Cash Crash in Australia?

As Currency News™ went to press, news came out that the cash management firms Armaguard, with a 90% share of the market, is seeking a cash injection to ensure it can operate its banknote distribution services profitably, just five months after it merged with rival Prosegur to create a near-monopoly that was supposed to do just that (see CN June 2023).

According to the Australian Financial Review, the Australian Banking Association (ABA) has filed an urgent application to the competition regulator – the Australian Competition and Consumer Commission (ACCC) – to allow them to meet and discuss a joint response to the possible crisis in distributing cash around the nation.

The issue, unsurprisingly, is that as the banks push customers towards digital payments, and the use of cash declines (which it is doing at a rapid rate in Australia), Armaguard is making heavy, and unsustainable, losses.

While the value of banknotes in circulation in Australia has grown to record levels due to their being used as a store of value, their use for transactions has declined sharply, with the percentage of payments in cash dropping from 62% in 2010 to 13% in 2021. It is expected to continue to fall – forecasters from Accenture are predicting to just 4% by 2030.

Needless to say, this decline has pushed up the unit cost of delivering banknote to bank branches, ATMs and retailers.

The merger between Armaguard and Spain’s Prosegur was approved by the ACCC despite creating a company with a near monopoly of the cash distribution market on the grounds that the likely (and rapid) exit of one or the other without the merger would cause significant disruption. Hence the green light to merge, which was supposed to relieve financial pressure on the two by allowing them to consolidate routes and cash-distribution centres.

But that hasn’t happened, projections pointing to a $190 million cash deficit over the next three years. Armaguard is now requesting industry support to that amount, telling a meeting of the Reserve Bank of Australia, Treasury officials and representatives of the ABA that it has insufficient self-generating fund to invest in the future sustainability of its distribution networks. It is also reported to have indicated that there is real risk it will cease to supply services without further financial support.

If the ACCC provides authorisation for the banks to collectively negotiate with Armaguard, their meetings are likely to discuss not only the short-term issue of extra financial support for Armaguard, but longer-term solutions for the troubled industry.

This could include the banks – potentially alongside the federal government – creating a public utility to provide cash services. But the banks in the past have not been keen, due to the logistical and security challenges, and the sector’s pressured economics. The government may also be asked to help fund the services.

According to the ACCC application, the banks are concerned ‘any suspension, exit or default by Armaguard in the supply of [cash delivery] services could reduce the availability of cash to the major banks at a distribution level, and other participants in the retail cash distribution chain such as other commercial banks, Australia Post, major retailers and ATM service providers’.

Somewhat ironic, given that many of the banks are the ones that are closing ATMs and bank branches and driving down demand for cash by reducing access to it in the first place.

There have been instances in the past of companies with large or dominant market shares going under and threatening the supply of cash in their countries – but not recently. In 2006 Heros, the German CIT company that had acquired the largest market share by undercutting its rivals and driving its competitors out, collapsed after embezzlement by the senior management came to light. ln 2012, Panaxia, one of Sweden’s three CIT companies, also collapsed. Again, senior management had embezzled money.

In both those countries, the problems lay with fraudulent managers and inadequate regulatory oversight. That is not the case this time round. The problem is not the company, but the environment in which it operates. And it’s a problem that is by no means unique to Australia.

This situation has long been predicted. A reduction in cash usage for whatever reason, and whether or not encouraged by banks, governments or the payment companies, will inevitably lead to higher unit costs for handling the cash that remains. Which in turn provides an incentive to further reduce access to and hence the use of cash, leading to a vicious downward spiral.

The way that Australia addresses this problem will prove an interesting test case for other countries in the same position and likely to face a similar situation.