Travelex cash shows demand for foreign currency

Travelex cash shows demand for foreign currency

A Sydney building contains a massive amount of hard cash but we’re not saying where it is.

I’m standing in a highly secured vault, in an unmarked office in a large business park in the Sydney metropolitan area.

Wads of cash are stacked high in piles on dozens of trolleys. All up there are tens of millions of dollars in this room, which is about the size of a quarter of a rugby field.

It’s a scene that suggests the death of cash may be exaggerated.

As a condition of entry, AFR Weekend agreed not to disclose the location of this facility – run by foreign exchange firm Travelex – or any of its security measures, including in our photographs.

Money sourced from foreign banks arrives on international flights on weekends. Brook Mitchell

The company is obviously keen to avoid an intrusion in the style of Ocean’s Eleven or Mission Impossible.

Suffice to say, the level of security here is on par with Hollywood’s famous heist movies. There are many, many cameras and impenetrable walls.

To gain entry and to exit, I was weighed and scanned. I was asked to leave my computer and mobile phone in a locker in a separate room.

The extensive security is necessary due to the special and highly desirable nature of Travelex’s product: bank notes.

The London-based company is among a dying breed in the financial services landscape: one that remains willing to handle loads of cash.

“Many people think cash is facing the same existential crisis as DVDs and old-fashioned film, as the Blockbusters and Kodaks were challenged by Netflix or iPhones,” says Richard Wazacz, Travelex’s global chief executive.

“But I do not believe cash is facing the same threat by any means, especially for international travel. This comes down to giving customers what they want and need.

“Digital is not killing cash. Both systems need to exist in parallel.”

Travelex works with central banks and major banks around the world to source currencies – which are imported on commercial flights on weekends for Australians heading overseas. In addition, it receives notes from travellers, offshore or visiting Australia, who want Aussie dollars to spend.

Indeed, I am staring at an orange, four-wheeled trolley, which is stacked high – about a metre by a metre squared – with Indonesian rupiah, around $2 million in total.

Indonesian rupiah are sought by Australians going to Bali. Travelex sells around $2 million worth a week. Brook Mitchell

Travelex sells around this amount of rupiah notes to Australians every week, through its branches (at airports or city locations like Sydney’s QVB) and other distributors, like Australia Post or Helloworld travel agents.

Soon, this money will be spent in the bars and markets of Bali, as thousands of Australians chase the summer in Asia as international travel picks up after the pandemic.

Yen notes are also in high demand, for those wanting to ski in Japan. In some countries, cash remains king.

“You have to think of this like a product,” says Darren Brown, the head of Travelex Australia and New Zealand, holding a wad of US dollars freshly minted by the Reserve Bank of New York. It’s worth $100,000 and is about the size of a hardback book.

“This is my product. It just happens to be cash.”

Security concerns

Cash is certainly a strange product to sell. Obviously, all of this serious security is necessary to move it around, given criminals desire it. Like for gold bullion dealers, this creates large distribution costs.

Then there is the anti-money laundering (AML) and counter-terrorism financing (CTF) laws, which impose tough and strengthening restrictions on Travelex to ensure it properly identifies its customers.

Wads of US dollars, worth $100,000, are about the size of a hardback book. “This is my product,” says Travelex’s Darren Brown. Brook Mitchell

Cash is also different from most other products given its value fluctuates constantly, based on movements in trillion-dollar, global cross-currency swap markets.

To hedge this risk, Travelex runs a treasury operation in Sydney’s CBD. Its desk offsets the piles of cash here with digital money in commercial bank accounts.

Many of the security measures are the requirement of insurers.

Money comes in trucks run by “cash in transit” companies. Upon arrival, it is put through a special counterfeiting and counting machine, worth $750,000.

Weekend AFR’s visit to the secret operations provides a rare insight into the cash economy, and the complex logistics of moving money around.

This comes at a time when the major banks are closing branches and selling ATM fleets, making it harder to get Australian dollars out of commercial banks.

Only Commonwealth Bank lets customers withdraw money in foreign banknotes – the other major banks no longer service customers seeking international currency. This has created an opportunity for Travelex, and some other non-banks, which are stepping into the gap.

Volatility

It’s a move that seems counterintuitive, given an incessant focus on all things fintech, digital payments and crypto.

Drivers of the company’s unusual economics are geopolitical. Demand for British pounds and euro notes is depressed, despite attractive exchange rates. This is due to the sky-high price of international flights from Australia and the war in Ukraine, which has made some travellers nervy about visiting Europe. Many prefer to travel closer to home, especially in Asia.

India is also a big user of cash. Even in the United States, around half of low-value transactions are still done with cash. The US dollar remains Travelex’s most sought-after currency. A recent Gallup poll found 13 per cent of Americans make “all” or “most” of their purchases with cash, although this was down from 28 per cent five years ago.

Money arrives and goes out in many denominations. Brook Mitchell

Travelex and others working with cash face intense competitive forces. These are coming from the likes of Visa and Mastercard, which advertise relentlessly to get travellers to spend on their cards. Banks are also keen to keep money in the digital system – where they make fees facilitating payments and offering loans.

And then there are new digital competitors, like Wise, which is targeting travellers with pre-paid digital spending cards – an area Travelex is also pushing into, to create a more full-service offering.

The Reserve Bank is closely monitoring the economics of the cash distribution economy, which are strained domestically.

The two biggest “cash in transit” (CIT) companies, Armaguard and Prosegur, are seeking ACCC approval to merge. Their submissions have pointed to higher distribution costs as domestic cash usage declines, which is making duplicated work unprofitable.

Cash convenience

But cash remains popular with travellers, for several reasons.

One is its near universal acceptance. Many travellers also want some protection against network outages or glitches that make ATMs less reliable in the developing world. Cash can also help travellers get out of a pickle with foreign authorities.

Others are reluctant to waste time at a destination searching for cash machines or money exchange counters. When they are found and used to take Australian dollars from domestic bank accounts, fees and exchange spreads are high.

“I don’t think we are operating in a declining market yet,” Wazacz says.

“On a global basis, travel is growing much faster than the use of cash is declining. Overall the cash circulation for travel is going to go up. We are nowhere near the peak yet: we are decades away from peak.

“In Western, developed markets, you may see a different trend, as the use of cash declines slowly in countries in Western Europe and Australia. But a huge portion of customers still want some cash.”

Travelex estimates between $6 billion and $12 billion in foreign cash is spent by Australians abroad each year. Brook Mitchell

Travelex estimates between 10 per cent and 20 per cent of spending by international holiday-makers is done in cash. According to Statistica, Australian residents travelling abroad spent about $65 billion on overseas trips in the year ending March 2020. This would put pre-pandemic spending of cash abroad at around $6 billion to $12 billion.

Travelex does not report Australian earnings separately from the group, which generated revenues of £130 million for the third quarter of 2022, £80 million higher than 2021 and 83 per cent of 2019 revenue in the same quarter. Positive underlying EBITDA was £17.2 million in the third quarter, continuing the trend of a return to positive underlying EBITDA delivered in the previous quarter.

Travelex is on a comeback after a near-death experience during COVID, where overseas travel – the lifeblood of the business – dried up almost overnight.

Monthly revenue plunged to single digits. The UK company briefly entered “turnaround administration” before a debt-for-equity swap saw it taken over by its bondholders, who injected new capital.

The orderly restructuring also removed a former majority shareholder, Bavaguthu Raghuram Shetty, who was caught up in an accounting scandal in 2020. The current business has no connections to the former owners after its assets were taken over that year by a new entity.

Wazacz, who has a background in UK banking, has been boss for eight months. “The business is coming back very fast to rude health,” he says. “There is an opportunity for us because there is a demand for banknotes. Economies still need cash to circulate. We are not ready yet to support a cashless society.”

The company estimates 20 per cent of cash orders by Australians are pre-planned, with 75 to 80 per cent arranged at the destination. Travelex is keen to see higher pre-travel volumes, as it maintains walk-up services at major airports, where customers pay more. The spread on US dollars pre-ordered online and picked up at the airport is 1.5 per cent.

The vault visit also revealed the unusual nature of cash as a store of value, including its ability to wear and tear.

For example, the Pacific island of Kiribati uses Australian dollars, many of which are buried for safekeeping in the ground, under village huts or in the fields.

Wads of Australian $5 notes buried in Kiribati as a store of value, that need to be replaced. Brook Mitchell

I am looking at dozens of bags of Australian $5 notes in bad shape: such terrain and exposure to the elements can damage a polymer banknote. These piles have been handed in during an amnesty on the island; new ones will soon be returned.

For all the physical security, a bigger risk for Travelex is cybersecurity. The company was hit by a crippling ransomware attack on New Year’s Eve, 2019, just before COVID struck. No customer data was leaked or lost, but systems went down in a peak travel period. This has forced a lift to investment on IT infrastructure and defences.

Wazacz says the harsh lessons of 2020 have been taken on board. “In many jurisdictions around the world, we are regulated like a bank. We work closely with regulators. We have a lot of experience managing [cash] and this is our core business,” he says.

“Our social licence to operate is paramount to what we do. If I don’t have a licence to operate, I won’t be able to make a profit.”

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James Eyers

James EyersSenior ReporterJames Eyers writes on banking, fintech and technology. Based in our Sydney newsroom, James is a former Legal Affairs and Capital editor for the Financial Review Connect with James on Twitter. Email James at jeyers@afr.com.au

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