François Groepe: Improving the security and cost-effectiveness of
banknotes
Address by Mr François Groepe, Deputy Governor of the South African Reserve Bank, at the
18th conference of the Association of African Banknotes and Security Documents Printers
(AABSDP), hosted by the South African Bank Note Company (SABN), Cape Town,
17 November 2014.
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Good day ladies, gentlemen and fellow central bankers, a warm welcome to South Africa,
welcome to the Mother City and the 18th Conference of the Association of African Banknotes
and Security Documents Printers (AABSDP).
Cape Town is one of the most beautiful and well-known cities in the world - it is rich in
history, art, culture, nature and I sincerely hope that you will enjoy your stay. Its fame, and
that of South Africa, has been lifted by the extraordinary courage and dignity of one man,
Nelson Mandela, and I am proud that our new currency pays homage to this great man.
I have been informed that we have more than 300 delegates attending the Conference,
representing 80 organisations around the world, of which more than 25 central banks are
represented and various government institutions, such as printing works and mints. From the
outset we have aimed to invite a broad spectrum of people as possible and I am delighted
that we have succeeded in this endeavour.
The theme of this Conference this year is top of mind in the Security Printing Industry today,
as well as for Central Banks - that of improving security and cost effectiveness of banknote
production and circulation which, if done successfully will contribute to efficiencies in the
cash management cycle.
Following the Great Recession, most central banks had either their mandate expanded or
their mandate was more explicitly defined to include financial stability. The supply and
availability of cash is a critical component of financial stability because a shortage of physical
cash can lead to socio-political instability which may result in spill-over effects. Hence, it is
important that central banks approach and treat cash management with the same diligence
as they treat their monetary and financial stability mandates, as it does not stand separate
from those mandates, but in fact is a key component of those mandates.
Central Banks are continuously confronted with new developments in the design, production,
circulation and destruction of banknotes. The participation of various and new stakeholders
in the banknote lifecycle, trends in substrate choice, features and banknote life expectancy,
heightened demands for improved productivity and efficiency and emerging threats from
counterfeiters all add to this challenge.
Banknotes remain the most important contact point for Central Banks with the public and
therefore they play a key role in the reputation and public perception of the central bank. The
quality of banknotes in circulation also poses a reputational risk for the central bank and in
fact for the country. Poor quality banknotes cannot be used by the people to pay for example
their parking tickets where the pay-station will not accept poor quality banknotes.
Furthermore, poor quality banknotes, would lead to jamming of automatic teller machines but
also increases the risk of counterfeiting. These are but three examples of why it is important
that the quality of banknotes in circulation should be efficiently and effectively monitored and
controlled by the central bank, irrespective of the degree to which off-sorting may have been
privatised within a particular country.
The type of substrate to be used remains a very topical subject within the industry. Central
banks from both large and small economies have challenged the long accepted wisdom over
security and the longevity of banknotes. The longer a banknote lasts, the more value the
central bank will obtain from that particular note order. Given the size of orders, even a small
improvement in percentage terms can mean a substantial improvement in profitability. During
the Conference we will be debating this at length. Among our speakers, we have the Bank of
Canada, they recently changed their notes from paper to polymer and will share their
experiences with us.
The demand for cash is increasing and so is the cost of transporting and processing the
cash. Central banks increasingly recognise the need to revisit nationwide arrangements for
distribution and consider the role of the private sector; however, outsourcing brings with it its
own risks.
Whether sorting is carried out in-house or outsourced, central banks are under increasing
pressure to improve efficiency. During the course of the Conference some of the presenters
will focus on the different cash management systems employed by central banks.
Another challenge, facing the industry, is the forecasting of the demand banknotes. It seems
that there is no simple method to do this calculation. In South Africa, as in many other
countries, the demand for currency is showing an increasing trend. In 2012, the demand for
currency increased by 11 per cent with approximately R110 billion (US$ 10.6 billion) worth of
notes in circulation as at the end of the year. Central banks, therefore, are faced with
challenges to either reduce the volume of cash produced; or reduce the cost of producing the
cash, while at the same time enhancing the security and durability of the currency.
A new challenge for central banks is the requirement that all key business areas should be
included in effective contingency plans. High profile incidents around the world have
highlighted the importance of central banks having in place, considered and tested plans, to
deal with outages due to everything from supplier problems to natural disasters.
Generally, central banks source their banknotes from one, or a small number of international
companies. Currency managers need to weigh-up the importance of price against
considerations, such as time of delivery, quantity of order and quality of product. They also
need to consider if more than one supplier for, say ink, could be beneficial for operational risk
concerns. Procurement from external suppliers is expensive, complex and may span several
years. As with any outsourcing arrangement, production and quality, a standard needs to be
monitored.
The impact of technical innovations for the distribution of cash or payment mechanisms is
developing at a rapid pace, especially for the under-banked. The use of mobile phone
technology to transfer money is becoming a popular method due to efficiency and the lower
cost associated with this payment mechanism.
A further consideration by central banks is the cost that security features add to the banknote
production process. We all appreciate the need for security features to avoid the
counterfeiting of banknotes, but the question is at what cost and whether these costs can be
optimised? These issues will be presented and debated upon during the next few days by all
the participants and hopefully assist central banks with their deliberations in this regard.
The objective is, through the diverse nature of attendees at this Conference, to improve the
understanding of the issues for those involved in providing and managing banknotes; coins
and other secure documents and at the same time improving the understanding of the
consumers' needs by the suppliers. The Conference has set out to achieve this with a
mixture of presentations, workshops and panel discussions that touch on the latest
developments and technologies in the industry and allow adequate time for discussion and
dialogue. You are all encouraged to seek answers by asking questions and discussing the
issues. The overall aim is to improve understanding through education - Africa has some
catching-up to do, compared with the rest of the world. This is our attempt to start that ball
rolling strongly in the field of banknotes, coins, ID and other security documents and to
position this great continent as a producer, as well as a user of such products.
It is our sincere hope that you will gain in knowledge and establish contacts and relationships
that will continue into the future; but most of all our hope is that you will enjoy having an
enjoyable time.
Thank you