in favor of branch deposits during business hours or night depositories (processed in the branch the following day). Inside many branches is a central cash vault and multiple, independently managed tills at each teller station. Throughout the day, tellers buy and sell cash to the vault in order to maintain individual tills within specified parameters, doing so under dual-control. Automated cash handling mechanisms are often limited to table top discriminators, requiring tellers to handle cash deposits and withdrawals multiple times.

The use of teller cash recyclers to automate some internal branch cash handling has been growing steadily, however. In a December 2016 Celent survey of North American financial institutions, Celent found more than half of institutions using cash recyclers in some or all branches (see Figure 7). This is more than twice the utilization measured in a similar 2010 survey. The benefits of teller cash recyclers (and related assisted self-service devices) are manifest, yet their implementation is complex and beyond the scope of this report. A detailed discussion of branch cash automation is found in the Celent report, Cash Automation in Branch Banking: Cut Costs While Improving Sales and

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Service, June 2010. Modern branch designs (typically smaller, more automated, and designed to optimize sales and service interactions) almost always utilize a high degree of cash automation in an effort to minimize administrative workload. Teller cash recyclers, recycling assisted self-service kiosks and bulk coin accepting devices are relatively commonplace in modern branch designs.

Figure 7: Many Banks Still Do Not Automate Branch Cash Handling

Source: Celent survey of North American financial institutions, December 2016, n=135

Commercial cash branch deposits may be welcome, but they are certainly costly to process at most banks, relative to the comparatively efficient processes at cash vaults. For that reason, many banks charge commercial depositors higher fees for branch deposits than for deposits made at cash vaults via armored couriers, often twice as much on a per $1,000 basis. Ostensibly, this is done to provide an incentive for customers to make cash vault deposits. As banks rationalize the branch network, the idea of transaction migration has become a key strategic priority. Remote deposit capture (for check deposits) and remote cash capture (for cash deposits) are central to executing a transaction migration strategy.

In addition to their branch infrastructure, banks have historically invested in cash vaults to serve their major markets. The vaults grew to serve two purposes. They act as a practical staging area in the deposit collection process. They also serve an important role internal to the bank, in managing branch and ATM needs as well as the bank’s cash position with respect to Federal Reserve requirements. Vaults reduced operations activity in the branch network and provided some economies of scale; larger operations tend to be more efficient than small ones. This dynamic suggests fewer, larger vaults are more efficient than operating a larger number of smaller ones throughout a bank’s footprint.

Fewer vaults mean leaner operations within each vault, but at the cost of additional transportation and delay getting the cash to and from the vaults. This dynamic presents a practical operational challenge and inevitably a range of vault profitability to banks. As banks sought to expand their geographic reach with new vaults, profitability in those new vaults was often elusive. Banks responded by embracing virtual vaults operated by cash logistics providers that collectively maintain a vast nationwide network of cash vaults. The majority of the top 50 US banks have virtual vault relationships with one or more cash logistics provider. Once embraced for supporting fringe geographies and used alongside internal vaults, virtual vaults have all but replaced bank-operated vaults. Over the past

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decade, most US banks have outsourced all vault operations to CiT. The largest banks have blended networks. The rationale is manifest.

Cash logistics is a scale business. It costs comparatively little to add incremental capacity in an existing infrastructure (certainly less than building new vaults).Virtual vaults have proven to be an asset to financial institutions as a tool to improve enterprise cash logistics as well as a mechanism to grow banks geographic vault cash footprint with minimum investment. Yet, virtual vaults are an incremental improvement. Their use has resulted in consolidation of banking relationships among merchants in some cases, but has not fundamentally altered the costly task of cash control within merchants or the frequent transportation requirements for deposit and change orders. Branches remain central to merchant cash and coin transactions, particularly among smaller retailers.

The state of cash logistics among US banks is ripe for remote cash capture as a means to redirect branch cash deposits to the vault network — as well as a product that can garner additional treasury management revenue. Celent observes several factors within both retail and business/corporate banking lines of business favorable to remote cash capture. Specifically:

• Institutions are keen to migrate transactions to self-service channels. Remote cash capture is an excellent way to reduce the role of branches in meeting merchant’s cash and coin processing needs.

• Bank treasury management departments are keen to grow fee revenue without the expense of cash vault operations. They generally seek to own the client relationship, but show willingness to outsource key components of solution delivery.

MERCHANT CASH LOGISTICS Merchant cash logistics has always been an important topic to multiple constituencies within retailers, most notably Store Operations, Loss Prevention, and Treasury. We look at each in turn in this section. Before doing so, it is important to underscore that merchant cash logistics is becoming increasingly important — despite the continual growth of noncash payment methods. Retailer’s focus on store profitability in the face of growing digital commerce has spawned increased scrutiny toward administrative cost reduction, including cash handling.

Store Operations Just like many bank branches, cash handling remains a labor-intensive, inefficient process for most merchants. Daily activities include: checking in and out sales clerk tills, reconciliation of cash to the point of sale (POS) system and preparing and making bank deposits. Retailers with multiple check out registers often have cash rooms with dedicated employees counting outgoing and incoming tills and preparing bank deposits. Adequate inventory of currency and loose change is required at each register, resulting in “change orders” placed with armored couriers or depository banks. Dual control is a common requirement given the exposure for theft in those situations.

Understandably, cash control in retail merchants varies considerably. Large box retailers present vastly different cash logistics challenge than convenience stores, for example. What appears consistent, however, is that present cash practices require substantial daily labor. The procedures have stood the test of time, and although augmented by counting equipment and computers, require multiple custodial exchanges and substantial work, regardless of the merchant segment being considered.

For smaller format retail merchants, cash handling usually involves the site manager. A typical site manager at a convenience store or quick service restaurant would be responsible for counting cash at least two or three times per day, and would drive to the bank to make deposits — twice per day in some cases. Unit managers at cash-intensive

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merchants such as quick service restaurants can spend from two to three hours per day handling cash, according to Celent interviews. Many smaller format retail merchants employ drop safes near the point of sale as a means to safely warehouse cash throughout the day, since large volumes of cash in the till would present significant loss exposure via theft. Many of these same merchants would benefit greatly from cash accepting, validating safes at the point of sale. Others would see a business case for cash recycling.

Larger format retailers face a greater challenge by virtue of the comparatively large number of points of sale and the resulting complexity of cash control among them. Unlike smaller format retailers, these “big box” stores typically operate a cash room staffed with full-time personnel. Commonly, retail back office cash room operations are augmented by currency counters interfaced with cash settlement systems. Cash room automation streamlines the repetitive work and also provides centralized reporting for treasury and cash management personnel at headquarters. Even with automation, retailers spend considerable time issuing and managing cash funds. Doing so involves low denominations and large volume of bank notes with considerable handling and multiple touch points. For perspective, the cost of labor for store cash handling in a typical ten-register store can easily reach $25,000 annually.

Regardless of size, retailers face the ongoing problem of receiving higher value denominations (typically $20 bills) and providing customers with change using smaller value denominations. In addition to the need to make bank deposits, this dynamic creates the need for periodic change orders to restore necessary point-of-sale till inventory. One manifest benefit of recyclers is their ability to reduce the frequency of change orders and their resulting cost.

In summary, Celent observes several store operations considerations favorable to remote cash capture. Specifically:

• Reducing frequency of CiT — when paired with bank provisional credit. Recycling can further reduce CiT frequency by minimizing change order frequency.

• Reduced labor costs — all RCC solutions contribute to reducing in-store labor costs. • CiT decisions are often made at the store level, with retailers using CiT in some

stores, while others deposit at the branch. This trade-off between labor and CiT costs shifts with RCC, making broader use of CiT more palpable (albeit at reduced frequency), while reducing risk of robbery and harm to store personnel.

Loss Prevention In addition to labor cost, merchants experience internal and external theft as well as liability insurance costs as a direct result of cash acceptance. Even with dual custody, internal theft is commonplace. According to the National Retail Federation’s 2016 National Retailer Security Survey, the average loss rate among US retailers (total shrinkage) was 1.4% of sales, or US$45.2 billion nationwide in 2015. While shoplifting was the largest source of shrinkage (39%), employee theft of goods and money contributed to 36% of losses or approximately 0.5% of sales (US$22.6 billion) in 2015. Celent interviews among treasurers at retailers suggest theft related losses may be under reported in the above mentioned survey.

Not all internal shrinkage is attributed to employee theft. Fully 25% of surveyed shrinkage is due to administrative errors or unknown loss mechanisms. Cash handling contributes to this loss mechanism in many retailers, in part, due to a lack of precise accountability. Loss Prevention departments therefore invest in POS system reporting and data mining systems to uncover suspicious activity.

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Sixty percent of surveyed retailers invest in drop safes designed to safeguard cash that would otherwise be in check out tills and therefore exposed to robbery. These safes (both simple safes and validating depository safes) don’t necessarily impact the incidence of robbery, but do reduce the loss incurred when robberies occur.

CiT is a common loss prevention consideration; with nearly three-quarters of surveyed retailers using CiT. The survey sample was primarily among larger retailers operating more than 200 stores. Armored courier services are often funded from a retailer’s loss prevention budget.

The use of armored couriers to transport check and cash deposits seems like a logical decision. Why don’t all retailers use CiT? Because armored transportation is costly. Couriers price transportation based on a number of factors including distance to the vault, the ability to schedule additional stops on the same run and the time needed within the store to conduct the work. Stores that are far removed from the cash vaults incur higher transportation costs as do those with fewer other stops on the route across which the transportation costs can be divided.

The most likely to use CiT are large format (big box) chain stores which can amass comparatively enormous daily cash volumes. Retailers often select locations for courier transportation based on the amount of cash collected and the risk associated with using store personnel for transportation. A common metric that influences which store locations use armored transportation is the CAP Index, a quantitative measure of the likelihood of robbery available by zip code. Once stores are selected for armored transportation, frequency must be determined. Doing so typically involves balancing transportation cost with the cost of funds tied up as nonworking capital within the stores. Treasurers dislike infrequent courier pickups, however, because multi-day bank “lump sum” deposits complicate reconciliation and delay cash posting. Store Operations on the other hand, favors infrequent courier pickups because they disrupt store operations.

Celent interviewed a large, national retailer that spends over US$500,000 monthly for armored courier transportation across its 1,700 stores (about US$300 per store per month). Despite clear benefits, many retail merchants do not use armored couriers for deposit logistics. If they use them, they do not use them at each store.

In summary, Celent observes several loss prevention considerations favorable to remote cash capture. Specifically:

• Secured cash apart from checkout tills to reduce robbery exposure. • Rigorous cash handling procedures and accountability to deter internal theft. • Improved business case for broad utilization of CiT, which in turn, reduces loss

exposure associated with staff deposits to local bank branches.

Another set of considerations avail themselves at the treasury level.

Treasury Treasurers and corporate cash managers are less concerned about store operations as they are in achieving rapid cash application, minimizing bank fees, and reconciling bank deposits with point of sale information quickly and efficiently. Treasury typically owns bank and courier relationships if couriers are used for store level deposit transportation.

A historic reality among large retailers has been the pragmatic requirement for a large number of bank relationships. Retailers covering broad geographic footprints have had to maintain a particularly onerous number of relationships, complicating reconciliation and multiplying bank fees. Historically, the need for multiple depository relationships was a direct result of the transportation requirements inherent in cash and check acceptance.

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Deposits and change orders were made at a branch local to individual stores. In an effort to reduce the number of bank relationships, some retailers have performed proximity studies, trading off cost savings through fewer bank relationships with increases in local transportation and handling costs. CiT providers have responded by offering virtual vault solutions for merchants willing to use armored transportation at a majority of stores. Virtual vaults reduce local transportation costs because of their proximity to many retail locations. Once processed, currency and coin can be deposited in any financial institution having virtual vault relationships with the couriers (see Figure 8).

Figure 8: Reducing Bank Relationships Through Virtual Vaults

Source: Celent

Starbucks described the compelling benefits of its recent move from branch-based to a central treasury managed cash management regimen across 8,400 stores in a DTS Connex sponsored webinar.1 Starbucks’ move is indicative of an increased retailer focus on optimizing cash to drive efficiencies. Poor cash management negates a retailer’s ability to fully put it to work. Cash can sit idly in registers and in cash rooms, where its potential for investment, debt repayment, or business expansion cannot be realized, thereby negatively impacting retailers’ working capital position. This is catalyzing retailers to look at new ways to manage store cash.

In summary, Celent observes several retailer treasury considerations favorable to remote cash capture. Specifically:

• Reduction in nonworking capital. • Improved visibility to cash position. • Fewer depository relationships with a commensurate reduction in bank fees and

expense associated with reconciling deposits. • Transparency in CiT service levels.

1 A recording of the webinar is available at http://www.dtsconnex.com/hamilton/ .

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Total Cost of Cash Acceptance All of the abovementioned considerations from Store Operations, Loss Prevention, and Treasury contribute to an overall cost for cash acceptance. While quite real, this cost is not as obvious as that of card acceptance, for example, owing to its tangible interchange fee. In contrast, the cost of cash acceptance is spread across many areas and has many opportunities for improvement.

If CiT is used, careful management is a justifiably high priority. CiT, however costly, is just one component of the total cost of cash acceptance for retail merchants. Overall cost is highly variable, ranging from less than 0.5% of cash sales to over 3% of sales according to 2008 Brink’s research. A rough industry average appears to be approximately 2% of cash sales, making cash among the less expensive tender types — depending of course upon how much is received and how it is handled.

Much of the cost of cash acceptance for merchants represents a fixed cost. In particular, the cost of necessary security measures (surveillance cameras, security guards, secure storage, training, etc.), are considered fixed expenses. Table 1 illustrates the many components and some of the many factors affecting overall cost of acceptance.

Table 1: Components to the Cost of Cash Acceptance

COST COMPONENT FACTORS AFFECTING COST

STORE OPERATIONS

Transportation Scales with frequency and distance Often involves mix of armored courier and store personnel time and mileage costs.

Employee time managing cash Scales with cash volume.

Scales with number of POS terminals.

Internal theft Correlates to the number of custodial changes in the cash cycle.

Reduced through employee accountability and reduction in cash touch points.

Administrative errors Bank deposit adjustment fees scale with error rate.

Administrative errors also cause re-work and additional cost.

Liability Insurance premiums linked to theft incidence and use of employees to make deposits.

CENTRAL TREASURY

Reconciliation Increases with the number of stores and bank relationships.

Bank processing fees Increases with # of bank relationships.

Processing fees scale with volume. May include cost of sweep or zero balance accounts if multiple banks are used.

Interest cost on store funds Function of rates and amount of cash retained on premise.

Source: Celent

Automation of the cash handling process is the domain of RCC which can significantly contribute to reducing the total cost of cash acceptance for retailers while improving overall cash cycle management. The next section explains RCC, the current solution landscape, and why RCC can present a compelling value proposition.

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UNDERSTANDING REMOTE CASH CAPTURE

A variety of solutions to cash management have emerged. The simplest of solutions, pioneered in the convenience store segment, is the drop safe. Drop safes provide cash security and have been associated with reductions in theft, but offer no benefits from automation. Validating depository safes represent a more advanced option. Providing cash security similar to drop safes, these “smart safes” also reduce deposit preparation and transportation costs, reduce in-store cash handling and can reduce bank fees. A third option is the cash recycler. Recycling safes further reduce in-store handling and transportation costs and can reduce the cash on hand among deploying merchants. Exactly how these solutions are best used is a function of store specific variables.

Larger format retailers, for example, have seen a significant reduction in store-level cash handling through the use of cash room automation solutions. These consist of high-speed, large-capacity currency and coin recyclers paired with an enterprise cash management portal. These solutions replace the cash room attendant with fully self-service automation. Figure 9 shows one way to segment retailers based on the opportunity for cash logistics automation, showing clear segments for both smart (depository) safes and recycler-based cash room automation.

Figure 9: Clear Segments for Cash Automation Solutions

Source: Celent

The “best” solution varies from store to store based on many variables — including which functional area is sponsoring the initiative. Generally, larger footprint stores and those having a greater number of point-of-sale terminals, as well as those having higher average daily cash acceptance are more likely to choose a recycling solution. Several vendors offer detailed ROI calculators to assist retailers in designing a solution for maximum impact. Table 2 contrasts the solutions, benefits, and target segments.

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Table 2: Cash Automation Solutions Are Segment-Specific

Solution Price Range Benefits Target Segments

Drop Safes Less than $1,000 Cash security Single POS: - Small format QSRs - C Stores

Depository Safes $3k-$30k

Cash security Reduced deposit prep. And transport Reduced in-store handling Reduced bank fees

A few POS: - QSRs - C Stores - Movie Theaters - Liquor stores - Specialty retail

Recycling Safes Over $30k

Cash security Reduced deposit prep. And transport Further reduced in-store handling Reduced bank fees (fewer change orders) Reduced cash on-hand

Many POS: - Large grocery - Big box - Dept. Stores - Full-service

hospitality

Cash room automation devices Over $50k Further reduced in-store

handling

The largest big box, department and grocery store formats

Source: Celent

As early as 1999, retailers had the opportunity to “electronify” check payments at point of sale via conversion of checks to ACH debits (aka point of purchase check conversion or POP). Since the Check Clearing for the 21st Century Act (Check 21) became effective in 2004, a rapidly growing number of merchants have been able to truncate check receipts and process the payment electronically, thus avoiding the deposit transportation burden for those items. But, many merchants have been stuck holding the bag (of cash). With the electronification of checks, cash has become the final non-electronic payment type requiring physical deposit. It’s the last man standing, as it were.

Beginning in 2004, financial institutions and cash logistics providers began offering conceptually similar electronic deposit services for cash by providing merchants with technology that captures (validates and safely stores) cash on site and electronically transmits detail to a depository bank for provisional credit. This process is known as remote cash capture, a term trademarked by ARCA in 2009. Unlike checks, however, cash is not truncated at the point of capture and must be suitably handled. For this reason, RCC solutions require a collaborative effort among several parties. Financial institutions can’t offer an RCC solution completely on their own.

Key Research Question

2

What is remote cash capture?

Remote cash capture (RCC) is the deployment of secure, validating currency-accepting and recycling equipment (aka smart safes) at merchant locations

coupled with remote management, information reporting and provisional credit mechanisms.

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RCC is a closed-loop approach to cash management, a service that includes intelligent cash accepting or recycling safes, armored car transportation, deposit processing, and bank credit to significantly reduce the time and risk of handling cash. Remote cash capture relies upon four components.

1. Smart safes — Secure, in-store safes that accept, validate and count currency with a high degree of accuracy and dependability. Such safes have been available since 1995, but have more recently been linked with banks for provisional credit. Modern devices offer remote management and diagnostics capability, improving reliability and reducing servicing costs. User authentication improves transparency, improves procedural compliance and deters theft.

2. Currency reporting — Continual electronic transmission of the precise safe deposit/content information to central treasury and optionally, the merchant’s financial institution if provisional credit is desired. This provides the basis for provisional credit, when offered, and offers Treasury and Loss Prevention valuable insight.

3. Ability and willingness for the financial institution to grant ledger credit for remotely validated cash. A growing number of banks are offering provisional credit based on the validated currency. Commonly, cash logistics providers or third parties guarantee the funds, covering any losses resulting from discrepancies discovered following physical cash verification.

4. Service and support, including solution design, installation, and training, plus field service and remote diagnostics and monitoring in many cases.

5. Cash logistics, including armored cash pickup, change order servicing, deposit aggregation and virtual vaulting.

The centerpiece of any RCC solution is the bill validator cash accepting or recycling safe (a.k.a. smart safe). In addition to counting and validating cash as it is deposited into the safe, the validator safes facilitate audit trails and use a variety of standard reporting methods to simplify end-of-shift and end-of-day operations. Figure 10 illustrates RCC’s many components.

Figure 10: Multiple Interconnected Systems Deliver Remote Cash Capture

Source: Celent

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While bill validator safes have been in production since 1995, remote cash capture as described above came on the scene much later, with the first banks participating in provisional credit in 2004. The advent of provisional credit on remotely validated currency has resulted in a step change in merchant interest in RCC. This may seem odd considering the relatively insignificant contribution of float to overall cash acceptance costs. Daily provisional credit is key to RCC’s value proposition. Here’s why:

• Although the bank’s cost of provisional credit in today’s environment is quite low, merchants often value the credit in terms of their weighted cost of capital — a much higher rate.

• Reconciliation efforts are significantly streamlined through daily store-level deposits. Many store locations that don’t use RCC typically do not deposit daily.

• Provisional credit reduces the urgency for physical transportation. Courier frequency becomes a function of cash volume and safe capacity rather than access to funds. For merchants that already use armored courier transportation, the move to RCC can significantly reduce transportation frequency — and therefore, costs.

Figure 11 illustrates an example of provisional credit using RCC.

Figure 11: Provisional Credit Using RCC (Illustrative)

Source: Celent Note: Cutoff (polling) times and CLP pickup days vary based on location hours, cash volume and distances.

With the basics of RCC explained, we now examine its value proposition to retail merchants and banks.

MERCHANT VALUE PROPOSITION To understand the merchant basis for interest in remote cash capture, Celent interviewed eight merchant users or evaluators of the technology: Boston Market, Charming Shoppes, Checkers, Floor and Décor, Giant Eagle, Starbucks, T-Mobile, and Wendy’s, as well as multiple vendors of cash management solutions.

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The value proposition for merchants is a function of many variables. The benefits are also a function of the solution in place. Cash logistics providers have long deployed drop safes without validators. Now, single note cash acceptors are commonplace, while several manufacturers offer much larger bulk-feed cash accepting safes that also recycle currency. The latter provide substantial benefits beyond cash acceptors, but are large and expensive — limiting their applicability to larger format retailers having considerable cash usage (e.g., US$30,000 and higher per day). Table 3 on page 16 illustrates the spectrum of benefits of RCC based on the solution employed and suggests typical target markets for each solution variation.

Note that the benefits of same-day credit for validated cash is relatively significant to cash acceptor users for its ability to reduce the number of courier trips and resulting cost in many applications — not for its float value in the current low rate environment. Some users of recyclers, however, do not emphasize same-day credit because the larger benefit of systemic improvement in cash cycle efficiency overshadows. Moreover, recyclers have been more likely to be embraced by larger format retailers. The larger the store, the more likely it will utilize frequent CiT services. Thus, provisional credit’s ability to reduce CiT frequency diminishes among larger format retailers. More important was the recycler’s ability to reduce the cost of change orders. Merchants were quick to point out the following benefits of RCC

Cost Reduction • Eliminates the need for trips to the bank. Since cash is deposited electronically, local

deposits are no longer required. Courier pickups at less frequent intervals replace local deposits.

• Lowers reconciliation cost. Because funds are deposited daily into a central account, reconciliation of bank deposits to point of sale systems is simplified. Multi-day “lump-sum” bank credits are eliminated. Deposit activity can be consolidated into fewer bank accounts. Reconciliation is assisted by store-level and employee-level reporting.

• Improves cash flow. Because financial institutions provide same-day provisional credit for validated currency, retailers can improve their cash position without increasing the frequency of cash deposits or courier pick-ups.

• Reduces cash on hand. This benefit is sometimes over stated. Recycling smart safes can have a significant impact on cash on hand, but the merchant realizes a one-time benefit.

Risk Reduction • Increases staff safety and reduces robbery exposure. One franchise QSR owner

reduced liability insurance premiums by 30% as a result of RCC. • Reduce internal and external losses. Employees can’t access cash once deposited

into the safes. Any resulting shortages from not depositing cash would be readily discovered.

• Increases employee accountability. Employees interact with safes using individual PINs, so all activity is tracked to individual employees.

• Eliminates missing deposits. Several retailers interviewed mentioned the disappointing reality that missing deposits are a recurring event, with little recourse for the treasurer.

Efficiency Gain • Simplifies store cash handling procedures. Cash counting and bank cash deposit

preparation is largely eliminated. • Increase efficiency of store managers. Typically, store managers are directly involved

in cash audits, till preparation and deposits. RCC relieves them of much of this effort, freeing them to mind the store instead of the cash.

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Table 3 summarizes merchant RCC benefits grouped by area.

Table 3: RCC Merchant Benefits: More Than Meets the Eye

COST REDUCTION RISK REDUCTION EFFICIENCY GAIN IMPROVED FUNDS AVAILABILITY

Lower deposit fees

Fewer adjustments

Fewer courier runs

Fewer change orders

Reduced shrinkage

Reduced errors

Lower liability

Lower risk of robbery

Faster, simplified reconciliation

Less store effort handling cash

Improved employee accountability

Faster funds availability without daily transportation

Source: Celent

FINANCIAL INSTITUTION VALUE PROPOSITION A bank’s RCC value proposition is a function of its position in the value chain. A bank simply providing provisional credit for safes sold and serviced by a third party would realize a weak value proposition compared to banks willing to stand up a complete solution — but would also require a smaller investment. This section contrasts both approaches. To understand the financial institution value proposition, Celent interviewed ten banks currently offering same-day posting of validated cash: Bank of America, East West Bank, Fifth Third, First Source Bank, JPMorgan Chase, Key Bank, PNC, SunTrust, US Bank, and Wells Fargo.

Provisional Credit-Only Approach Celent estimates there are roughly 200 US banks offering provisional credit with one or more CiT-led solutions. For banks simply providing provisional credit, the financial institution value proposition for remote cash capture may not be obvious. After all, banks may appear to lose the cash processing business cannibalized by RCC and they must tie up nonworking capital in the form of ledger credit offered on non-investable funds held in distributed safes.

Celent found a relatively consistent value proposition among banks adopting a minimalist RCC position. Most banks interviewed look at RCC as a way to increase deposit growth and build or enhance customer relationships.

• Customer retention. More than one bank cited a large, valuable client pursuing RCC. For banks in this position, the alternative is to meet the client’s needs or lose the deposit relationship. Often, at risk may be the role of primary bank which can risk the loss of multiple sources of revenue beyond vault cash services.

• Deposit growth. Commonly, mid to large merchants utilize multiple bank relationships. Celent interviewed national retailers with hundreds of depository relationships driven by the need (or choice) to deposit cash and checks at branches near each store location. Even merchants utilizing armored couriers often have 30 or more depository relationships because couriers are often not used for each store. Thus the bank providing provisional credit stands to capture a disproportionate share of cash deposit volume. Further, since cash logistics providers provide check imaging in most cash vaults, check deposits can follow the cash to the winning RCC bank. Recall that deposit growth can be achieved with virtual vaults (see Figure 8 on page 13). Thus, RCC may not directly lead to deposit growth unless clients adopt it over a virtual vault approach to cash handling.

In many cases, banks’ decision to participate in RCC via provisional credit was largely defensive. In these cases, investments in sales and marketing are typically minimal

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alongside minimal Treasury Management revenue expectations. This works for many banks, particularly those with an otherwise uncompetitive Treasury Management product portfolio. But for banks wishing to compete more aggressively and for who retailers represent an important market segment, a bank-led approach to RCC may be preferable.

Bank-Led Solution Approach While banks have historically played a minor role in remote cash capture (e.g., providing provisional credit for cash deposits located in intelligent safes), the opportunity to capture a larger part of the value chain is at hand for banks willing to do the work. If managed adeptly, not only can banks carve out a more prominent role, they can do so in a manner that allows them to exert greater control over the cash cycle, improving its efficiency — and profiting by doing so.

Being bank-led does not define the RCC solution attributes, it just means the bank offering RCC is not hostage to the tightly bundled and proprietary constraints of CiT. Banks standing up their own RCC offering have many options. They are covered in the next section. Options aside, a bank-led approach to RCC invites a very different sales and marketing approach. Rather than being the last party in the discussion, banks lead the selling effort and take ownership for service delivery (typically with the help of third parties). Doing so creates a broader value proposition. In addition to the deposit growth and customer retention benefits, Celent observes two additional benefits: revenue growth and cost reduction.

• Revenue growth. In CiT-led scenarios, banks offering provisional credit may nominally receive ten percent of total monthly solution revenue, with CiT earning 90% of monthly solution revenue — not including any potential cannibalization of cash processing and change orders. Bank-led solutions lead to dramatically higher revenue realization because banks book all RCC revenue components except for cash transportation charges earned by CiT. The difference is stark — potentially ranging from roughly $200 to upwards of $1,000 per location per month.

• Cost reduction. RCC can siphon considerable cash volume away from participating bank branches. Most banks interviewed for this report price branch cash deposits at a premium to those received at cash vaults in order to reduce the volume of branch deposits and thus minimize the associated handling cost — with limited success. That’s because CiT is required to make vault cash deposits, and the cost of armored transportation typically more than offsets the bank deposit discount. RCC represents the best of both worlds from a cash logistics perspective. Cash is processed where it can be done most efficiently, branch personnel can focus on sales and service activity, and the bank receives fee income to offset its loss of working capital.

Arguably, the cost-reduction benefit is a generic one. Celent associates it with the bank-led approach because banks taking a minimalist position in RCC generally have so few RCC clients that the branch impact is minimal. Conversely, banks such as Bank of America and Fifth Third realize a tangible benefit because of the scale of RCC deployments. Those banks are examples of cross line of business collaboration. Once exceedingly rare, more banks are beginning to promote RCC as a mechanism to reduce branch transactions. Doing so reduces servicing costs and supports branch transformation efforts broadly underway.

But the decision to stand up an RCC product should not be undertaken lightly. While there are clear benefits to fielding one’s own solution, doing so comes with a comparatively greater investment. In Celent’s view, banks should not undertake such an initiative if its primary objective is to mitigate the risk of deposit loss from an occasional client. Conversely, if RCC makes strategic sense to a bank, merely providing provisional credit on a CiT-led solution will likely disappoint. Table 4 contrasts the two choices.

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Table 4: Bank-Led RCC Represents a Stronger Value Proposition for Participating Banks

Considerations Credit-Only Bank-Led Cost Elements Contracts/legal

System integration

Training

Support Revenue Elements Provisional credit fee

Cash processing fees

Change order fees

Hardware/software/service fees

Source: Celent Legend: = low effort/cost/revenue impact, = high effort/cost/revenue impact

The opportunity for banks appears to be strongest among smaller merchants: auto parts stores, midsize grocery, drug and pharmacy, healthcare providers, restaurants and bars. Large format retailers have far more complex cash management needs and see less benefit in provisional credit since most invest in daily cash transportation as a practical necessity. Thus, banks pursuing the large format retail segment must develop a deep understanding of merchant cash management considerations and how each element of RCC solutions addresses them. A small but growing number of banks are doing so.

ADOPTION DRIVERS Multiple participants in the value chain cite accelerating adoption. Celent attributes this to five factors that are both important and systemic. Taken together, they represent a take-two moment for the industry. For banks, they represent an opportunity to make step-change improvements in the value they provide to merchant clients as well as a step-change growth in treasury services revenue earned by so doing. Here are the five factors that will drive continued adoption.

1. Open Systems Environment The solution landscape has moved from a CiT-dominated closed-loop system to a bifurcated one. Now, alongside proprietary CiT-led solutions are open system alternatives with the advent of third party, hardware, and CiT-agnostic software solutions. This is significant, because it allows solution providers to de-couple CiT. This offers retailers a much-desired flexibility to choose its CiT relationships, as well as the ability to provide a single view of enterprise cash — even when multiple CiT and/or hardware manufacturers are used. Additionally:

Key Research Question

3

What is leading to the growing adoption of RCC?

Five factors contribute to important and systemic growth in remote cash capture adoption. Key among them is the growing number of open-

systems alternatives to proprietary CiT solutions.

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• As interoperability improves between hardware and software platforms, the cost and complexity of systems integration among all parties are on the decline.

• Since solution bundling is fundamentally easier in an open systems environment, more solution providers are actively selling to retailers — hardware providers, software providers, banks, and CiT. This is rapidly increasing awareness of RCC and accelerating its adoption.

2. Hardware There is much to be excited about in the hardware realm of RCC. There are more manufacturers active in the market, and most all have introduced second-generation devices designed for remote management and more easily integrated with external systems. Additionally:

• Small footprint, lower-cost validating safes are now available that improve the RCC business case among smaller format merchants.

• Recyclers are now able to better accommodate provisional credit and streamline CiT servicing. Many models now offer separate depository cassettes or safe bags in addition to cassette or RSM recycling mechanisms.

• Broadly available remote monitoring and management capabilities improve device reliability and significantly reduce servicing costs. Smart safes generally are no longer the headache first generation devices were. Malfunctions can now be detected remotely — and remotely repaired in some cases. If a safe goes offline or its contents approach a preconfigured threshold, appropriate parties are alerted. Field support personnel know in advance of likely problems and can update firmware remotely, significantly reducing the cost of field maintenance.

• Competition is growing among manufacturers. Traditional smart safe manufacturers are investing in recycling platforms, and traditional recycler powerhouses are investing in smart safes.

3. Business Intelligence As encouraging as the hardware developments may be, hardware attributes are typically not central to the RCC value proposition to retailers. Instead, the focus has moved beyond hardware to the benefits of enterprisewide cash visibility and management. Instead of proprietary approaches to business intelligence tied to specific CiT or hardware configurations, a growing number of platforms offer CiT and hardware flexibility. In some cases, retailers adopt cloud-based software platforms first, and subsequently install smart depository or recycling safes. Additionally:

• CiT and hardware-agnostic monitoring platforms emerge with varying capabilities from vendors such as Fiserv, International Financial Services (IFS), Namsys, and Safelogy.

• Banks now have a cost-effective path to market in white labelled, cloud-based portals that integrate cash management, remote device management, alerts and reporting.

4. Managed Services Options Until now, banks wishing to stand up their own RCC solution required substantial up-front investment and a long-term commitment. Not anymore. Now, providers such as Cash Connect, G4S, and Superior Press offer banks a variety of options, from program management and systems integration to full managed services solution delivery. Additionally:

• Banks seeking a minimalist approach to RCC need not concede the disadvantages of participating only in CiT-led solutions.

• Solutions can be flexibly designed and delivered — often in less than six months. For example, a bank could begin its foray into RCC with a limited line of smart safes and

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manually applied provisional credit until a critical mass of clients is on board. It could then optionally expand the device options and invest in core systems integration for the automatic application of credit.

5. Retail Business Climate With the continued growth in digital commerce, retailers of all sizes are under pressure to improve same-store sales and reduce costs. Retailers are keen to spend less time on tasks and more time with customers. In this climate, the value proposition of RCC is resonating with Store Operations, Loss Prevention, and Treasury alike.

The next section compares selected solution alternatives and the vendors involved.

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SOLUTION DELIVERY ALTERNATIVES

Three solution delivery alternatives were mentioned previously. While each delivers a conceptually similar product, they do so in a meaningfully different manner that can be important to retailers. In each of the three alternatives, different actors in the RCC value chain deliver the various RCC service elements. Figure 12 illustrates each service element and contrasts their delivery across each of the three alternatives.

Figure 12: Three Solution Delivery Alternatives Are Available for Retail Merchants

Source: Celent

This section looks more deeply into competing alternatives and contrasts solution providers aligning with each alternative.

MANUFACTURER-LED SOLUTIONS In addition to the cash logistics providers, multiple hardware manufacturers are selling bill validator safes and recyclers direct to retail merchants and through value added resellers. In those implementations, the retailer is tasked with systems integration and separate contracting of provisional credit, equipment purchase or leasing terms and armored transportation.

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With manufacturer-led solutions, bank provisional credit is left to the retailer and its bank to arrange. Not all implementations involve provisional credit.

Typically web-based, cash management software provides retailers with data from every safe on the network with a variety of configurable reports and alerts. The software also supports remote safe management in most cases, a function used by the servicing agent, not the retailer. Software also typically supports provisional credit. Manufactures either develop their own portals (ARCA, FireKing, Glory) or utilize software developed by a third party (Armor Safe, Ellenby, Revolution, Tidel). Table 6 lists the majority of manufacturer-led solutions available in North America.

Table 5: Many Manufacturers Are Independently Selling into Retail

MANUFACTURER SMART SAFE RECYCLER OPERATING SYSTEM PORTAL FIELD SERVICE

ARCA CS1one CSeXtra

CM18 CM18EVO

ARCEO (proprietary) Proprietary In-house

ARMOR SAFE CacheSYSTEM CacheNET Proprietary Namsys In-house and third party

ELLENBY CashTrak Proprietary Safelogy Third party

FIREKING Ascent Series Summit Series Planned* Linux Proprietary In-house

GLORY CashInfinity Windows Proprietary In-house

GUNNEBO Deposit D Series

Note and Coin Recycler

Windows Proprietary VARs Bancsoource

REVOLUTION 7500 Series Windows Axeda G4S

TIDEL Series 3 Seried 4 Series 4e

S5 Recycler Windows Fiserv Burroughs

TRITON VersaSafe Windows CE Proprietary VARs

Source: Manufacturer interviews, Celent analysis *Coming in 2018 with Glory and Fujitsu as the hardware providers.

Most manufacturers cooperated with Celent’s research, but RFI participation varied considerably. We cannot convey a precise view of manufacturer market share as a result. Among depository safes, Tidel enjoys a substantial market share, followed by FireKing and the balance of the market lagging considerably behind FireKing. Among recyclers, Glory holds a commanding market share lead in the US, followed by Arca, Diebold-Nixdorf, Revolution, and SoCal Safe.

Manufacturer-led solutions are CiT agnostic and can sometimes support competitive safe reporting. The latter is key, because retailers desire a single view of cash position and may utilize multiple device types.

FULLY MANAGED SOLUTIONS Fully managed RCC solutions are assembled (and in some cases delivered) by third parties based on the specific needs or requirements of individual banks. The aim of all fully managed solutions is to equip banks with CiT agnostic RCC solutions quickly and inexpensively. The idea is conceptually similar to a bank outsourcing its lockbox or cash vault processing to a third party, rather than building the capability in-house. Thus, these

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solutions could be used to supplement an existing RCC offering or provide the end-to-end capability. One way to think about these solutions is in terms of the solution components and service delivery.

Solution Components Solution components refer to the specific hardware and software options offered to prospective banks along with component functionality. For example:

• Smart safes and various sidecar or peripheral options. Most solutions provide turnkey options for banks to offer merchants the ability to buy or lease devices. Most lead with a specific device manufacturer, but support alternatives to varying degrees.

• Bank brandable cash management portal for use by retail merchants • Provisional credit mechanisms. Minimally this requires banks to apply credit

manually. In some cases, the credit application can be automated through core system integration. Providing this credit also requires cooperation as well as systems integration between the depository bank and the armored courier servicing the smart safes (optionally, a third party in the case of Cash Connect and G4S).

• Change ordering mechanisms as part of the same bank brandable web portal. • Remote device management capability for use by the bank or servicing

organization if first line support is outsourced. • Content guarantees. In most cases, banks own the cash once deposited. Should

discrepancies emerge between validated safe totals and subsequently verified cash totals, fully managed fully managed solution providers typically offer a content guarantee to protect the bank from loss.

• Cash purchase — One provider, Cash Connect, offers an alternative to bank-owned cash as a path towards provisional credit. Unlike other provisional credit arrangements, Cash Connect owns the cash once it’s validated, not the depository bank. Cash Connect reconciles validated cash records with each participating carrier and deposits funds daily into the merchant’s local bank via ACH or wire. Using this approach, banks can participate in provisional credit for merchant clients without negotiating multiple CiT contracts and virtual vault relationships.

Service Delivery Service delivery refers to the services offered banks to help them stand up and support the chosen solution components. For example:

• Overall program and system management, including active network management. • Hardware and software design and configuration. • Individual customer set-up, configuration and onboarding. In some cases, this can

include hardware training support and servicing. • Posting of provisional deposit credit files to the bank’s DDA platform. • Armored courier management. Smaller banks and merchants may not be in a

position to negotiate favorable CiT terms. Both Cash Connect and G4S optionally perform carrier selection, negotiate SLAs, reconcile carrier invoices, and aggregate billing, if desired. Because of their scale, they may be able to negotiate more favorable CiT terms than many smaller banks could do themselves.

• Some providers even offer sales support to the bank’s treasury salespeople. • First-tier support is a common offering among providers. Typically this takes the form

of 24/7 telephone support and interaction with the provider of field service, when necessary. Remote monitoring goes hand-in-hand with service and support offerings across all solution providers.

In some cases, providers offer considerable flexibility around service delivery elements — providing as much or as little as each bank may want

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Providers Celent identified four providers of fully managed RCC solutions; Cash Connect, Fiserv, G4S, and Superior Press. Each provider’s solution is unique in one or more ways.

Table 6: A Snapshot of Fully Managed RCC Solution Alternatives

Elements Cash

Connect Fiserv G4S Superior Press

Solution Components

Hardware Arca FireKing

ARCA Tidel

Tidel Revolution Tidel

Portal Fiserv Fiserv Proprietary Fiserv

CiT Integration x x x x

Provisional Credit x x x x

Content Guarantee x x x x

Cash Purchase x

Solution Delivery

Merchant hardware installation, set-up and training

via third parties

via hardware partners

x Via Bibbeo

1st tier support x x x x

Field Service x via

hardware partners

via hardware partners

x

Remote Monitoring x x x x

CiT Management x Via Cash Connect x

Source: Vendors, Celent analysis

Cash Connect — A veteran of ATM cash management, but new to RCC, Cash Connect is distinctive for its Cash Purchase Service — an innovative approach that may appeal to smaller banks that lack the appetite and/or budget to facilitate a closed-loop remote cash capture offering. Also distinctive is its CiT management offering. Cash Connect is not the only remote cash capture solution with CiT management. However, Celent is impressed with the breadth of carriers involved (7 or more) which affords banks the ability to “fine tune” CiT programs on a merchant-specific basis.

Fiserv — Fiserv is distinctive for its broad device support and its significant number of core system integrations. For prospective banks using one of Fiserv’s core systems, the path to fully-automated provisional credit is comparatively fast. For its fully managed solution, Fiserv leads with ARCA and Tidel hardware, but will accommodate other hardware choices, if desired.

G4S — Unlike bank-led solutions, the G4S solutions are bank agnostic. Unlike CiT-led solutions, the G4S solutions are CiT agnostic. G4S sells retail direct and is also courting large banks. Unlike other fully managed solution providers, G4S uses a proprietary cash management portal. Unlike a number of competing solutions that are new to cash room automation, G4S has offered its Cash360 solution since 2013. It has a demonstrable ability to sell and service the largest of retailers (Wal-Mart).

Superior Press — Superior Press provides a turnkey offering with a five month path to implementation yielding quick revenue realization. It also offers broad program management, including the platform, hardware, implementation, communication, network monitoring, and maintenance. Unlike some other options, Superior Press is willing and well-positioned to serve banks across the asset tiers.

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OUTLOOK AND OPPORTUNITIES

The US retailing industry is experiencing difficult times. Industrywide revenues are flat, while losses due to shrinkage and cash theft are on the rise. Investment in loss prevention is also growing, according to the 2016 National Retail Security Survey. Durbin did not provide the interchange relief retailers hoped for, and general purpose reloadable debit cards, with their higher interchange, have not grown substantially. Consumer cash usage will decline modestly, remaining exceedingly relevant. Retailers will be warm to ideas to make cash acceptance more attractive. As one CFO interviewed for this report said, “It will be increasingly difficult to defend not investing in smart safes on an employee risk basis alone. You can’t put a cost on an injured employee”. Now is the time for banks to revisit their RCC strategy.

Will they? Many are about to.

Solution providers are responding. Significant capital infusion among intelligent safe manufacturers will likely usher in new and improved hardware options designed to address a wider market segment than historically enjoyed. Concurrently, more banks are joining the fray, albeit smaller ones, which will add competition and collectively greater sales activity. Celent expects robust resulting growth over the next several years, with the number of installed safes growing between 13% and 15% CAGR through 2021 — with the significant majority of new installations accompanied by provisional credit (Figure 13).

Figure 13: Provisional Credit Is the De Facto Standard

Source: Solution provider interviews, Celent estimates

Celent estimates there are approximately 115,000 connected smart safes installed in the US through 2017. This corresponds to a market penetration of only 10% based on conservative estimates of the US RCC market opportunity of 1.2 million safes (Figure 14). Over the next several years, Celent expects bank participation in RCC to grow from its current level of ~200 to nearly 300 banks. But the real story will not be the number of banks becoming involved in RCC, but the manner in which they do so.

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In the longer term, several factors will favorably impact RCC’s growth prospects.

1. RCC’s evolution to an open-systems environment. Until recently, this was more theory than practice. Practical open-systems solutions are now at hand.

2. An inevitable return to sustainable short-term interest rates will make provisional credit more attractive to retailers. This will enhance the RCC value proposition.

3. A growing concern for personnel safety and loss from theft will be a door-opener for an RCC discussion at many retailers for whom the cost of cash acceptance may not be perceived as problematic.

Figure 14: Bank Participation in RCC Will Continue to Grow

Source: Solution provider interviews, Celent estimates

OPPORTUNITY FOR BANKS Broadly, Celent sees two opportunities for banks in light of the prodigious market opportunity for RCC.

1. For banks of all sizes: decide why you shouldn’t pursue RCC in light of the attractiveness of bank-led solutions and the comparative ease of doing so in today’s environment.

2. For larger banks: consider broadening your solution exposure to include cash room automation.

For banks not yet participating in RCC, the opportunity is ripe to get involved. Early movers have generated merchant awareness at great expense. Every participant interviewed for this report cited accelerating sales volume and a growing implementation pipeline. While CiT providers are showing diminishing interest in further bank integrations, an open systems approach is now available. Smaller, regional CiT providers are joining the fray with relative ease as a result of the several newly available fully managed solutions. Small and midsize banks could similarly join the fun. The majority of the top 100 US banks have yet to enter the market with bank-led solutions. Celent’s conclusion: banks are asleep at the switch. The time is now for large banks to revisit their

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RCC strategy. Continuing to concede 90% of attainable revenue to CiT is no longer defensible in Celent’s opinion.

Banks with larger format retailers in their client base should investigate broadening their RCC solution portfolio to include recycling devices. If not selling them directly, banks should minimally ensure their cash management portals and provisional credit mechanisms support recyclers. Doing so substantially increases the market opportunity by addressing the needs of larger format retailers such as grocery, supermarket mass merchants, and department stores.

For the majority of banks already participating in RCC, there is great opportunity in simply investing resources in the market. Far too many banks are passive at best, letting CiT do all the selling. Many banks barely lift a finger unless CiT brings them a client who wants provisional credit. The adage, “one reaps what he sows” applies here. Celent observes that banks taking this position often see RCC through a narrow, tactical lens. For example, several banks interviewed for this report cited RCC’s potential to cannibalize vault cash revenue. True enough. The landscape is littered with once successful companies that took a similar view of protecting legacy sources of revenue. Kodak comes to mind. In sharp contrast, more aggressive banks that place strategic importance on RCC assert that the majority of RCC clients are net new to the bank. What outcome would you rather have? RCC represents a great way for banks to add value and charge for it. Banks worried about being disintermediated can use RCC as a way to reintermediate.

Banks have the opportunity to “dethrone” CiT from its dominant position in the RCC value chain. Already, the dozen or more device manufacturers operating in the US have been eroding the Big Four’s market share from its peak of roughly 85% in 2007–2009 to 48% in 2017 (Figure 15). What happens next will depend on how banks respond.

Figure 15: The Big Four CiT Providers Enjoy an Eroding Share of the US RCC Market

Source: Solution provider interviews, Celent estimates

Opportunity knocks for banks daring to claim a larger role in the RCC value chain by taking an active role in managing the cash control cycle. The market remains nascent, with 90% of the market opportunity yet to be realized. Now is the time for forward-thinking banks to leverage the big changes taking place in this growing market.

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Was this report useful to you? Please send any comments, questions, or suggestions for upcoming research topics to info@celent.com.

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APPENDIX: VENDOR PROFILES

HARDWARE MANUFACTURERS The hardware market for retail currency automation hardware has been easily segmented in the past. There were smart safe manufacturers and there were recycler manufacturers. Few, if any, participated in both segments. The environment has evolved. Recycler manufacturers such as Arca and Glory are introducing smart safes, while smart safe manufacturers such as Fire King and Gunnebo are readying recyclers for market entry.

Table 7: Hardware Manufacturers and Their RCC Offerings

MANUFACTURER DEPOSITORY SAFE

CASH/COIN RECYCLER

CASH MGMT. PORTAL FIELD SERVICE

ARCA CS1one CSeXtra

CM18 CM18B CC3R

Proprietary In-house

ARMOR SAFE CacheSYSTEM Namsys Mixed

ELLENBY CashTrak 410 CashTrak 420

Safelogy Third Party

FIREKING Ascent Series Summit Series

2018 launch* Proprietary In-house

GLORY Cash Infinity Series

Proprietary In-house

GUNNEBO Deposit Series Note and Coin Recycler

Proprietary VARs

REVOLUTION 2000/4000 Series 2500/4500 Series 5000/6000 Series 7500 Series

Axeda G4S

TIDEL Series 3 Series 4/4e

S5 Recycler Fiserv Burroughs

TRITON VersaSafe Proprietary VARs

Source: Hardware manufacturers * Coming in 2018 with Glory and Fujitsu as the hardware providers

Other safe manufacturers such as LBM Italia, Lincsafe, and Volumatic are not included because they do not materially participate in the North American market.

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FireKing Since its inception in 1951, FireKing Security Group has evolved from a manufacturer of fireproof Vital Records Protection (VRP) equipment into a broad-based security and asset protection company with a bevy of product and service offerings. Through a network of distributors and integrators, FireKing products are available in over 85 countries. A portfolio company of Pfingsten Partners, LLC FireKing acquired Corporate Safe Specialists in 2011 and AP Unix Software in 2012.

Table 8: FireKing Snapshot

HEADQUARTERS New Albany, IN

FOUNDED 1951

ANNUAL REVENUE Not disclosed

EMPLOYEES Approximately 450

SELECT PRODUCT OFFERINGS Ascent Series Smart Safes Summit Series Smart Safes Summit Control Web-based portal

SOLUTION PARTNERS ArmaGard GARDA Sectrans

RELEVANT ACQUISITIONS 1999: NKL Industries and subsidiaries 2011: Corporate Safe Specialists 2012: AP Unix Software

DISCLOSED CLIENTS Banks: Fifth Third Bank Retailers: Boston Market, Chipotle

Source: FireKing Security Group

Products Among a broad array of safes, office products and video security solutions, FireKing leads with two safe smart safe product lines: Ascent and Summit.

The Ascent Series includes bill validating safes, as well as coin and note dispensing units, with riser, sidecar and base options. All are B rated, with multiple single or bulk-feed bill validator options and a high-speed thermal printer. Ascent offers a local end user cash deposit and dispensing solutions for their local operations. All units are capable of transmitting daily credit information by location and a number of pre-established reports by location. As positioned by FireKing, “Think of Ascent as an entry level solution that can be run locally and upgraded to Summit, should the user ever find need for a more enterprise wide program.” FireKing provides an upgrade path for customers who would like the visibility and reporting provided by Summit. The hardware can be retrofit on location to accommodate a Summit solution.

The Summit Series, designed as networked safes, are deployed alongside Summit Control web services portal to make near real-time cash handling information available to the retail enterprise. The combined solution allows total remote management of retail cash management devices along with a complete set of reporting tools for Operators, Finance, Treasury and Loss Prevention. Unlike Ascent, Summit Series safes are configured and monitored centrally. Models within the Summit Line accommodate different speed and capacity needs with a choice of standard or high-capacity cassettes featuring single note or bulk note feed validators.

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Figure 16: FireKing Ascent and Summit Series Devices

Source: Fire King Security Group

All FireKing smart safes run on Linux and utilize an intuitive, icon-driven touch screen user interface that displays information based on each individual user with context-sensitive help. Each offers Ethernet and Cellular device connectivity.

Summit Control provides a user portal for cash management and remote monitoring and diagnostics based on Amazon Web Services (AWS). Beyond standard reports, Summit Control provides a bevy of configurable device-specific alerts, such as: inactivity, cassette nearly full, jam events or main vault alarm (unauthorized safe entry). Customers define who gets what alert and for what reason.

Summit Control also provides a broad range of remote device management. Retailers can make real-time changes to the hardware remotely, including: adding / deleting / modifying users, touch key management, add or remove denominations and software / firmware upgrades.

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Figure 17: Summit Control Serves Multiple User Groups

Source: FireKing

Support FireKing maintains an internal service organization providing a nationwide direct service and support infrastructure, supplemented by a network of third party providers to service over 300,000 units throughout the United States.

Go to Market FireKing sells into the Retail, CiT, and Government market segments both directly and through a network of value-added resellers. For the Retail segment, FireKing solutions equip Fifth Third Bank, Garda, and others.

Differentiators Historically, smart safe offerings were not highly differentiated. In contrast, FireKing’s Summit Series is differentiated for its: • Modern architecture — Summit and Ascent hardware both run on the LINUX

operating system — a significant advantage to both Windows CE and Windows XP in Celent’s opinion for its longevity of support and ease of remote upgradeability. Owners of safes using older, unsupported operating systems invite ongoing challenges.

• User interface — utilizing an intuitive touch pad UI with embedded context-sensitive help reduces training time and the heads down vs. kneel down approach brings the interface closer to the user.

• Highly functional and configurable Web portal — Summit Control provides an uncommonly broad range of configurable alerts and remote management functionality, such as key management and user administration as well as a map-based device monitoring portal.

• FireKing maintains its’ own real-time monitoring system and in-house service team. This benefits end-users with faster issue resolution. With a warrantable service call reported to be at or under .5 call per year, FireKing boasts the industry's highest uptime for its’ Summit solutions.

• For additional data security, Summit utilizes 256bit encryption and read only protection at the device level.

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LEVERAGING CELENT’S EXPERTISE

If you found this report valuable, you might consider engaging with Celent for custom analysis and research. Our collective experience and the knowledge we gained while working on this report can help you streamline the creation, refinement, or execution of your strategies.

SUPPORT FOR FINANCIAL INSTITUTIONS Typical projects we support related to currency automation include:

Vendor short listing and selection. We perform discovery specific to you and your business to better understand your unique needs. We then create and administer a custom RFI to selected vendors to assist you in making rapid and accurate vendor choices.

Business practice evaluations. We spend time evaluating your business processes, particularly in [list several here]. Based on our knowledge of the market, we identify potential process or technology constraints and provide clear insights that will help you implement industry best practices.

IT and business strategy creation. We collect perspectives from your executive team, your front line business and IT staff, and your customers. We then analyze your current position, institutional capabilities, and technology against your goals. If necessary, we help you reformulate your technology and business plans to address short-term and long-term needs.

SUPPORT FOR VENDORS We provide services that help you refine your product and service offerings. Examples include:

Product and service strategy evaluation. We help you assess your market position in terms of functionality, technology, and services. Our strategy workshops will help you target the right customers and map your offerings to their needs.

Market messaging and collateral review. Based on our extensive experience with your potential clients, we assess your marketing and sales materials — including your website and any collateral.

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RELATED CELENT RESEARCH

Remote Cash Capture 2012 Update: Big Changes in a Growing Market March 2012

Cash Automation in Branch Banking: Cut Costs While Improving Sales and Service June 2010

Remote Cash Capture: An Idea Whose Time Has Come March 2009

Virtual Vaults: They’re Not Just for Cash Anymore March 2006

Copyright Notice

Prepared by

Celent, a division of Oliver Wyman, Inc.

Copyright © 2017 Celent, a division of Oliver Wyman, Inc., which is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. All rights reserved. This report may not be reproduced, copied or redistributed, in whole or in part, in any form or by any means, without the written permission of Celent, a division of Oliver Wyman (“Celent”) and Celent accepts no liability whatsoever for the actions of third parties in this respect. Celent and any third party content providers whose content is included in this report are the sole copyright owners of the content in this report. Any third party content in this report has been included by Celent with the permission of the relevant content owner. Any use of this report by any third party is strictly prohibited without a license expressly granted by Celent. Any use of third party content included in this report is strictly prohibited without the express permission of the relevant content owner This report is not intended for general circulation, nor is it to be used, reproduced, copied, quoted or distributed by third parties for any purpose other than those that may be set forth herein without the prior written permission of Celent. Neither all nor any part of the contents of this report, or any opinions expressed herein, shall be disseminated to the public through advertising media, public relations, news media, sales media, mail, direct transmittal, or any other public means of communications, without the prior written consent of Celent. Any violation of Celent’s rights in this report will be enforced to the fullest extent of the law, including the pursuit of monetary damages and injunctive relief in the event of any breach of the foregoing restrictions.

This report is not a substitute for tailored professional advice on how a specific financial institution should execute its strategy. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisers. Celent has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been verified, and no warranty is given as to the accuracy of such information. Public information and industry and statistical data, are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information and have accepted the information without further verification.

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