The ECB is currentlylaying the groundwork for a new generation of bank- notes, while moving forward in parallel with its digital currency projects. The global debate on digital currency is far from over, because banknotes and coins retain real trust in many countries around the world. The trust it generates is based on complex processes that go far beyond merely printing papers.
The word fiduciary itself describedby the Oxford dictionary as “of or per- taining to a trustee; pertaining to or of the nature of a trusteeship”. Indeed, the banknote printing sector would not exist without the fundamental trust required by central banks in the process itself, and in the actors deployed to carry it out. The omnipresence of banknotes in our daily lives belies complexity of this process, and just a few highly specialised firms have the know-how to carry it out, or have the trust of governments and central banks.
“Banknotes are still the currency of trust. This is true even in the most advanced countries where electronic payments are gaining ground, because banknotes and coins represent a store of value, Eric Boissonnas explains. He is the head of Koenig & Bauer Banknote Solutions (KBBS), a key player in this sector. In the European Union, only 25% of euro notes are used for transactions, while 50% are used as a store of value. This trend was highlighted during the COVID pandemic…”, he adds.
In spite of this, the European Commission has been putting forward plans for a digital euro this year, in the framework of its ambitious digital transition initiative. Nevertheless, the EU is making moves towards legally obliging commerces to accept cash, in a blow to advocates for cashless societies. In Sweden, a country many have predicted will become the world’s first completely cashless society, many have rebelled against the ditching of cash, once again highlighting the intrinsic trust people have in physical tender.
Yet, the sudden shock of the COVID-19 pandemic in 2020 led many to wonderif it was time to fully embrace digitalisation. It seems, that this has not been the case. The shift in people’s payment preferences, although distinguishable from the pre-pandemic world, has not been so definitive. The Bank of England has even suggested that the value of banknotes in circulation remains elevated even two years on from the pandemic, nearly at a historic high: “this reflects people – up to 60% of the population – holding more cash as a store of value, which is a fundamental role of money.”
Nonetheless, the sector is fraught with uncertainty and instability. Questions about the future of fiduciary industry and the imminent encroachment of digital do however seem to be focused in highly digitalised nations, notably in Europe. Elsewhere, cash continues to dominate. “Apart from the most advanced countries, cash is ever-present, accounting for more than 90% of transactions, a constant that is not fundamentally challenged by initiatives to move towards electronic transactions,”affirmsBoissonnas.
This belief is echoed across the sector. Dr. Ralf Wintergest, CEO of Giesecke+Devrient, is not worried about the threat of digitalisation for cash, stating“we are convinced that cash keeps playing a vital role in the variety of payment methods despite the ongoing digitalisation of the payment landscape: It’s simple, it’s easily accessible to everyone and universally accepted.”
Cash, describedby CEO of French security printing firm OberthurFiduciaire as “a timeless concept”, isn’t going anywhere, and the security of its production process has never been so important. This very secretive endeavour, which this Banco de Mexico video illustrates in an educational way, is highly technical, and involves a plethora of specialists in different disciplines, from designers and engravers to lab technicians and engineers, with a particular focus on security features including holograms, with dedicated high-tech inks and substrates.The production cost of the banknote is proportional to the sophistication of customer demand and requirements, and to the concentration of expertise represented by each denomination, which can range from just 5.4 $ cents for U.S. dollar, to 40 cents of franc for a Swiss note.
The cash cycle
The fundamental role banknotes play in our global financial system means that central banks govern their life cycles with utmost care and attention throughout the process, from design to production to destruction. The ecosystem is complex in nature. Each banknote must meet the highest of standards of security, functionality and design. According to EricBoissonnas, “the number of banknotes printed each year depends on the demand for the banknotes, which is growing at an annual rate of 2 to 3% worldwide, despite certain disparities.”
Banknotes are printed at the request of central banks, who in turn will distribute them to the various credit institutions within their economic area once quality has been assured. These commercial organisations distribute them to their customers. If any notes are found to be damaged, they are collected by banks and sent to reserve banks or sorting centres, or returned to the central bank for inspection. Any damaged or unfit notes are duly removed from circulation. Some of these notes may be destroyed, and replaced with new ones. The unfit notes are typically shredded or incinerated in a secure manner to ensure they cannot be reintroduced into circulation or fall foul to counterfeiting.
In the eurozone, for example, the European Central Bank (ECB) and the national central banks (NCBs) decide how many banknotes and coins are needed to meet public demand and replace damaged samples every year. In general, NCBs are in charge of the printing or sourcing process. They are manufactured in the central bank’s own printing facility, but this process can also be outsourced to a printing works accredited by the ECB or, through a company owned by the NCB itself. The Banco de España, for example, owns a company dedicated to the printing of its Euro banknotes quota: Imprenta de Billettes S.A. or IMBISA.
Central banks set guidelines for the lifespan of each denomination. Periodically, central banks introduce new series with updated designs and enhanced security features to stay ahead of counterfeiters, as is the case with the ECB, which is currently working on a new series of euro banknotes. Efficiency, sustainability and security all take precedence, with innovative security solutions highly sought after by central banks. Of course, these processes come at a cost: for example, the 2023 currency operating budgetof the U.S. Federal Reserve was $931.4 million.
Integrated approach to meet comprehensive needs
The manufacture of banknotes requires highly specialised printing equipment that only a few experienced firms have the capacity to produce and available to only few state or privately-held printers. Numerous logistical and technological constraints as well as fundamental security imperatives have to be taken into account. Central banks have therefore to place their trust in controlled and integrity-checked processes proposed by highly specialised fiduciary organisations, using innovation and R&D budgets to reaffirm the public’s trust in the security of both its end product and the process itself. Some central banks are even contributing directly to progress in this area, with their own R&D, such as the Banque de France, which patented a complete range of innovative security features, including the Trilumic solution in collaboration with the German company Hueck Folien.
But the process requires much more than just innovation. This is because the costs that institutional clients have to take into account are not limited to the banknote's initial production chain, but are increasingly extended throughout the banknote's life cycle. Eric Boissonnasexplains that “The cost of circulating banknotes is around 70 times higher than the cost of producing them. However, this ratio rises to 200 times the production cost in highly developed countries, where the life cycle is far more complex.”Indeed, this process is neatly summed up in a 2020 reportfrom the UK National Audit:“Running the cash system incurs costs for both taxpayers and businesses. The production costs of notes and coins are offset by income resulting from theirsale to the market at face value. In 2019-20, the Bank incurred note productionand distribution expenses of £119 million and HM Treasury incurred UK coinproduction expenses of £23.6 million."While production costshave to beoptimised, a major effort is requiredin orderto streamline cash circulation and availability to the public in turn.
This is why security printers’ suppliers and manufacturers of printing machines must offer a complex, comprehensive end-to-end integrated service package that involves design, conceptualisation, development, production, training, local maintenance, updating and adaptation, and must involve the maintenance of machines throughout their lifetime, thus apportioning total costs throughout the lifecycle. Eric Boissonnas highlights that high-quality security features allow to authenticate banknoteshundreds of times and that theseprinted features contribute to optimisingcirculation costs, by “reducing the need for secure transport and the associated environmental impact.”
The ultimate goals of such a complex networkis the efficiency of cash production and distribution in a very demanding ecosystem. The equipment developed to deliver cash quality must therefore themselves be held to the highest standards, from development to maintenance and replacement. The proficiencyof this ecosystem and its stakeholders, as well as continued public demand, are why physical cash has and will continue to play a vital role in our economic lives. As President of the ECB, Christine Lagarde highlights, "Banknotes are part of our economy, our identity and our culture – and we at the ECB have an immense responsibility to ensure that people maintain their trust in them."
