Loomis Fargo & Co.: Making Money Move, Efficiently - ' Jumping Through the Fed'By John McCormick Print
The nation's No. 2 armored-car company wants to electronically manage cash for retailers, banks and the Fed—and boost revenue in the process. First, it needs to upgrade a system that's still largely based on human sweat and paper strips.
The existence of the Boylston facility is, in fact, a testament to the inefficiency of the nation's cash handling system. In the Boylston area, for instance, much of the money in Loomis trucks goes from its bank customers to its cash handling facility and then on to the Fed—where the next day Loomis picks up cash, brings it back to its cash handling facility and then delivers it back to the banks.
Each month, Loomis trucks make about 1.3 million pickups and deliveries. And, at each step, there are transaction costs, people costs and operating costs.
Labor and fringe benefits total 40% to 50% of Loomis' revenue, according to Rick Miller, the company's vice president of operations.
The 200 employees in the Boylston facility, for instance, make about $9 to $14 an hour, for an annual payroll of almost $6 million. In addition, armored trucks cost about $80,000, and each of Loomis' almost 3,000 vehicles needs fuel and maintenance. Vehicle expenses run between 11% and 14% of revenue, Miller says. Then there's the cost of the facilities, which eats another 5% to 10% of revenue.
The whole process of handling cash in this country, according to Miller, is fairly inefficient. But, he says, "There are efficiencies to be gained."
Indeed, Bosse says, the company is now trying to automate as much of the process as possible to drive cost and inefficiency out of the system. "The more technology you can get in," he says, "the better the price you can give" to customers.
But there are impediments to the electronic movement of cash.
Across the country in Las Vegas, five nights a week, a courier pulls out of Loomis' parking lot on Palm Parkway and heads to the airport. The courier carries a cash letter for the Business Bank of Nevada—a record of the checks Business Bank is depositing that day in the Federal Reserve Bank in Los Angeles, 270 miles away.
At the airport, the letter is loaded onto a plane that flies to Burbank, Calif., where it is picked up by another courier and driven to the Fed in downtown Los Angeles. Despite the circuitous route, the bank saves "a lot of dollars" sending the letter by ground and air rather than electronically, according to Larry Charlton, Business Bank of Nevada's chief operating officer. That's because the Fed charges the bank per bit to receive electronic files, which the Fed would have to convert back to paper for banks that are covering the checks but can't receive electronic files.
"Does that make sense?" Charlton asks. "Why not charge banks that do paper? Let's charge banks that can't receive electronic files."
That may not happen soon, though. There is no law requiring banks to process electronic files—although there is the Check Clearing for the 21st Century Act, which went into effect in October 2004. Known as Check 21, the law requires banks to treat the electronic image of a check as the legal equivalent of a paper check.
Charlton, who used to send his bank's checks to the Fed in Los Angeles, now sends them to the Loomis vault in Las Vegas, nine miles away.
Loomis employees feed Charlton's checks and deposit tickets into a machine owned by banking services company Fiserv, which captures the images and sends them across Fiserv's network. The images are archived in Atlanta, and are read to see if the handwritten amount on the check matches the amount the bank says it is depositing. If the two numbers don't match, the images are displayed on a workstation in Omaha, Neb., where a Fiserv employee balances, or proofs, the transactions by viewing the images and making corrections. When all of the transactions are balanced, Fiserv ships them back through the network to Loomis, where Loomis employees run the checks through the machine again to get them encoded with the correct dollar amount. Then, Loomis creates the cash letter. Charlton's paper checks and deposit tickets are stored for a period of time and then destroyed.
Charlton says he introduced Loomis and Fiserv, hoping they would work together, because he was spending $6,000 to $8,000 a month in transit costs sending checks to Los Angeles. He arranged a meeting in his office, which Loomis confirms.
"I said, 'I'm an old banker used to running big vaults,'" says Charlton, who worked at Bank of America. "I could see the benefit."
In September, however, Loomis announced a partnership with Alogent Corp., a software vendor whose product processes checks in fewer steps.
In Alogent's system, Loomis employees at the vault scan the checks and deposit tickets into Alogent's software, which creates the images and balances the transactions at Loomis. As with Fiserv, employees intervene to balance transactions manually if necessary, but they don't handle the paper checks again. The software creates files of images and transaction data that are sent back to each bank from Loomis' data center in Houston, which consolidates work from all Loomis vaults. The banks are responsible for archiving the images, and they create their own cash letters—either image- or paper-based—to send on to the Fed or another agency for clearing. Loomis plans to ultimately integrate Alogent's software with the Glory vault system.
Alogent's Michael Hackney, executive vice president of business development, claims that "there's a massive move afoot to change infrastructure" so that checks are cleared via images rather than paper, but the Business Bank of Nevada's Charlton is sticking with Fiserv. He likes Fiserv's software, and a change would mean "a major conversion." Also, Fiserv is building a check-clearing network to compete with the Fed's, according to Charlton.
Regardless of how many ways Loomis decides to image checks, it is selling services that, prior to Check 21, were performed by the Fed. To stay efficient, the Fed is now consolidating its operations for processing both checks and cash.
And that's where Loomis really hopes to gain.
In Portland, Ore., and Little Rock, Ark., where the Fed has closed branches, Loomis serves as the Fed's cash depot. This is a collection point for excess currency that banks are shipping back to the Fed, and for new currency they are ordering from the Fed.
The Fed has given responsibility for cash depots in other areas where it has closed branches to Brink's, Loomis' chief competitor. The agency declines to discuss any work it is doing with the armored-car carriers.
Silewicz thinks Loomis has a leg up on its industry because of the work it has done over the years on e-business. Still, he says, "today, there's not one place that the Fed or a banker can go to and say, here's the flow of funds."
Since the mid-1990s, when the Fed eased regulations on how much cash banks needed to hold in reserve, the banks have been eagerly shipping excess cash to the Fed each night. That way, the cash is earning interest and not sitting on their books. The Fed has never yet charged banks for processing cash. But, in late 2003, the Fed said enough. It proposed charging recirculation fees to banks that overuse the Fed's cash processing facilities—for example, banks are not supposed to ship $20 bills back to the Fed and order newer twenties (which work better in ATMs) within a five-day period.
And the Fed is now finishing a pilot program called "custodial inventory" that would allow banks to hold excess cash overnight in as many as 150 bank-owned facilities. The cash would be considered off the bank's books as if it were at a Fed branch.
Ultimately, Loomis hopes to control at least some of these Fed transfer points, and to do so in a way that would allow the company to sell more services to its own customers. Loomis has no commitment from the Fed. But it has had discussions with the agency about synchronizing its Internet Change Order system with the Fed's own online ordering system, so that when banks order cash in bulk from the Fed, they could specify to Loomis how they want the order broken down for different branches. Loomis could signal back to banks how much cash their ATMs are consuming so banks could modify their orders. It could send banks an electronic Advanced Ship Notice when the cash leaves the Fed, and send notices to the Fed when the banks return cash.
Perhaps in the future, Silewicz says, the Fed would even accept Loomis and other third parties as designated cash processors for banks that are holding excess cash through the Fed's custodial inventory program.
'Virtual Pooling of Cash'
In a perfect world, there would be "a virtual pooling of cash," says Blacketer of Carreker, where banks would have pieces of cash in different places—in their own vaults, at a carrier like Loomis, or at other banks—and would pull cash from the pool as needed, relying on data capture and accounting across institutions.
To survive in this world, armored carriers will need sophisticated information-technology systems; but, as Blacketer says, this has not been their expertise in the past.
"It's been hard for them to turn around and make a million-dollar investment in technology when they're focused on expense management," he says.
Which is symptomatic of the entire industry, says John Jay professor McCrie: "It's just part of the upgrading that this industry has not yet done."
Loomis, however, feels that it is in a good position with its Web-based ordering system, SOFI tracking and accounting system, and Glory inventory setup. "It's e-business now," Grochett told 22 hand-picked Loomis and Securitas managers at Securitas' quarterly training meeting in Las Vegas in August.
Grochett told the managers that day that e-business had been a transition at Loomis, not a quick fix. "We're dabbling in the Federal Reserve information exchange process," he said. "We're recognized by the Fed as a key player, and this couldn't have happened without e-business."
And, he has maintained, the company is filling in the gaps by ramping up wireless systems for drivers and pushing out bar-code systems to its cash facilities.
"Over the years, providing technology solutions has not been a priority, but [it] has taken on significant change in the last five years," Silewicz says. Still, he adds, "There's so much further to go."
- Making Change: It costs $110 billion a year to move cash around the country; there's got to be an easier, cheaper way.
- Most Logistics Problems Involve Less Shooting: Cash carriers that handle automation wrong could go out of business; but forgetting real-world dangers could get people killed, too.
- Automating a Cash Warehouse: The place has computers, but the real work is done on paper.
- Jumping Through the Fed's Hoops: Pickup and delivery is inefficient enough, but add in a few extra stops so the Fed can keep an eye on things, and you add days of delays.
- Vital Stats: Loomis, Fargo & Co.: Company size, challenges, goals, and how it will measure its progress.
- Player Roster: Who's moving, who's shaking and what they're shaking up.
- Base Technologies:What they're using to do what they're doing, and what they'd use to do it better.
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